NAPSLO’s 2015 Annual Convention, held at the Manchester Grand Hyatt San Diego and Marriott Marquis San Diego Marina, drew record attendance this year, reinforcing the sentiment that business in the Surplus Lines market remains, in a word, excellent.
One need look no further for proof of the E&S industry’s favorable status than A.M. Best’s 2015 Surplus Lines Report—which illustrates how surplus lines insurers have continued the momentum gained in 2012 and 2013 by ending 2014 in strong form, with nearly $1 billion of net underwriting profit that included over $525 million of net accident year underwriting profit and $376 million in additional profits taken from prior years in the form of favorable reserve development.
Additionally, during 2014 price momentum likewise was sustained as direct premiums in this sector grew 6.7%.
NU was on hand in San Diego conducting interviews, providing content for a section of PropertyCasualty360.com specially devoted to the conference, and producing the NAPSLO show dailies over three days. Editor-in-Chief Shawn Moynihan sat down with NAPSLO Executive Director Brady Kelley for a conversation about the state of the E&S business, the evolution of cyber risk and communicating the message of wholesaler value.
Shawn Moynihan: We talk about the E&S industry having entered what some are calling like a “new normal” in which outside capital drives prices down but it also allows for more experimentation into the types of non-standard risks that surplus lines writers can write. I was curious about whether you think the E&S business is going to ever really be the same again.
Brady Kelley: I think everybody is calling it a “new normal,” yes. There’s an abundance of capital and we’ve had a relatively short break from any catastrophic events or significant losses, so that is still driving some pricing pressure in certain areas.
A significant cat loss, though, changes that “new normal” but I don’t think it changes the capital. I think if you read the A.M. Best report, you’d see surplus lines and carriers are performing really, really well. They’re returning on that capital, so I don’t see the capital part of the equation changing much.
Shawn: Because it’s still such a great bet.
Brady: It’s a great bet, and you’ve got some really savvy executives running these carriers and performing very well. I just think a big [cat] event changes everyone’s thoughts on what the pricing should be. We haven’t had one for a while.
Shawn: Much of the growth in P&C right now is in surplus lines. Premiums are up again, and the E&S market is currently one of the success stories in P&C. What do you think is the major differentiator that gives the E&S market such an edge in such a highly competitive market?
Brady: One key element is the pricing discipline, the underwriting discipline that they see in those carriers and the innovation that they bring to the marketplace, the types of coverages that are emerging, new risks that are emerging—driverless cars, drone technology. We keep talking about cyber liability and that is certainly not new, but more and more companies are waking up to the fact that if they suffer a breach it could severely damage their business.
I think you’ve got more and more insureds figuring out what the risks are and they’re buying more and more product as a result, and our members are creating new programs and coverages to fit those needs. You’ve got some highly disciplined carriers underwriting coverage and some expert brokers developing programs to meet the needs of insureds. I think that’s what gives them the edge.
Shawn: I wanted to talk about cyber, because on the surface, it really is a surplus lines risk in that you need some serious expertise and a deep bench of underwriting talent in order to price it appropriately—yet there are so many traditional-market carriers that want to be in that business, and several are. In the end, do you think cyber should be more of an E&S play?
Brady: I do. It is primarily and absolutely an E&S play. I think you’re right, more standard carriers are starting to develop some level of programming around it, but they’re not offering the broad coverages that the surplus market is. I think that as the cyber risks evolve, as insureds’ understanding of what their exposures are change, products will continue to innovate to meet those.
Lloyd’s and the University of Cambridge’s Centre for Risk Studies released a new report in July [“Business Blackout”] that looks at the insurance implications of a major cyber attack on the U.S. power grid and other large installations. That’s an event we’re thinking about as an organization, something along the lines of a Northeast power grid failure or attack and the substantial losses that could result from that. Those are types of potential major events that I don’t think anyone is prepared for, but it’s going to be the E&S market that starts to develop the type of protections that will be needed.
Shawn: I realize that one of the ongoing efforts by NAPSLO is communicating the value of surplus lines solutions. How has reinforcing that message changed over the past several years, if at all?
Brady: I don’t think it’s overly difficult to communicate the value of wholesale distribution, the value of a wholesaler or a NAPSLO member to solve your complex problem. These members make it easy to describe why it is you want to go and use them to solve a complex risk.
Two years ago at this convention, we did change our logo and we added the tagline, “Where complex risk meets innovative solutions,” and then started describing our members’ attributes around that message of why you want to trust them with your business. But from there, the editorials that we are able to place and the ads we’ve placed, the story is pretty simple to tell. I don’t think there’s a challenging message in that. Our only challenge is to figure it out where we can best spread that message.