A few weeks before the NAPSLO Midyear Educational Conference,executives of member firms shared their thoughts on the top storiesof 2009 and the potential impacts on the E&S/specialtysegment.

o Peter Eastwood, president and chief executive officer ofLexington Insurance in Boston, said: "One does not need a crystalball to foresee a diminishing demand for property insurance andliability coverage in the areas of construction and architects andengineers, given the dramatic slowdown in construction.

"Clearly, with the economy stagnating so severely, the reductionin commercial activity will continue to impact negatively on anumber of other classes of business," he added, identifying lawyersprofessional liability, transportation, recreation, hospitality andreal estate.

Explaining the impact on the lawyers E&O class, Mr. Eastwoodsaid "layoffs among law firms truly are unprecedented as the demandfor legal work literally is drying up."

In addition to "obvious victims of an economic slowdown," Mr.Eastwood said industries previously considered recession-proof arebeing adversely affected by the condition of the equity markets,such as higher education and health care.

This is "exacerbated by the Madoff and mini-Madoff schemes whichhave come to light, and further diminished the ability ofhistorically reliable philanthropists to support theseinstitutions," he said, also citing "the havoc this could cause tothe E&O and D&O sectors claims-wise."

"The mention of claims reminds us that the underwriting is notthe only side of the equation that is impacted by a recession," hecontinued--adding, however, that "the claims side may be somewhatschizophrenic."

Explaining the schizophrenia, he said, "a slowing economy ischaracterized by a reduction in the sort of commercial activitywhich gives rise to claims. Put simply, fewer trucks on the road,for example, mean fewer accidents."

Counteracting this is the well-recognized phenomenon known asthe moral hazard, he said, explaining that "when times are tough,the first thing to go is maintenance"--adding that maintenancelapses of commercial insurers "logically should result in increasedclaims activity."

Mr. Eastwood said Lexington is preparing to deal with thechallenges of the foregoing developments by focusing on what it cancontrol--underwriting. "Our underwriters must be on their game,recognizing that the deterioration of the exposure bases due tocurrent economic conditions results in a mismatch betweencurrent-year premiums and prior-year losses," he said.

o Robert Berkley, executive vice president of W.R. Berkley Corp.in Greenwich, Conn., articulated a similar strategy: "Focus onmaintaining discipline, focus on preservation of capital, and donot follow/join competition," he said, summing up his company'splan for dealing with the challenges of the economy in 2009.

Mr. Eastwood added that innovation, which has always been a keypart of Lexington's business plan, "will be more important thanever in these difficult times."

Adding revenues from new products to current-year premiums willease the imbalance that would otherwise result from decliningexposures, he said. In the most recent five-year period, Lexingtongenerated $2 billion in gross written premium from new products, henoted.

"Understanding social and economic trends ranging fromsustainability, global supply chains and terrorism risks--aparticularly undertreated exposure--is a good starting point" fornew product development, he said.

"Moreover, the E&S platform allows us to move swiftly tocreate new products that are meaningful to our clients and to bringthem to the market without regulatory delay," he added.

o Christopher Timm, president of Century Insurance and executivevice president of Southfield, Mich.-based Meadowbrook InsuranceGroup, like Mr. Eastwood highlighted the problem of mismatchedpremiums and losses, focusing his remarks on the stress thatreduced sales will put on classes with products andcompleted-operations exposures.

"Losses flowing from the products/completed operations hazard onsales made during the more robust years will need more rate on thereduced current-year exposure to produce adequate premiums. By theend of this year, we believe several carriers will see a need forsubstantial rate increases in such lines," he said.

"Reduction in the exposure base is a problem that will affectall facets of our business," he said. "We need to maintain avigilant control on expenses and a detailed approach to trackingour performance."

Expressing some optimism about the potential for business toflow back into the surplus lines market, Mr. Timm said that forstandard carriers, dropping E&S-type risks from their books"will be a most effective and efficient way to deal with theproblems of rate adequacy and capacity, while avoiding thedifficulties caused by attempting to raise rates in a down or flateconomy."

The migration of risks back to the E&S market will beespecially evident in small and midsize hospitality businesses, aswell as habitational and contracting business, he predicted.

Still, he said, 2009 will prove to be a tough year for agents aseconomic activity declines. "We have noticed an increase inshopping activity, while our overall business is flat to slightlydown," Mr. Timm reported.

"We believe that carriers that are able to give their agents thetools they need to be the most efficient will do well. We havetaken the steps to provide our agents with expense-saving onlineand local tools. We are focused on helping our general agents andtheir retail producers maintain profitability on the businessplaced with us," he added. "Our focus on expense control will allowus to pay commissions needed to adequately compensate our agentsfor the value added."

Mr. Timm also suggested that as the economy tightens,claims-made coverage will be more acceptable as a risk-financingmethod for some contractors and product suppliers looking for waysto save money.

"Agents will need to be able to explain the difference in theclaims-made and occurrence form as one of timing of payment for therisks assumed. This could be especially helpful for thehomebuilding industry," he said.

"We need to be a vehicle for education of our producers andprovide the tools for them to help educate the retailers," hesaid.

Wholesale brokers, like the carrier executives, identifiedrecessionary economic conditions and the meltdown in financialmarkets as the key developments that will impact theE&S/specialty segment in 2009--and shared similar strategiesfor dealing with the impacts.

o Robert Owens, president of RPS of Lexington, a unit of RiskPlacement Services in Kentucky, said: "Our company, as are manywithin our business, is closely looking at every expense in orderto reduce expenses and preserve people as much as possible as thedownturn continues."

"If production talent is lost, it will be very difficult to havethe talent and capacity to take full advantage of the upswing ifand when it occurs," he added. "The broker industry is in survivalmode, however difficult that may be."

o Tap Johnson III, president of TAPCO Underwriters inBurlington, N.C., noted that the general economy has taken a hugetoll on MGAs and brokers, with the combination of fewer insureds inbusiness, lower payrolls and receipts for those still in business,and lower rates all working to drop premiums down 40 percent ormore from 2006 highs, in his estimation.

"Most firms are just now coming to grips with how to respond,"he added.

TAPCO, he said, has always been focused on margins, efficiency,transparency, control and best practices--referring to his firm'sprocess for binding small policies in a five-minute phone call.

Late last year, TAPCO was acquired by Birmingham, Ala.-basedwholesale insurance broker CRC Insurance Services, and Mr. Johnsonpredicts there will be continued--and accelerated--consolidation onall fronts: retail agencies, MGAs, brokers, E&S carriers,standard lines insurers and London brokers.

"The sad news is if [you] didn't already see this coming anddon't have a plan well in place, it is likely too late. Theseconsolidations will not be at the benefit of the seller," hesaid.

o Scott Smith, president of S. H. Smith & Company inHartford, said his company has been adding to staff, regardless ofthe market cycle. "We added 15 percent to staff in 2008 and havebeen adding to staff already in 2009," he reported.

Most additions have strengthened the firm's capabilities intechnology-related coverage areas such as privacy and security, hesaid, noting that other hires are in the firm's fundamental linesof product liability, general liability, health care, construction,manufacturing and financial institutions.

"We have an extremely strong group of brokers and underwriters,as well as market relationships in all of the executive protectionlines," he said--also highlighting his firm's very strong propertyteam.

In addition, the company has a program unit that has been ableto bring at least one new national program to market in each of thelast four years. "We are very bullish in this area and continue tostaff here as well," he said.

Turning to the broader industrywide impacts of the meltdown infinancial markets, Mr. Smith called the implications "potentiallycatastrophic."

"The predictable consequence would be insurer insolvencies,which would put additional strain on the surviving carriers," hesaid. "It would also put a strain on the underwriting results thatshould result in a property-casualty market that is significantlyharder than we have seen in the last two-to-three years."

The hardening market, he added, "of course brings with it higherpremiums, a capacity crunch, and a restriction of insuranceabilities for the most vital lines of the business as well as newerindustries."

However, Mr. Owens also pointed out that a slowing economy willhide the increased pricing impacts of a hardening market. UnlikeMr. Timm and other carrier executives, Mr. Owens believes this willmean that standard companies--which will be "under extremepressure" to preserve premium volume--"will continue to invade thetrue E&S marketplace."

In addition, he noted that a number of E&S startups haveoccurred in the last few years. "The demand by theirowners/investors to produce revenues and profits will help keepE&S pricing down even as we experience a hardening market,"according to Mr. Owens.