Filed Under:Agent Broker, E&S/Specialty Business

The 'Deal': The house rules in the E&S industry are changing constantly

Can the E&S industry evolve to meet a changing environment while dealing with both internal and external risk factors?

About the time NAPSLO 2014 begins, Atlantic City’s newest luxury casino, “Revel,” will close its doors after only two years in operation (including two bankruptcies in that time).  It’s yet another major loss for Atlantic City, which depends on the casino industry for a full 70% of its tax revenue.  In August, Moody’s cut the rating for the city’s $245M in general obligations to junk, and Atlantic City’s already high 13.1% unemployment rate will increase further with the loss of an estimated 3,100 Revel jobs.  There is also a huge potential loss for the lenders, who thought it was a good idea to invest $2.4B - $2.6B to build the state-of-the-art-facility, not to for mention New Jersey taxpayers (see: me) who pledged $261M in tax incentives to hasten Revel’s completion.  Clearly, some smart people seem to have been worried about the wrong things when planning this failed casino.

Are we, as an industry, worrying about the right things? Of all the risks to which Revel was exposed, its backers at least had the luxury of knowing that risk inside the house, at the tables, was a lock.  They knew that math would guarantee they’d win, if they got gamers to play.  E&S markets, however, are exposed to both external factors and the risk inside the house. Carriers should be so lucky as to have the certainty that Revel had: guaranteed underwriting profit, if only enough bets are made.

Reasons for Revel’s quick and total loss reportedly include self-induced hurdles, like a poor layout and an initial “no-smoking” policy.  External factors included increased competition from NY and PA casinos and from online gaming.  Moreover, Revel’s home town had failed to adapt to a changing environment. In Atlantic City, gaming accounts for 78% of casino revenues. Compare that to Las Vegas, which also had a recession-driven decline in gaming revenues but which relies on gaming for only about 34% of revenue.  Relying on entertainment, Las Vegas’ overall revenues increased every year since 2010, while Atlantic City’s have declined.  Las Vegas dealt with environmental risks and is growing.  Atlantic City tried too late, and appears to have failed with Revel’s closing being the latest blow. 

Unlike the static gaming rules at a casino, the house rules in the E&S industry change constantly. New variables to underwriting property, casualty, and professional risk include climate change, extreme weather, rapid class action status for investors, ever increasing medical costs and jury  awards, and court rulings challenging long-held truths like what “occurrence” means.  Can the E&S industry evolve to meet a changing environment while dealing with both internal and external risk factors? 

Consider the fictional ten-year snapshot below on an imaginary excess casualty account.  Assume the exposure growth kept pace exactly with inflation and that they marketed their business once in the recession and got a big premium decrease in 2008.  The limits and attachment points are constant, at $25M and $1M respectively.  In 2004, the carrier’s “bet” started at 223 -1 (though the odds were actually longer, considering commission reduced the premium received and defense-outside-the- limit increases the maximum possible outlay).  By 2013, they reached 301-1 (-35%), after having spiked to a high of 385-1 in 2008.  Not only is the carrier’s payback period now much longer, but attachment point has been halved in real terms, because medical costs trends and CPI have eroded the real value of the primary layer over the past ten years.  In short, the bet got a lot worse, but the carrier hasn’t really noticed.  $1M primary attachment points have remained standard since the mid 80’s for all but the toughest risks.  In this way, the market hasn’t evolved to meet an external challenge.   

Here’s a list of just some of the ways that our collective business (the house) is exposed to external, uncontrollable and systemic risk factors:

Training & Talent

Markets and brokers have skimped on training as bottom lines suffered. It’s a natural reaction to rising expenses, and deteriorating results. Training takes time and money. Most can spare neither. But, will next-generational decision makers be equipped with the tools they need to react quickly to a changing environment, like Revel did not?

Casual Capacity

The risk that E&S markets “bet” against is increasing in cost, but our response to that trend has not kept pace.  Markets continue to casually and easily put up $25M in limits, with  “$1,000 per million” pricing readily available in high excess casualty layers. These “commodity” layers would need a least 1,000 similar loss-free accounts to cover any single limits loss, and logically such bets should extremely  rare. Currently, the longest odds to win the Super Bowl before the 2014 NFL season are the Jacksonville Jaguars who are opening at 250-1. A team 4 times as bad as the Jaguars winning the Super Bowl in February 2015 carries those same 1,000-1 odds. Yet, nearly everyone at NAPSLO has at least one story where a loss went into the high excess layers unexpectedly.

Bad/Slow/Too Much Data; combined with 1 & 2 above

It’s true that both markets and brokers are operating with more access to ‘big data’ than ever. The question remains whether we, as an industry, will be able to translate that data into actionable information upon which better decisions are made. 

In a famous scene in the 1995 movie Casino, a hapless supervisor of a section of slot machines (Don Ward) isn’t aware until it’s too late that he has been scammed. Don knew the data and he knew what was happening wasn’t right. But he didn’t act fast enough and gets fired for it by his boss, Ace Rothstein (Robert DeNiro):

Ace Rothstein: Four Reels, sevens across on three $15,000 jackpots. Do you have any idea what the odds are?

Don Ward: Shoot, it’s gotta be in the millions. Maybe more.

Also notable is the fact that Ol’ Don Ward’s bad/slow decision and subsequent firing in the movie ultimately led to the downfall of “the house. 

Haphazard Market Underwriting Controls & Oversight

There’s and old poker tenet often cited by insurance icon Warren Buffett: “If you’ve been in the game for 30 minutes and you don’t know who the patsy is, you’re the patsy.” This adage applies uniquely and especially to our industry, where a “patsy” can often believe it has won a round and so proceeds to go on an ill-conceived betting binge.  Many a program or deal or relationship has been lost because of a new player who entered the marketplace late, with insufficient experience and/or information.  We compete in an industry in which the least informed participants are also those most likely to believe they have “won," if only for that period of innocence until the losses begin to mount.

As compared with price, which is measurable and immediate, great service and world-class claims handling are hard to sell, because only a small fraction of our customers will ever really need us. No matter how much risk consultation, safety expertise, claims professionalism, or good old fashion long-term relationship a market or broker can offer, there will always be some customers willing to move their business for lower premiums – and for relatively nominal differences. Nevertheless, our industry’s challenge is to continue to diversify our offerings and effectively “de-commoditize” ourselves. 

Our ability to grow and thrive as an industry will depend on our response to the changing environmental factors around us, our ability to create a sustainable risk-transfer model driven not merely by price, but by value as well.  We need a model where both the market’s and the broker’s revenue streams can be diversified away from simply trading premium dollars for occasional loss payouts –  where risk-bearing markets are better incentivized to make reality-based underwriting judgments using accurate information and to offer clients risk consultation and solutions.   

Revel faced external, uncontrollable forces like online gaming and the negative effects of its early “no smoking” policy.  The E&S industry is similarly exposed to various risks beyond its control, with cat bond markets, judicial re-interpretations what an “occurrence” is, runaway jury awards, brokers operating with a legitimate fear of losing deals to substandard competitive proposals, loose authority letters, abundant treaty capacity and capital, low/no bond yield, and good old fashioned underwriting risk among them.

Successful markets and brokers will evolve and respond to both their internal and external challenges, as Atlantic City and Revel didn’t. Their odds at success will improve if they pay attention to emerging risk and adapt. Better training for their brokers and underwriters who can access better data and offer clients better product suites beyond simply paying claims, or hunting for quotes, will make it a lock. 


  • Wall Street Journal 8/12  Closing of Revel Casino Deals Another Blow to Atlantic City
  • Star Ledger 8/17 “Revel in Atlantic City will Close in September”
  • CPI Data: Bureau of Labor Statistics


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