NU Online News Service, Sept. 21, 3:05 p.m.EDT

Inland-marine insurers are faced with a thinning and agingtalent pool in a line of insurance that requires highly specializedindustry and insurance knowledge, according to a recent ConningResearch & Consulting report.

Additionally, this segment, which has consistently been thebest-performing medium-sized property and casualty line, is facingpressures related to heightened competition and fewer availablepremium dollars due to a flood of new entrants and impacts from theweak economy.

Regarding talent, Conning says inland-marine insurer operationsare typically staffed by individuals with “deep expertise in anindustry segment served by an inland marine product and in itsinsurance exposures.” The report quotes an industry source,speaking to the relationship between product focus and financialperformance, as saying that “it's not the classes [of business]that make [inland marine] profitable—you have to make itprofitable.” Conning says this underscores the principle thatknowledge of risk and behavior in the marketplace is whatultimately drives performance

However, Conning notes that insurers are cutting back onin-house training programs, and professionals are finding more workon their desks as the result of widespread industry layoffs. “Theneed for adequate training in inland marine is exacerbated by thefact that much of the current leadership of this industry is of theBaby Boomer generation and faces imminent retirement,” Conningnotes.

Compounding the talent issues, inland marine has seen many newentrants who have noted the profitability in this line and arelooking for a slice of the pie. Since 2006, Conning says, 10companies have announced the formation of inland-marine teams andlaunching plans to write business in this segment.

“One potential effect of the formation of the new inland-marinewriters in the past half-decade is dilution of talent pools atexisting inland marine insurers,” Conning says. “The high demandfor insurance knowledge and industry expertise to support the manyproducts in inland-marine underwriting, loss control and claims hascreated substantial demand for experienced practitioners with goodtrack records.

Another impact of the influx of new entrants has been toheighten competition in an already-soft market.

Additionally, the available premium in the segment is shrinkingdue to economy-related issues affecting inland marine's two biggestlines: construction and trucking. For construction in particular,Conning notes new insurers were lured into the market during theconstruction boom of 2000-2006. However, the bubble-burst in2008-2010 has left insurers battling over less premium. “Somelingering impacts of the construction boom-bust cycle oninland-marine insurers include expanded coverage grants,particularly in soft costs, hastily built structures during theboom, and increased exposures created by contractors cuttingcorners in post-crisis circumstances.”

Other inland-marine lines, such as fine arts and yachts, havealso seen new entrants, but Conning notes that these traditionallydesirable markets have faced challenges “as the recent financialcrisis wreaked havoc on the high net worth sector and particularlyon certain classes of luxury goods and property.

Still, even with the challenges, Conning says inland marine wasstill the best-performing medium-sized P&C line in 2010, withdirect written premiums of $13.2 billion. Combined ratios haveaveraged between 10 and 15 points lower than those of the broaderP&C industry “for several decades.”

One reason for the inland marine success, Conning says, is thatit is principally a non-filed class, “relatively free from rate andform restrictions, driven instead by the business judgment of itspractitioners.” Conning notes that inland marine is also largely afirst-party line of insurance, “with greater transparency in itsresults, as distinguished from the uncertainty often surroundingresults in third-party lines, caused by occasional revelations ofloss-reserve inadequacy.”

Digging deeper into inland-marine results, Conning says the mostprofitable segments are for personal inland-marine products andsome of the more-specialized commercial inland-marine classes.“Larger size or scale was not found to be correlated with superiorperformance, as many of the most successful inland-marine insurerswere not in the upper tiers of the premium league tables,” Conningnotes.

Conning also says there are a few “pure play” companies in thesector that specialize in only one inland-marine product, and thesespecialists outperformed the generalist inland-marine writers.Specialists wrote in areas that include event cancellation, finearts and equipment breakdown warranty.

Conning cites Liberty Mutual as one company that has shown a“meteoric increase” in reported inland-marine premium over the pastdecade, achieved through organic growth. Hanover and OneBeacon alsoachieved strong organic growth over the last decade “though therise of Liberty Mutual stands out,” Conning says.

The report cites QBE as a company that has achieved strongnon-organic growth through mergers and acquisitions.