The excess and surplus lines market may be seeing some positive rate movement, but a lack of supply or capacity isn't the reason.

Income statements, rather than balance sheets, are driving rate movement in the market, says David Bresnahan president of Lexington Insurance Co.

Bresnahan was part of an A.M. Best Co. webinar, “Inside Today's Surplus Lines Market.”

“The management at many companies is changing the goal posts—the finish lines—as it pertains to how low a combined ratio [is needed] to underwrite to in order to generate a satisfactory return,” Bresnahan says.

Lexington is seeing rate increases of about 14 percent thus far in 2012 after 7 percent increases in 2011, he adds, but more rate does not always translate to more premium.

The American International Group Inc. (AIG) subsidiary is most noticeably seeing submissions rise in property. Lexington is writing more new business in property in 2012 than it did in 2011, Bresnahan says. The insurer is getting looks in other lines but the competitive market may be keeping down additional new premium, he adds.

Maureen Caviston, president of Partners Specialty Group, says unforeseen losses in the standard property market—especially last year—has “resulted in some property opportunities coming in to the [surplus] market because standard markets had not factored that in to their underwriting.”

Like in 2011, this year has presented unpredicted losses. A year ago, inland wind and flood may have been the culprits, but this year wildfires are giving standard carriers claims “totally unforeseen,” Caviston says.

The E&S market is being affected by two rival forces: an underwriter's need to tighten coverage and increase rate, and his or her desire to maintain market share, states Robert Sargent, president and CEO of Tennant Risk Services and president of the National Association of Professional Surplus Lines Offices (NAPSLO).

“There some tension because the underwriters don't want to lose market share—they'd like to retain those accounts if they can,” Sargent observes. “But new business underwriters with appropriate levels of information and documentation are willing to take a shot at new business as well.”

Caviston says the challenge for incumbent underwriters is great. New underwriters don't have the same history on an account as the incumbent—which could lead to that new underwriter offering a lower price.

Special Reports /

Income Statements, Not Balance Sheets, Driving E&S Rate Increases

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