While this year marks the "Year of the Ox" on the Chinesecalendar, participants in the E&S/specialty insurance segmentare ushering in 2009 as the "Year of the Underwriter," according tothe head of a large excess and surplus lines carrier.

Explaining how his company will deal with the challenges that aneconomic downturn will create for specialty insurers in 2009, PeterEastwood, president and CEO of Lexington Insurance, said that "wemust stay focused on what is within our control. 2009 will be theyear of the underwriter."

"The carrier that is nimble and executes well, will weather thestorm. Those that do not may flounder," he added.

Mr. Eastwood was one of more than a dozen executives contactedby NU's E&S/Specialty Lines Extra recently to share theirpredictions on the top stories likely to play out in 2009, and howtheir firms will deal with the challenges ahead.

Glancing in a rearview mirror to look back on the events of2008, and gazing into their crystal balls to forecast what's ahead,the consensus view of the top story that will impact theE&S/specialty segment might easily be summed up by a phrasepopular during a past political campaign--"It's the economy,stupid."

Robert Owens, president of RPS of Lexington, a unit of RiskPlacement Services in Kentucky, was the first to tell NU that theeconomy is "the number one issue affecting our industry for2009."

"With a slowed economy, the demand for insurance has declined,reducing both premium volume and overall exposures," he said,articulating a view that would be repeated many times over.

While the downward impact of an economic recession on insurancepurchases weighed heavily on the minds of executives who sharedtheir views with NU's E&S/Specialty Lines Extra, the turmoil inthe financial markets also scored high as a potential top storyamong those who worried about the uptick in losses that mightdevelop as a consequence of both.

Scott H. Smith, president of S.H. Smith & Company inHartford, who identified the "impact of the financial meltdown onthe insurance industry" as the top story for 2009 "and beyond,"said, "We are predicting this monumental event will stagger notonly the predictable lines of insurance, such as E&O, andD&O, but also other major areas."

Explaining the less predictable impacts to lines other thanprofessional liability and directors and officers liability, henoted the potential for foreclosures and arson to impact theproperty line, and for inflated awards and crime to hit generalliability.

"The insurance industry needs to reserve for the usual type ofactivity that accompanies recession in the extreme, in addition tothe predictable claim activity for financial setbacks," Mr. Smithsaid.

Taking a cue from a recent political campaign slogan and theobjective of the new administration in Washington--to follow ablueprint for change--responses from many longtime NAPSLO membersexpressed hope that a top story in 2009 might be one about achanged insurance market with regard to pricing and competition in2009.

While every broker and insurer responding to a direct questionabout whether the market would harden this year answered that itwould, several doubted that the lessons of 2008 or of past softmarkets would be heeded by all.

Some respondents, echoing the promise of real change inWashington from President Barack Obama's administration, predictedfederal regulation of the industry in one form or another. Otherseyed the economic stimulus package, with its planned investments inthe nation's infrastructure, as a potential boost to commercialconstruction activity and to the demand for E&S insurance thisyear.

Michael Miller, president of Scottsdale Insurance Company, isn'tthat optimistic. "The stimulus package from Congress will have alag effect, as it will take time to roll it out. This would seem toindicate that there will be businesses that will continue tostruggle and that the number of new companies will be lower," hesaid.

Mr. Miller and other carrier executives, however, did foreseeone development that could push business back onto the books ofE&S carriers in 2009--a potential retrenchment of standardcarriers from the E&S business precipitated by impaired capitalpositions.

"We are seeing a significant reduction in capital across theindustry, and the ability to attract new capital is lacking.[Standard] companies will have to evaluate the risk profile oftheir books of business," he said.

Nathan Warde, president of Aspen Specialty in Atlanta, notedthat "the capital markets remain very constricted." While they maynot be entirely frozen, he said he believes the inability "torecharge [an insurer's] capital base following a significant lossevent...is forcing some management teams to rethink how they haveput their capital to use."

"Those carriers with significant catastrophe accumulations arealready moving to reduce them. Others are looking at their morevolatile lines of business, which could potentially lead to somecarriers shedding books of business deemed either as being toovolatile or non-core."

"Either trend will push more business into the E&S market,"he said, echoing the sentiments of Christopher Timm, president ofCentury Insurance and executive vice president of Southfield,Mich.-based Meadowbrook Insurance Group, who also predicted areversal of the "soft market-induced expansion" of standard carrierrisk appetites into surplus lines.

Mr. Timm noted that the combination of storm losses andinvestment write-downs in the past year resulted in an overall lossof surplus in the industry.

He said the standard markets entered traditional surplus linesniches in recent years with standard forms, standard underwritingand standard rates.

As a result, "the experience on this portion of their businesscannot be good," he concluded. "Many company executives are seeinga need for rate increases. A simple analysis would show arelatively easy ability to effect a gain in rate adequacy byexcising such risks from their books."

Mr. Timm said "this should be especially evident to thoseexecutives who take the time to look in the small account and BOP[businessowners policy] segments of their business. We expect thisbusiness to start returning to the surplus lines market near theend of this year."

No matter which of the seven stories executives picked as thepotential biggest to impact their businesses in 2009, participantsin the E&S/specialty market said they are well-equipped toweather the storms ahead. (The list of the seven stories issummarized in an accompanying text below this article.)

"Widespread loss of jobs and loss of opportunities willencourage most [members] to revisit and implement the fundamentalsof success," according to John Wood, president of Specialty RiskAssociates in Shreveport, La.

"As strange as it may appear, this type of environment couldproduce more opportunities for the E&S business," said Mr.Wood, who is also president of the Kansas City, Mo.-based NationalAssociation of Professional Surplus Lines Offices.

"We are ready to step in and serve our customers," he said,adding that NAPSLO is conducting a media campaign "to inform ourretail customers of the value of wholesale brokers and that,through their knowledge, experience and expertise, we bring valueto retail insurance agents and corporate risk managers in placingspecialty insurance coverage."

At Lexington, Mr. Eastwood outlined his company's approach tothe challenges ahead this way: "We must be nimble and focus onthose areas where we believe that we have a competitive advantageboth in capacity and expertise," he said. "It is those qualitiesthat we will rely on to maintain our underwriting integrity, ratherthan engaging in expedience-motivated underwriting that surely willcome home to roost in future years."

More details of Lexington's approach and the responses of othersurvey participants are included in a related article, "NAPSLOMembers Brace To Weather Economic Storms Ahead."

The List

Insurance and broker executives listed the following topics aspotential top stories of 2009 when NU's E&S/Specialty LinesExtra reached out for predictions recently:

#1: It's The Economy, Stupid

#2: Claims Fallout From The Credit/ Subprime Crisis, Madoff-TypeSchemes

#3: A Harder Market Ahead

#4: Federal Regulation Comes To Insurance

#5: Economic Stimulus Boosts E&S Insurance Demand

#6: Insurers Work To Preserve Capital

#7: Standard Carriers Retrench From E&S Business