Soft market conditions persist for insurers writing service industry risks, thanks in part to the lousy economy, according to experts in the field, who point out that standard carriers continue to write business that is generally the domain of excess and surplus lines companies, indicating that competition is still fierce for this line of business.
While professionals said they expect the market to turn near the end of the year, they noted the effects of the challenging economy have already prolonged the current soft market conditions, causing carriers to battle harder over a shrinking premium target base.
Of course, market conditions vary depending on the particular risk. Experts pointed out "service industries" involve a wide variety of exposures--some of which attract different insurance markets than others.
For example, the average "plate and food" restaurant will be written mostly in the standard market, according to Ken Laderoute, vice president of underwriting for wholesale brokerage Burns and Wilcox.
Health and exercise clubs, on the other hand, tend to be the domain of E&S carriers, as the risk of injury to members keeps most standard carriers away, Mr. Laderoute noted.
Meanwhile, many service industry risks, such as bars and motels, can find a home with standard carriers in soft markets but are otherwise written by E&S insurers.
Just under three years ago, the market softened and standard carriers began to compete over traditional E&S risks. Richard Kerr, chief executive officer at MarketScout--an online exchange which puts out a monthly "Market Barometer" survey on pricing trends--said over that time period just about all service industry risks migrated away from the E&S market, adding that this business "continues to be most competitive."
As in most soft market cycles, standard carriers have been primarily concerned with premium growth and volume, and underwriting standards have become lax, according to Mr. Laderoute.
He added that standard carriers are now competing for business such as bars, which are "usually left to E&S," as standard markets don't have much appetite for the increased exposures associated with pure-liquor service as opposed to traditional full-service restaurants.
While soft market cycles are a long-standing reality for the insurance industry, this cycle is being exacerbated by the severe economic downturn that is causing additional concerns for both insurers and the risks they write.
Mr. Kerr said the current economy has caused the service industries to shrink as business establishments have either cut payroll or gone under altogether, meaning carriers are competing harder for fewer prospects and a less insurable exposures.
Mr. Laderoute said with payrolls and receipts in decline, insurers are writing smaller policies. But because insurer investment returns have been low, companies are pressured to keep premiums written levels high to compensate, prompting them to be more aggressive over risks they might otherwise avoid.
For E&S carriers, competition among standard markets is just one reason they are not seeing much new business from the service industries.
Jim Carney, vice president of contract underwriting for Scottsdale Insurance Company, said that when the market changes from soft to hard, E&S carriers will typically see a lot of startup risks--new businesses that the standard market prefers to avoid.
However, in this economy, the number of startups is down, impacting the amount of business available to E&S insurers, he noted.
Like insurer appetite, however, the impact of the economy varies for the service industries depending on the individual risk.
Some types of businesses are virtually "recession-proof," according to Mr. Laderoute--meaning these risks won't see a decline in insurable exposures. He cited fast-food restaurants, discount stores and auction houses as examples.
Other businesses, though, are hit particularly hard by the recession, such as fine-dining restaurants and higher-priced clothing and auto shops, Mr. Laderoute said.
The economic effects, he noted, are all related to consumer spending. If people are limiting their expenses and not buying higher-priced luxuries, then certain segments of the service industries will suffer as a result, he explained.
While the economy is adding an extra challenge for E&S carriers, Mr. Carney and Mr. Laderoute said they are not in a panic or doing anything out of the ordinary in the current marketplace.
Essentially, as usual, it is all about finding specialty niches, according to Mr. Carney, who noted that Scottsdale is looking to see what forms it can develop to offer something that standard carriers do not.
But when standard carriers lower rates and compete heavily over a given business, it is not in an E&S carrier's best interests to battle on price. "We expand and contract," Mr. Carney said, speaking to how the E&S market is responding to current conditions. "That's exactly what the E&S market does."
Mr. Laderoute said whether the overall marketplace is hard or soft, E&S players typically try not to write an entire account but get pieces of the business--for example, writing property only, or general liability.
When the market is soft, he said, E&S carriers try to develop new products and programs to identify gaps to fill in existing coverages, he added.
To that end, Mr. Laderoute said E&S players have an advantage over standard carriers since they do not have to file rates and coverage forms with insurance departments. This allows them to be more flexible in bringing products to market and pricing them according to risk, he explained.
As for when the long-anticipated market turn will occur, Mr. Kerr said pricing pressure is starting to ease a bit. In May 2008, he noted, average pricing was down 12 percent. In May 2009, it was down 8 percent, indicating that rates decreases are starting to moderate, although we have a ways to go before there is a hard market.
"I think we will see some hardening toward the latter part of the year," he said, predicting that buyers will likely see a slow, gradual turn, with rates finally beginning to increase toward the end of 2010.
Mr. Carney said standard carriers are starting to re-underwrite their books of business now, but the results are not yet being seen in the market for service industry risks.
By the fourth quarter of this year, E&S carriers should begin to see bars and other traditional E&S service industry risks return, Mr. Laderoute predicted.
He said E&S carriers and wholesalers will be ready to write this business when it does eventually come back. "We thrive in harder markets," he said.