ONE OF the key roles of the excess and surplus-lines marketplace is to function as a “relief valve” during hard markets. When standard insurers start restricting their underwriting or pull out of certain states or classes of business altogether, affected risks have always been able to turn to the E&S markets. The relief-valve role was amply demonstrated during the recent hard market, when direct premiums for E&S insurers rose by 62% in 2002 and a still-healthy 28% in 2003, according to A.M. Best. At the end of that year, the E&S market accounted for 13.1% of commercial-lines premiums, Best's noted, up from 6.1% a decade earlier.

In some states, the move to the E&S marketplace was even more pronounced. In California, the leading state in the country for E&S business, E&S premiums were up 104.5% in 2002 and 43.1% in 2003, according to the Surplus Lines Association of California. But in 2004, growth dropped sharply to 8.4%, according to information the association released in January. Undoubtedly, E&S business was off substantially around the country, as standard carriers, in better financial shape after several years of hard-market premiums, began to once again eye business they'd let go three or four years earlier.

Where will the E&S market go from here? One place to start looking for an answer is with the reinsurance community. Traditionally, Jan. 1 has been the big date for renewals. After receiving them, insurers get a clearer picture of a key factor affecting their costs and capacity for the year ahead. Tom Leonhardt, senior vice president of Towers Perrin Reinsurance, a major reinsurance broker, said that when he entered the business 30 years ago, practically all reinsurance treaties renewed on Jan. 1. Today, renewals take place pretty much throughout the year, he said, but Jan. 1 remains the single largest day for them.

Overall, Leonhardt said, reinsurance rates were “softer” this Jan. 1, with rate reductions most in evidence on the property side, the degree of softening varying by a book's exposure to hurricane losses. Direct and broker reinsurance markets, including London, are all looking for business aggressively, Leonhardt said, “So there's plenty of capacity out there, even for earthquake aggregates.” After property insurance, he said, reinsurance next is most plentiful for general casualty insurance and then the traditionally longer-tail lines.

Leonhardt said it's hard to generalize about the effects of reinsurance on insurer formation or expansion. Since 9/11, a number of carriers, some Bermuda-based, have entered the E&S market, but some were backed by very large parents that didn't necessarily need much reinsurance support, he said. On the other hand, small, regional E&S insurers with a relatively narrow focus could well use

reinsurance to expand and are welcome partners for reinsurers because of the restricted scope of their coverage. Reinsurers, he observed, not only provide insurers with surplus relief (giving them more capacity to write business) but also can provide added expertise in lines of business, which can help an insurer grow. The upshot, he agreed, is that for either E&S or standard markets that want to expand into new areas, the reinsurance support “most definitely” is out there. Therefore, reinsurance conditions are right for standard insurers to aggressively take back business from the E&S markets-and for E&S insurers to resist, where they wish to.

What are the participants in the E&S marketplace seeing and predicting? In the remainder of this special report, a number of current and former leaders of the American Association of Managing General Agents and the National Association of Professional Surplus Lines Offices give their perspectives. Executives of several prominent E&S insurers and a wholesaler weigh in as well.

Joe Hutelmyer
Seaboard Underwriters

The year ahead for the E&S marketplace likely will be characterized by caution and slow growth, according to Joe Hutelmyer, president and CEO of Seaboard Underwriters in Burlington, N.C. Seaboard, which does business nationwide, focuses exclusively on trucking and other commercial-auto risks. Hutelmyer also is the current president of the American Association of Managing General Agents.

Hutelmyer said he has spoken to some E&S carriers that are projecting 10% growth for 2005. Overall, however, he said the consensus seems to be for very limited growth, with lower rates accounting for negative 5% growth in some lines.

Hutelmyer said he expects competition from standard markets to come primarily in personal-lines auto and property. In contrast, “We're not seeing any activity coming in on commercial auto or commercial property,” he said.

In regard to how E&S carriers might respond to competition from standard insurers in the year ahead, Hutelmyer said, “I think we're going to see people picking their spots.” They'll fight to retain the profitable portions of their books, he said, while looking to grow where they see opportunities. He believes that the E&S market will continue to fill the void created by the exodus of the standard markets from the small independent agent. He also predicted that E&S carriers will be most successful writing program business in certain well-defined niches, away from more general risks like manufacturers, contractors and products liability “unless it's a really tough product.”

To a degree, Hutelmyer said, insurance company executives appear cautious because of uncertainties over such matters as the eventual effect of the Spitzer investigation into insurance agency/broker compensation, federal versus state regulation and the implications of the federal Sarbanes-Oxley Act for reserve adequacy and other balance-sheet issues. “Right now the marketplace is such that everybody is talking pricing discipline, and actually practicing what they preach,” Hutelmyer said. “I think that all it takes is one or two markets that are aggressive, that are looking to increase market share, to change the attitude. But right now, we're seeing people hold the line.”

Richard Polizzi, ASLI
Western Security Surplus

While market conditions are softening, E&S carriers for the most part remain disciplined underwriters, according to Richard Polizzi, president and CEO of Western Security Surplus and the current president of the National Association of Professional Surplus Lines Offices.

WSS maintains offices in Pasadena, Roseville and Los Alamitos, Calif., and in Dallas, Texas. “That puts us strategically in the two largest surplus-lines states,” Polizzi noted. By design, WSS is a generalist, he said. Besides insuring an array of commercial-lines risks, it also writes homeowners insurance and personal articles floaters. As an MGA, WSS tends to focus on small, non-manufacturing accounts, he said, while placing the “full gamut” of risks as a surplus-lines broker. About 70% of its business is nonadmitted, and 30% is admitted.

Polizzi said that in the territories he serves, contractors and many professional risks continue to rely heavily on the E&S markets for coverage, and that carriers can still command price increases for such business. Manufacturers with major products liability exposures and aviation risks (although WSS doesn't write them) also must continue to count on E&S carriers, he said. Accounts with problematic loss histories or locations are among others that continue to be served by the surplus-lines market. For “run-of-the-mill risks,” however, market conditions clearly are loosening, he said, and pricing is more flexible. Polizzi said that one obvious sign of softening in the E&S marketplace is that carriers are lowering minimum premiums for certain classes of business. On the whole, however, he said he finds them maintaining underwriting discipline.

“I think the difference between the market today and…30 years ago is that the people who run the E&S carriers are by and large…more sophisticated,” he said. “There are fewer markets out there that are willing to chase premium for the sake of market share.

“But they are also realistic, and understand that during the hard market they've had their way, and now things are changing and they have to be a little more flexible. There are going to be accounts that are going to go back to the standard market…but there are other ones they will want to retain, and they will be more aggressive than they have been in terms of pricing.” Property insurance, he said, is one line that has seen, and will continue to see, the effects of such competition.

Polizzi said he expects the role of wholesalers to continue to grow, regardless of whether the market is hard or soft, as carriers look to them to deliver more than niche-oriented products. “The wholesale industry is supposed to be opportunistic in the best sense of the word,” he said, “and if a need arises in the marketplace, we're going to take advantage of it.”

Kurt Bingeman, CPCU, ASLI, RPLU
Russell Bond & Co. Inc.

At Russell Bond & Co. Inc., the changing E&S marketplace has been reflected in a higher percentage of relatively small-premium accounts, according to President Kurt C. Bingeman. For the marketplace as a whole, increased competition is leading to a migration of large accounts back to standard carriers and may prompt E&S carriers to reconsider greater use of admitted paper, said Bingeman, who also is a past president of the National Association of Professional Surplus Lines Offices.

Russell Bond is located in Buffalo, N.Y., and operates primarily in the Northeast. It derives about 40% of its business from professional liability insurance, a line in which it occasionally writes large accounts, particularly for financial institutions. On the whole, however, its clients tend to be small or midsize, Bingeman said. About 60% of its business is nonadmitted and 40% admitted.

Because of a pronounced softening in rates in the second half of 2004, Bingeman said his business was up only slightly last year. In 2005, he said he's projecting a little more than 10% growth. “We're going to have to work hard for that 10%,” he added.

Russell Bond certainly got off to a good start. New-business submissions in the first two weeks of January were up 130% from a year earlier, Bingeman said, while the number of new policies bound was up even more, to 150%. But because of today's lower rates, premiums were up only 55%, he added.

The increase in submissions didn't just happen. Bingeman said he has placed renewed emphasis on marketing. In particular, “we've tried to get to know our regular producers better,” he said. Russell Bond has expanded out of its traditional New York territory, he added, and is now writing E&S business in Pennsylvania, New Jersey and Connecticut. In response to softening market conditions, the company is contemplating acquisitions as a way to enter new territories or acquire new markets, he said.

Bingeman said that when standard insurers start returning to previously abandoned lines, they usually go after large accounts first. That's the case now, he said, as E&S carriers find it harder to hold on to commercial auto and contracting accounts larger than $100,000 in premium.

Another sign of the softening market, Bingeman said, is that E&S insurers seem more willing to discuss using admitted paper. Just about all the major E&S insurance groups, he noted, have admitted as well as nonadmitted companies. During a hard market, E&S carriers tend to use nonadmitted paper almost exclusively, because it offers greater flexibility in regard to terms and pricing. In a more competitive soft market, however, they may be forced to write more business on an admitted basis, he said.

In D&O insurance, a core product for Russell Bond, rates are continuing to decrease, Bingeman said, “Although everything I read tells us our D&O premiums should be going up.” In what appears to be another response to increasing competition, some of his markets that write D&O and EPLI for nonprofit organizations now are also interested in writing the rest of their coverages. While that could create some opportunities for MGAs, there also could be resistance from retail agents, Bingeman said. When they can, those agents generally prefer to place the auto, GL, property, etc., with their agency companies to get higher commissions and credit toward meeting volume commitments and qualifying for profit sharing.

Not all lines are softening, of course. Program administrators with which Russell Bond works in the public-entity sector are turning more to nonadmitted paper for products like public officials E&O and police professional liability, Bingeman said. Municipalities generally prefer-and sometimes mandate-admitted coverage, he said, “But if there are not a lot of facilities out there, I'm sure they'll understand the need to move with the marketplace.”

In today's market, Bingeman said commercial auto continues to be a strong product for Russell Bond. “There are not a lot of facilities for small commercial auto and garage liability,” he said. Russell Bond also has been writing more monoline workers compensation insurance-not usually thought of as a surplus-lines broker's product-after a couple of major insurers stopped writing the coverage in the Northeast.

Bingeman said that while he expects growth to be modest this year, particularly compared with the hard-market years, he plans to continue adding staff. The extra people will be needed to maintain present service levels, he said, because while revenue may not go up greatly in 2005, he expects a much higher policy count. He added that good service and sound relationships are vital to maintaining the 95% renewal rate Russell Bond historically has enjoyed for nonprofit D&O and some E&O accounts. To keep that figure as high as possible, Russell Bond compensates service staff on the basis of retention as well as revenue.

In recent years, Russell Bond has invested in imaging and other technology, which should serve it as well in a soft market as it has in the hard market. The MGA also has retained consultants to help it identify internal strengths and weaknesses.

“We're still moving ahead,” Bingeman said.

Baron Garcia
Oklahoma General Agency

A softening E&S marketplace is beginning to manifest itself in such forms as the return of underwriting credits and lower underwriting surcharges for certain risks, according to Baron Garcia, president and CEO of Oklahoma General Agency in Oklahoma City, Okla. Garcia, who is a past president of the American Association of Managing General Agents, predicted a decided “loosening” in the marketplace later in the year.

Oklahoma General Agency does business in Oklahoma, Arkansas, Kansas and New Mexico. It primarily writes commercial lines, including commercial auto, monoline general liability, monoline property and general liability for habitational risks. It also writes a gamut of personal-lines products, other than auto insurance.

About 70% of Oklahoma General's business is admitted, and 30% is nonadmitted. That ratio is practically opposite of what it was just a couple of years ago, Garcia said. He attributed much of the change to the need to respond to a surge of business during the hard market. “With the admitted markets, for which we had full binding authority, it was much easier to quote and get things written than to submit an account for a quote to a (nonadmitted) company that gave us limited or no binding authority,” he said. (Oddly enough, Garcia said that many retail agents also are expressing a preference for admitted paper out of concern about the Spitzer investigation, although he granted it's hard to see a connection.)

In regard to the E&S markets, Garcia said nothing seems to be changing in personal lines, particularly for low-end products. Current rates are holding, he said, and no credits are available. “If we're going to renew it, at best it will be at expiring,” he said.

For some risks, however, Garcia said he saw small but definite signs of softening. One carrier recently reduced its rates 5% on a program providing property and GL coverage. Another reduced the surcharge it applies for multiple claims to 15% per claim from 25%. It also reduced its surcharge for new ventures.

In commercial P&C, underwriting credits, which were practically nonexistent in the hard market, are starting to show up again, Garcia said. He stressed that the situation was nothing like it was four years ago, when credits of 20% to 25% for clean accounts were common. The most available today is 10%, he said, although 5% is more likely.

Commercial auto, where underwriting restrictions that many carriers put in place two years ago remain, is still in a hard market, Garcia said. “There, absolutely nothing has changed,” he said, “and we have zip credit authority.”

Garcia said he's beginning to encounter more competition from standard insurers. “I'm seeing (St. Paul) Travelers and Liberty Mutual, where the last two-and-a-half years, we haven't quoted against them on anything,” he said. The competition, he added, is coming mainly on large monoline property and GL accounts that had migrated to surplus-lines carriers during the hard market. Garcia said that with E&S carriers appearing to stand firm on such accounts, standard carriers might be able to get this business back with relatively small price reductions.

Garcia said most of his E&S carriers have informed him of plans to grow 10% to 12% in the year ahead, but he predicted it will be hard for them to achieve sustained growth. Nevertheless, Oklahoma General Agency itself is shooting for a 13.5% increase in gross written premium, which he called “pretty aggressive.”

For the last three years, Garcia and his daughter have made some calls on retail agents but really have not had a marketing department. That won't get it done, he said, in today's changing marketplace. “I can see the writing on the wall,” he said. “We're going to have to be out beating the bushes, making sure our customers know what we have available and what we can do for them.” In January, Garcia hired a full-time marketing director who has experience in a retail agency. “He's going to be able to talk to them (retail agents) as if he were sitting on their side of the desk,” he said.

E&S companies, while not budging much yet on rates, have been taking steps on the service side to make themselves more desirable partners, Garcia said. For instance, one of his carriers informed him of its objective to be the most efficient one he has for transacting business. Another is about to go to direct bill, as Garcia said many E&S insurers already have.

As the year goes along, Garcia said he expects E&S insurers to become more competitive. Much as carriers waited to see who would be the first to raise rates when the market hardened, he said, they now seem to be watching for the first to drop them. “By the time spring is over, I think there's going to be some loosening of prices,” he said. “I think it's going to become a lot more competitive than we've seen in the last three years.”

Nicholas D. Cortezi
All Risks Ltd.

While accounts “at the margin” of the E&S marketplace increasingly will be picked up by standard insurers in 2005, there are still good opportunities out there for brokers and MGAs, according to Nick Cortezi, CEO of All Risks Ltd., in Hunt Valley, M.D., and a former president of NAPSLO.

All Risks, which sells an array of commercial- and personal-lines business, functions as both an MGA and a surplus-lines broker. It also operates a number of national programs. It does business up and down the East Coast and increasingly in the West, where it recently opened offices in California and Texas. About 80% of its business is nonadmitted, and 20% is admitted.

Cortezi said his E&S markets have not informed him of any strategic changes they plan to implement in 2005. “I think all the carriers are focusing on trying to keep their renewals in what is a flattening or, in cases, a softening marketplace,” he said, adding that many nonetheless are still looking to grow. The task, he said, will not be easy, with brokers and insurers pursuing a shrinking pool of available accounts. “The risks aren't being kicked out of the standard marketplace because of underwriting discipline, the way they were,” he said. Among those likely to be wooed back to standard insurance companies are property accounts, he said, even those that have had adverse loss histories.

Cortezi said he so far hasn't noticed any changes in compensation or other incentives E&S insurers are offering for business. He added, however, that when markets have changed to soft from hard in the past, carriers usually started to pay larger upfront commissions at some point.

Despite the softening market, Cortezi said he was upbeat about the year ahead. “We are looking to add talent as quickly as we can find talented people,” he said. “We think there is a terrific amount of opportunity on our side of the marketplace.” He said All Risks is looking for both brokers and underwriters, in part to meet the organization's growing presence in California, Texas, North Carolina and Florida.

All Risks writes a considerable amount of program business, which has experienced difficult times in the past few years. “The program marketplace was hit hard by the market change,” Cortezi noted, “and we were lucky enough to go through it with our programs intact and in some cases in better shape.”

A softening market can be both good news and bad news for program business, Cortezi said. As rates stop growing or even start to fall, the profitability of a program may drop “below the waterline,” he said, not that the program-business market is currently approaching such a point. The good news, he said, is that in a softening market, more carriers see specialty programs as a more likely path to growth than the “generalist approach.”

For Cortezi, the good news apparently outweighs the bad. He said that while All Risks normally tries to launch one or two new programs a year, “we'll probably be rolling out three or four new products this year that we'll distribute on a proprietary program basis.”

Rob Giles
Midwest General Agency

“The market certainly has cooled off significantly,” said Rob Giles, president and chief operating officer of Midwest General Agency, who was reached in Phoenix, where he was visiting with a number of his E&S insurers. Most feel pricing needs to stay at the level it now is, said Giles, who is a past president of AAMGA. They are concerned, however, that new players that have entered the market in the past few years, attracted by hard-market rates, may now cut premiums aggressively to gain market share. Despite increased competition from standard insurers and other E&S carriers, Giles said, most of his insurers have told him they are planning for 10% to 15% growth in 2005.

Midwest General Agency, located in Eau Claire, Wis., owns First Western Insurance, a general agency in Des Moines, Iowa, and recently purchased Tower Special Facilities, a general agency located in a Milwaukee suburb. Midwest and its affiliates do business in Minnesota and Nebraska, as well as Wisconsin and Iowa. The organization writes a broad mix of business. One specialty is long-haul trucking. The requirement in most states that truckers' commercial auto insurance must be placed in admitted markets helps account for the organization's 60/40 split of admitted to nonadmitted business.

One area in which Giles expects more competition from standard insurers is for recently formed business. In the past three or four years, he noted, many start-ups were founded by people who had been “downsized” out of a position or otherwise lost their jobs. “Now that they've been in business for three years and have verifiable loss runs, a lot of standard markets are picking them up-which is the way it's supposed to work,” he said. “We take the new guy on the block with no experience, and we insure him for a few years. Then he becomes eligible for a standard market.” He said standard insurers also seem to be showing more interest in technology accounts, although Midwest General Agency is not greatly involved in that niche.

Giles said he certainly continues to see opportunities in the E&S marketplace. For one thing, new businesses continue to be formed. Many professionals and most contractors remain difficult classes of business, he said, and insurance for both long-haul trucks and heavy job-site trucks remains a specialty. High-limit excess and umbrella liability policies will continue to be written mainly by E&S insurers, he added.

In response to softening conditions, Giles said his organization is marketing more aggressively. Midwest General has been holding more workshops in communities throughout its territory, where invited retail agents learn about the organization and the products it has available. “They've been very successful for us,” he said.

“We think that over the last few years, we've really laid the groundwork with our marketing efforts and with aligning ourselves with some of the stronger markets in the E&S business,” Giles said. He added that pursuing continuing education through the AAMGA University and NAPSLO's educational programs also has been an important part of Midwest General's preparation. “We're not going to see the growth we've seen in the last few years,” he said, “but we think we're still positioned well to grow.”

Tom Comer
Swett & Crawford

At Swett & Crawford, the nation's largest wholesaler, President & CEO Tom Comer said he expects a significant reduction in rates in 2005. Swett places at least 60% of its business with nonadmitted carriers, he said.

“I see a downturn in rates, say to the tune of maybe 15%,” Comer said. “We were seeing it already in January.”

Comer said that with many reinsurance renewals still to come in 2005, the full impact of reinsurance on the year is yet to be determined, but he added that insurance premiums will be coming down, regardless. “No question about that,” he said.

As standard insurers start opening up their books to business they've shunned for the past few years, Comer said he expects softening “pretty much across the board, with property leading the pack.” Where rates become unreasonably low, however, E&S carriers will pretty much let the business flow back to the standard market, he said. “I think everyone is saying, 'If we can maintain our book, fine,'” he said. “'If we lose (accounts), we're not going to jump out the window.'”

For now, at least, E&S insurers are maintaining their underwriting discipline, Comer said, “but they're going to struggle to make their margins.”

Kevin Kelley, CPCU
Lexington Insurance Co.

When discussing the E&S marketplace, said Kevin H. Kelley, CPCU, chairman and CEO of Lexington Insurance Company, the nation's largest E&S insurer, one should keep in mind that there are “markets within the market,” each having a different cycle and being at different stages in those cycles.

Kelley called the property-insurance market “very schizophrenic.” While reinsurers, as a group, are being relatively cautious and are willing to let business go, particularly in areas with high wind-damage exposure, Kelley said primary carriers seem intent on growing market share. “They are willing to cut rates to do that,” he said. “In many cases, they are willing to stretch into areas that historically they have not been involved with.”

Kelley said he finds this behavior at odds with last year's hurricane season, which he said caused insured damage estimated at anywhere from $20 billion to $35 billion. One possible reason for the split between insurers' and reinsurers' actions is that many reinsurance treaties are yet to renew, Kelley said. As they do, and as primary insurers get a more accurate fix on their ultimate losses from the four hurricanes that hit Florida in 2004, Kelley said there could be a “delayed reaction” lessening the price competition.

Kelley acknowledged that rates for Jan. 1 catastrophe reinsurance renewals were flat or slightly lower in most cases, “but you have to keep in mind that, because of the way these four storms developed, the losses to the CAT market were relatively small. So most of…the loss fell inordinately on the insurers, not the CAT reinsurers.” Quota-share reinsurers, on the other hand, “got hit with some pretty good losses,” Kelley said. “So I think what you'll see in 2005 is a reasonably good CAT market, from an insurer's standpoint, but a much more disciplined property quota-share market.” He added that while the market is not pushing for property-insurance rate increases, as one might have expected in the wake of the hurricanes, “we are seeing a much smaller rate reduction than we saw throughout 2004.”

So will E&S insurers compete for property insurance or let it return to the standard markets? “I think it will depend on the wind season, which, as you know, starts in July,” Kelley said. Other developments, including an earthquake or “geopolitical event,” also could cause the market to “snap,” he said. “I think the property markets are a lot more fragile than maybe some people think.”

Turning to other parts of the E&S marketplace, Kelley said Lexington continues to see “reasonably good opportunities” for writing casualty insurance, “but there again, we're starting to see some pressure on rates,” particularly for short-tail risks. Professional liability rates, he added, continue to grow at single-digit to low double-digit rates.

Asked where he sees opportunities for Lexington, Kelley cited coverage for architects, engineers, contractors and health-care risks. For casualty risks in general, he said, “I think one of the things we bring to the table…is the capability to write both a primary policy and an umbrella for the same account.”

Mike Miller, CPCU, CLU, ASLI
Scottsdale Insurance Co.

At Scottsdale Insurance Co., the nation's fourth-largest E&S carrier, the emphasis in 2005 will be on retaining business and monitoring the marketplace with the help of its wholesalers, said Mike Miller, CPCU, CLU, ASLI, Scottsdale's president and chief operating officer.

Miller said the market hit a plateau, probably in the second half of last year and perhaps earlier for property insurance. “Our current view of the market is that it's fairly stable,” he said. “We don't see opportunities for any kind of meaningful rate increases, and certainly there is some downward pressure in certain lines of business.”

Like many others interviewed for this article, Mill

Special Reports /

E&S marketplace girds itself for greater competition

Related Stories

Recommended For You