National Underwriter had two reporters on site inAtlanta Oct. 8-10 at the National Association of ProfessionalSurplus Lines Offices' (NAPSLO) annual convention: Editor-in-ChiefBryant Rousseau and Chad Hemenway, senior editor, markets. Here aretheir reports from the show floor, along with comments from severalNAPSLO board members on what they believe the biggest challengesand opportunities in E&S lines will be over the next 12months.

THE RUNDOWN ON RISKS

There's an overwhelming consensus that Catastrophe ExposedProperty has led the charge on risks exiting standard-linescarriers for the surplus market. But what are some of the othertypes of exposures where the E&S market is seeing an uptick inbusiness?

“Tougher products,” says Carol Stark, vice president of SelectRisk, Casualty & Programs, at CNA Insurance. “When the marketgoes soft, heavy farming and heavy mining machinery flow into[standard carriers]. But they're coming back to us.”

Stark pointed to a recent deal where CNA's Select Risk surplusdivision wrote the risk for a tunnel-boring machine at amining-equipment company, while its retail arm wrote the otherrisks.

Roxanne Mitchell, president of the surplus-lines unit at XLInsurance, agrees that “severity-driven” products, in whichadmitted carriers were dabbling during the soft market, arereturning to their traditional home in E&S.

Stark adds that retail-channel markets are also shying away fromrisks associated with foreign-made goods, giving the wholesalespace plenty of opportunity on this front.

Another manufacturing class in which E&S is findingadditional business: sports protective products, driven in part byall the recent media coverage (and legal activity) around thesubject of football helmets and concussions.

And in Hospitality risks, “retail markets are gettingconservative with regard to their appetite for Assault &Battery, so they are pulling out of anything with a large liquorexposure. So we're being very opportunistic there,” Stark adds.

Mitchell notes that “Miscellaneous E&O continues to grow incertain tougher segments, such as security guards.

“And we're seeing some growth in certain tougher Constructionsegments, such as Street and Road and Sewer,” says Mitchell, whoadds that XL is seeing “a huge increase in interest” in its BufferAuto product with commercial-fleet and other transportationcustomers—a product that XL developed after last year's NAPSLOconference, where it became clear a huge demand existed for thiscoverage.

 — Bryant Rousseau

NRRA IMPORTANCE STRESSED AS DODD-FRANK REPEALTHREATENED

NAPSLO Executive Director Brady Kelley says members have been toWashington to “stress to [Congress] the importance” of theNonadmitted and Reinsurance Reform Act (NRRA) portion of theDodd-Frank Act, which has been under fire by Republicans, includingpresidential candidate Mitt Romney, who has vowed to repealDodd-Frank if he is elected.

Kelley told members attending the general session that the tradeassociation “has to protect” provisions in the law dealing withnonadmitted insurers. He called the NRRA a “good, strong law,”which will take time to implement to its fullestextent.

There may be hope of saving some parts of Dodd-Frank if Romneywins the election and follows through on his repeal threats. Duringthe first presidential debate, Romney said there are someregulations in the financial-overhaul act that are warranted.

Former Florida Gov. Jeb Bush, the convention's featured speaker,used Dodd-Frank as an example of the kind of overregulation he saysis “stifling investment.” He blasted the 2,450-page document'svagueness, with countless clauses containing the word “may.”

Remembering his audience, Bush, who calls himself anincreasingly “libertarian conservative,” says the NRRAportion of Dodd-Frank is not a subject of hiscriticism. 

The former governor also praised the surplus-insurance industryfor its response during his tenure,which included the 2004 and 2005 hurricane seasons. Thestate's recovery was aided, he says, by the lack of regulatoryoversight of surplus lines.

“We recovered far faster because of your industry,” he told thepacked meeting room.

— Chad Hemenway

A GROWING CONCERN: CARRIER SOLVENCY

Retail brokers are increasingly concerned about the solvency andindependence of their potential insurance partners, says Alan J.Kaufman, president and CEO of wholesaler Burns & Wilcox.

“We've never had to send out so many financial statements,” hesays, adding that it is a request he's happy to fulfill. “[Brokers]are re-evaluating who they want to do business with. Maintainingrelationships is important, and they don't want any E&O claimsfor themselves.”

Kaufman says he'd rather see his competition healthy thanotherwise. The industry then looks better overall.

But the fact is, with so many producers still competing forpieces of the same pie, he predicts more consolidation amongbrokers large and small.

Kaufman says B&W has increased market share by hiring more“ambitious, eager and innovative” young talent while spending on anintense marketing campaign. Submissions are up, and the wholesaleris binding more, he adds.  —CH

XL: WORKING ON THERAILROAD

In just over a year, XL's surplus-lines unit has expanded itsfocus from just one line of business to five. One of these newfocus areas: railroads.

“We came out of the gate with all the coverages any railroadcustomer could need,” says Roxanne Mitchell, president of thesurplus-lines unit at XL Insurance. Mitchell notes that she and herteam have more than 100 years of combined experience with the railmarket.

“The railroad business has been great, performing extremely wellthis year from both a top- and bottom-line perspective,” she says,adding that some of the traditional rail markets—and there aren'tmany that play in this niche space—have been retreating oncoverages or significantly raising their rates, which has helped XLquickly establish itself in this space.

“It's a very volatile business, and railroad exposures arereally different from anything else,” says Mitchell, citingderailments as just one example. “But we really know this businessand have great relationships, and it's a line we're committed toand excited about.”  —BR

MARKEL OVERHAULS IT PRO POLICY

During the NAPSLO convention Markel announced the launch of itsoverhauled IT Professional policy, which now includes configurablefirst- and third-party Data Privacy and Security coverage, GeneralLiability and Media Injury options in addition to basicProfessional Liability.

The policy includes coverage for regulatory fines and penalties,including Payment Card Industry and HIPAA fines.

Coverage under the Media section extends to content published ina variety of forums, including social media.

“It also includes our unique coverage for theft of money andsecurities, as well as interruption costs to restore the insured'sdata and extra expenses while recovering from a breach,” says JakeKouns, director of Cyber Security and Technology Risks underwritingfor Markel.  —CH

THE CNA EDGE IN CLAIMS, RISK CONTROL

When asked what sets CNA Select Risks apart from its competitiveset, both Carol Stark, vice president of Select Risk, Casualty& Programs, at CNA Insurance, and John Angerami, the head ofSelect Risk, both zeroed in on their claims and loss-controlcapabilities.

“We have a claims group dedicated to E&S—and that's veryunique,” says Stark. “Especially on the E&S Casualty side, youneed claims specialists with the 'intestinal fortitude' to fightthose claims that need fighting.”

And in risk control, CNA Select Risk has a dedicated team ofProduct Liability specialists who are all UnderwriterLab-certified—and certified in Six-Sigma and LeanManufacturing.

“This gives them a unique perspective on tough product andmanufacturing risks,” says Stark. “We can achieve good results froma Product Liability and Premises standpoint just by having themimprove manufacturing processes. And insureds have really seen thevalue of that.”  —BR

OPTIMISM: MORE LINES IN THE WATER

Hank Watkins, president of Lloyd's America, says those he spokewith at NAPSLO have expressed optimism for the U.S., driven by moreactivity—that is, more submissions. While many of these submissionsare merely lines dropped in the water—producers seeing what's outthere for their clients—that's still an improvement over eightmonths ago, when producers were just “passing the lake.”

“It feels better around here than it did a year ago,” Watkinsobserves of the general NAPSLO atmosphere.

On the industry response to emerging risk, such as ContingentBusiness Interruption and Cyber Liability, Watkins says it takestime to understand exposure. He uses Employment Practices Liabilityas an example: It used to be a big unknown, with products rolledout little by little. But now it is “freely underwritten.”

“Will Cyber ever get to that point? I don't know. It's such ahigh, global risk,” he says.  —CH

SMALL-BIZ EXCESS CASUALTY: TRICKY, BUT CAN BE'GOLD'

There are a couple competitors “in the trenches” writingsmall-market Excess Casualty, but many carriers avoid it. Theeffort just doesn't pay—even though loss ratios are good—becausethe premiums aren't high: Expense ratios can cancel out the moneycoming in. But Linc Trimble, head of Excess Casualty at Torus, saysthere is money to be made—if you're efficient.

In fact, Trimble says “small business can be gold” if you cancut the time spent on underwriting and servicing. “It's anunderserved marketplace, and we can make a difference,” hesays.  —CH

SAY GOODBYE TO AS-IS RENEWALS

Yes, there is some positive rate movement—but with that comes“more trading and bargaining” at renewals, says David Bresnahan,president of Lexington Insurance Co. The “as-is” renewal is rarer.In the end, some insureds are prepared to take on more risk viaself-insurance or co-insurance.  —CH

RISK ON THE ROOF

It seems appropriate that there was some specialty risk on theroof of the Marriott Marquis, host of the convention, for most ofOct. 8. It was hard to miss the production trucks in front of thehotel, but passersby may not have seen the actors on the roofthrough the dome near where CRC, LIU, Markel and National IndemnityGroup were stationed. Rumor was the movie being shot was “CatchingFire,” the second film in the “Hunger Games” trilogy, due to bereleased in November 2013. And on Oct. 9, window-washers weredangling from ropes at the very top of the 52-story hotel. So who'swriting them?  —CH

THE LONG & TALL OF IT

If a study is ever done of the industry with the tallest averageheight of the professionals working in it, I'd wager that surpluslines comes in near the top (maybe just behind the NBA). There werelots and lots (and lots) of attendees soaring past the 6'4” mark.Never has this 5'11” (and a half) reporter felt so short at aconference!  —BR

Matthew Nichols
NAPSLO President
President, All Risks Ltd.

“Rates are being driven up in Construction risks, personal linesand Workers' Compensation, among others, and the standard marketsare trying to clean up their books of business. We expect to seesurplus' top-line premiums start moving back to growth again. Thedriving factor is that the standard side has been underpricingnontraditional risks, and it has been a struggle [for them] to findacceptable levels of profitability for those lines of business.

“Whether the economy helps us or not, the volume of businesswill be more significant than it has been in 2012.”

James Drinkwater
Member, NAPSLO Board of Directors
CEO, AmWINS Brokerage

“The specialty marketplace remains fluid. We have seen asignificant increase in submissions and bound accounts in a varietyof areas as the standard markets seem to have a lack of appetitefor certain classes and specific industries while our marketsunderstand the inherent risks and can underwrite themaccordingly.

“Our largest growth area has been Catastrophe Exposed Property,and this will continue to be both a challenge and an opportunity.In addition, a few markets such as New York Contractors,Transportation and Health Care have moved away from the standardadmitted marketplace.”

Joel Cavaness
Member, NAPSLO Board of Directors
President of Risk Placement Services Inc.

“The economy continues to be sluggish, which affects surpluslines. A certain amount of our success depends on providingcoverage for startup businesses with no experience in insurance. Weface a dilemma if there is a decline in startups due to theeconomy.

“Finding, recruiting, retaining and educating the right peoplein the industry is always a challenge. We need to keep the energy,momentum and growth of business going.”

Steven Gross
Member, NAPSLO Board of Directors
Chairman & CEO, Metro Insurance Services Inc.

“From the vantage point of a program manager, the greatestchallenge right now and for the foreseeable future is to manage ourclients' expectations on rate increases. It is evident that theindustry has come to a crossroads where underwriting profitabilityis a high priority as a result of low investment income and poorexperience over the last seven years of declining rates.

“Continuing to reduce redundancy in reserves has to become morelimited as the last few years of higher loss ratios come home toroost. What is especially challenging is the forecasting ofappropriate rate increases on accounts that have proven to beprofitable (as a result of mild weather events) despite thedepressed rates, knowing it is only a matter of time before thoseaccounts are not profitable.”

Gilbert C. Hine
Member, NAPSLO Board of Directors
President of McClelland & Hine Inc.

“For carriers, the challenge is achieving adequate ROI writingbusiness in a market with continued significant capacity, fallinginvestment yields and declining underwriting margins. For brokers,the challenge is in effectively dealing with spotty marketconditions as carriers begin to implement corrective actions ontheir more marginal lines. Both must continue to make majorresource commitments to implement effective, timely technology toadd value to their relationships and achieve increases inproductivity in an age of instant information and 24/7communication.”

Letha E. Heaton
NAPSLO President, 2010-2011
Vice President, Admiral Insurance Co.

“Addressing the troublesome and pretty chaotic Catastrophe andWind environment, we know that weather patterns have demonstratedthat historic models aren't reliable. What will be a reliable modelis still largely an unknown.

“As for Cyber & Data Breach coverage: Everyone wants towrite it, but nobody wants that first ground-breaking class actionsuit. What the climate will be for plaintiffs in this class will inno small part be determined both in courtrooms and by statutes. Myguess is we haven't even anticipated all the ways this exposure cango wrong.”