In his new role as Senior Vice President ofExcess & Surplus Lines at Philadelphia Insurance Cos., ScottBayer will be tasked with defining the carrier's presence in thenonadmitted market, identifying profitable target niches, expandingthe insurer's product offerings to existing agents and expandingits distribution sources.

Here, Bayer talks with NU about where opportunities can be foundin the E&S market, the need for diversification in carriers'risk portfolios, and the age-old conundrum of balancing marketshare and underwriting profit.

What do you consider the biggest growth areas in theE&S market at the moment, and where are E&S insurersgetting rate?

I don't believe there is one single growth area for E&Sright now: Some of the best opportunities we are seeing areindividual accounts being carved out of standard markets due toadverse experience or exposure volatility, such as largerhabitational accounts written on a guaranteed-cost basis. Manystandard carriers are realizing this approach leaves no room forerror with respect to claim frequency. Surplus-lines carriers areable to approach at various attachment points and rates thatreflect an individual account's loss history and underwritingcharacteristics.

With so many carriers pulling out of high-risk sectorsand those risks now being shifted back to the E&S market, doyou see those risks staying there, or is it a cyclicalthing?

I would like to say that business moving back to the E&Smarket will stay for the long term. However, having done this for25 years, I know that sooner or later parts of the business willmove back to standard carriers. As rates increase, terms tightenand profit margins increase, the business becomes a target forstandard carriers willing to write it for less and include it intheir portfolio of coverage.  

Watching the market begin to tighten over the past six monthsand looking at the business slowly being corrected (versus sharpspikes typical of past hard-market cycles), there is somediscussion of that slower turn assisting in keeping the business inthe E&S market for longer periods of time. Of course, carriersthat are able to diversify their portfolios will have greateraccount retention over time to protect against such migration ofbusiness.

Philadelphia Insurance Cos. has differentiated itself inthe insurance marketplace by offering such a wide variety of nichecoverages. How much is this strategy currently applied to theE&S market, and what unique coverages can you see being writtenin E&S that may present new avenues ofopportunity? 

Philadelphia has experienced tremendous success in identifyingniche insurance opportunities, and there is no reason the E&Sside of the house will vary from that strategy. The PhiladelphiaE&S operation will approach opportunities in a continued nicheapproach that is thoroughly discussed internally before beingreleased. 

How would you strike a balance between carrier desirefor more market share against the need for more thoroughunderwriting in order to prevent losses?

[That's] the great question of market share versus underwritingprofit. The easy answer is underwriting profit trumps market share100 percent of the time. Now, with that said, how do companiessurvive without premium growth? How do companies survive withexpense ratios that overshadow loss ratios? Theycan't. 

You answer this question by simply working hard in identifyingas many opportunities as you can that justify a minimumprofit-margin opportunity. Get out there, mix it up, and find thoseopportunities that allow you to grow profitably. If it was easy,anybody could do it.

—Interviewed by Shawn Moynihan