NU Online News Service, Sept. 13, 1:04 p.m.EDT

Specialty insurers increased premium at an average 4 percentannual-growth rate over the past five years, beating the industryaverage, which remained close to flat over that time, a ConningResearch & Consulting report says.

Conning says almost 75 percent of insurers in the topunderwriting performance quadrant for the industry are specialtyinsurers. The report also says that insurers are moving towardincreasing their specialty capabilities, illustrated by recentmerger and acquisition trends. Conning cites 2011 examples ofHanover acquiring Lloyd's insurer Chaucer for $510 million andSelective acquiring the renewal rights for Alterra's $77 millioncommercial excess and surplus book of business.

This expansion, Conning says, could improve insurers' riskdiversification, underwriting results and premium-growthopportunities. But the firm notes that expansion withoutdevelopment or acquisition of expertise “misses the criticalsuccess factor associated with specialization.”

Additionally, Conning says newly minted specialty insurers maynot have access to smaller specialty markets through their regularretail distribution channels and may not receive adequate supportfrom wholesalers and managing general agents.

“The third concern is that naive capital could disrupt thesemarkets,” Conning says.

Conning acknowledges that “specialty insurance” is an “impreciseand inconsistently defined term and marketplace.” The report says,“Insurance professionals and industry analysts use this and similarterms to describe classes of insurers, classes of customer markets,and distribution processes. These include, at times, excess andsurplus insurance, high-risk insurance, customer niches, and alsoinsurance provided by single-product providers. These markets oftenoverlap, a factor in the imprecise definition.”

Still, Conning notes that many industry professionals andanalysts consider specialty insurance to be more profitable thanother lines, “despite its amorphous market definitions.”

Conning says the sum of specialty sub-segments it analyzed forthe report represented more than 40 percent of property andcasualty insurance premiums in 2010, with the high-risk marketaccounting for about $70 billion, including $32 billion in E&Spremium.

Addressing distribution dynamics in the specialty market,Conning says it seen “an expansion in the channels, including onehigh-risk market insurer that expanded into direct onlinedistribution. Some insurers are also offering specialty productsand programs to retail distributors, bypassing wholesalers andMGAs. “The condition is exacerbated by a proliferation of onlineportals funneling business to a number of destinations andbypassing the multi-tiered specialty-distribution system,” Conningsays.

The firm adds that the increase in specialty products andinsurers is “rapidly adding to the complexity of specialtydistribution,” although this is somewhat offset by regulatorymodernization for the non-admitted market, the rise of largerwholesalers with a global reach and better technology.

“We see compelling reasons to drive the growth of electronicallysupported exchanges for specialty insurance,” Conning says. “Thefuture could have more-transparent products and pricing and havefaster and more cost-efficient processing.”