One typical sign of an insurancemarket in transition from soft to hard is the shift of certainrisks from the admitted universe back to the specialty market.

And according to some well-positioned industry sources, this isclearly starting to happen in lines such as high-risk property.

“Business that went to the standard market is now coming back,”Mark Lyons, CEO of specialty-insurer Arch Worldwide, assertedduring a presentation on industry financials at Advisen's PropertyInsights Conference held in New York this month.

According to Lyons, admitted insurers are now getting rateincreases on the insurance lines they know best and therefore canshed the risks “they weren't comfortable with anyway.”

“When standard carriers begin to see adverse [conditions for]the [specialty] business they took, they typically return to theircore competency,” adds Richard Shaak, president and CEO of StarrTechnical Risks and president of Starr Specialty Lines. “And we aredefinitely seeing this happening.”

W. Robert Berkley, president and chief operating officer of W.R.Berkley Corp., noted in April during the company's most recentquarterly earnings call that he, too, has seen a gradual increasein the flow of submissions to the specialty market.

IN THE (DANGER) ZONE

Of the account types being jettisoned by the admitted market,the one most commonly referenced is high-risk property.

MarketScout's Market Barometers for April and May 2012 bothmention a retreat by admitted insurers in coastal areas ashurricane season blows in.

MarketScout CEO Richard Kerr notes many admitted markets arecutting back capacity or requiring higher deductibles inwind-exposed areas.

Chris Zoidis, vice president of the special-risk division atbroker Burns & Wilcox, says admitted commercial-lines carriers“seem to be tightening underwriting guidelines around the fringesand nonrenewing accounts with a loss.”

Zoidis notes this is happening especially for properties inProtection Class 9 and 10 areas—the classification related to fireservice in the area of the insured property (with 10 being noservice).

For personal property, carriers have become less tolerant ofclaims when considering renewals, adds Zoidis. Additionally,carriers are retreating from business in mono-line homeowners'insurance in favor of more-profitable auto-insurance business.

“During the soft market, many were willing tostay with mono-line homeowners', but now we're seeing them abandonthat,” Zoidis says. “If they can't get auto and home together,they'll drop the home even if it is a nice account.”

While some of this dropped business does end up with an admittedcompetitor, many national and regional carriers haveadopted the same strategy, Zoidis adds.

THE MODEL IMPACT

Risk Management Solutions' (RMS) Version 11 U.S. hurricane modelundoubtedly has also had some effect on the return of accounts tononadmitted insurers. Zoidis says the model allows admittedcarriers to reassess portfolios on a per-risk basis and identifythose not performing well.

Joel Cavaness, president of Risk Placement Services Inc., asubsidiary of insurance-broker Arthur J. Gallagher, says RMS' modelrevision has had a “significant impact” on carriers' perception ofcoastal property.

“Some looked and said, 'Whoa! We have too much here,'” he saysof carriers' coastal exposure. Most action thus far is in Texas,the Carolinas, New Jersey and New York, he adds.

At the American Association of Managing General Agents' annualmeeting in May, Immediate Past President Mark Rothert noted duringa presentation that RMS Version 11 has had an impact on theavailability and affordability of reinsurance, which has drivensome risks—some of which have been profitable for many years—toexcess carriers.

THE EFFECT ON AGENTS

Zoidis says retail agents are so nervous about whether coveragerenewals will even be made available that many of them aresoliciting quotes from nonadmitted carriers as well, in order tomake sure their clients will have some coverage options.

Cavaness notes that one upshot of this transition is thatproducers will find themselves having some difficult conversationswith clients.

With the prolonged soft market now on its way out, many agentsare no longer able to offer clients a low-priced option at renewal.“If you've been [at the same brokerage] for 10 years, you may neverhave had to deliver price increases,” he says.

With clients seeking Wind coverage in the Southeast, forexample, agents will be forced to break the news of price increasesof 10-15 percent or more, whether the quote originates from anadmitted or nonadmitted carrier.

“We have been educating [agents], because they've never had todo it,” says Cavaness. “It's difficult to bring that to aclient—something they may not expect or have budgeted for.”