The years 2001 up to the fourth quarter in 2007 marked excitingtimes in the excess and surplus lines industry. The market was inconstant motion. The phone rang off the hook and the quote-to-bindratio was phenomenal. There was a surge in technology. Insurersintroduced new business models with single-key entry from thequote, to the binder, to policy issuance. To meet the marketdemands, insurers designed transparent 24/7 online rating systemsthat were added to both wholesalers' and producer agencies' websites. Agencies began implementing paperless environments tostreamline their workflows.

The economic realities of 2008 and the opening months of 2009,however, challenged most industries, and the E&S market was noexception.As we move into the second half of 2009, positive signsare emerging. Insurance experts are predicting that E&S's nextbusiness cycle will be one of controlled growth with a gradualprogression of rate increases. Don Wurster, president of NationalIndemnity Company in Omaha, Neb., spoke about how the cycle willtransition. “Markets harden when people stop talking about waitingfor it to happen. It is the people hanging around waiting for themarket to change that is causing it to not change. Hard marketsoccur when underwriters change behavior, not rhetoric.”

According to Todd Markel, vice president of National SpecialtyUnderwriters, Inc., in Boca Raton, “The property markets arehardening due to higher reinsurance rates, but with CitizensProperty Insurance Corp. competing in Florida, the existingproperty market will harden slower than the previous one. There aremore markets now that will write business, so when one marketraises its rates, there are others that will write that businessfor the expiring premium. The property market will continue to becompetitive for some time.”

Also of consequence in recent years is the significant entranceof admitted carriers into traditional E&S lines. That trend maybe reversing itself. According to Markel, “The calculated impact ofreducing the property exposure has caused many admitted carriers towrite more casualty risk than before in Florida. Eventually, theadmitted market will realize this is not a good fit for theircompanies and will start to shed non-standard risks.”

Gary Sanborn, CEO of the Orlando division of Crump InsuranceServices, Inc., concurred. “I believe we are on the verge of achanging market in Florida, and this change will be more aboutunderwriting and capacity than simply pricing,” he said. “Thecurrent state of the economy will not permit a large rate increase;therefore, I do not believe that we will see rates increase at thesame percentage as the previous hard market. All carriers willbegin to re-underwrite their books of business and re-establishunderwriting guidelines. These changes will generate moreopportunities for surplus lines brokers.”

“Invisible” Hard Market

This new business cycle is being referred to as the “invisible”hard market. In an April 6 article by Mark Ruquet in NationalUnderwriter, Marsh & McLennan Cos. President and CEO BrianDuperreault was quoted from a January speech: “We are in thebeginning stages of a hardening market, but countervailing economicforces are turning this into our first 'invisible' hard market.When our market turns, it usually happens very clearly.”Duperreault explained that in today's economy there is acontraction in business operations; therefore, the amount ofinsurable exposure remains in decline. This decline in exposureoffsets any volume gains from the premium increases, creating an“invisible” hard market, since insurers and brokers fail to seegrowth despite higher rates.

Additionally, the current economy has caused a tightening ofcapital in the market, and 2008 was the fourth most expensive yearfor insured catastrophe losses in the past 10 years. Reinsurancecontracts for catastrophe-exposed property that renewed in Apriland July are experiencing a 15 to 20 percent rate increase [AlSlavin, "Calm Before the Storm," Best's Review, June 2009]. Thoughit is difficult to forecast when these rising reinsurance costswill trickle down to the customer, clients should be advised toprepare and budget for an increase in premiums.

On the legislative front, the Florida E&S market achieved asignificant victory during the 2009 session with the passage ofHouse Bill 853. The Legislature observed the insurance community,representing many interests, working together to preserve thesurplus lines industry in Florida. HB 853 clarifies the ambiguitycreated by the Florida Supreme Court in the Essex v. Zota decision:That Chapter 627 of the Florida Statutes applies to surplus linesinsurance. (The surplus lines industry is governed by Chapter 626of the Florida Statutes.) The Essex v. Zota case addressed a simplequestion of whether or not Florida law required a copy of thesurplus lines policy to be delivered to the insured, as opposed tothe insured's retail agent. There was a collective sigh of reliefwhen Gov. Charlie Crist signed the bill into law.

Laying the Foundation

As agents and brokers weather today's market, several industryleaders offered insight into how they are using this time toprepare for the next business cycle. “We must continue to build onlong-term relationships,” said R.C. Chaffin, president and CEO ofSeaCoast Underwriters, Inc., with offices in Coral Gables and LakeMary, and chairman of the board for the Florida Surplus LinesService Office. “Staying in contact with our insurance companiesand keeping our customers informed is key. In addition to marketingcalls, our agency schedules face-to-face underwriting visits withour customers that we plan to continue.” The last business cycleillustrated how growth could be achieved through the attrition oftechnology. Today, offices continue to evaluate their businessmodels and train their staff and customers on new technologies.Technological systems under consideration for purchase or upgradeinclude business process intelligence, server virtualization,updated web sites, and new phone systems. Sanborn said, “Surpluslines brokers are well positioned to take on more business with anexperienced staff and a paperless environment. In the past fiveyears most brokers have improved their internal processing and ITsupport systems. If our business increases, there will be a need toexpand our staff.”

Industry associations are focusing on membership campaigns andopening the channels of communication within their memberships.AAMGA and FAIA have utilized online networking systems such asTwitter and LinkedIn to keep their memberships abreast duringannual meetings. The Florida Surplus Lines Association launched agrassroots program connecting their members' voices to support HB853 directly to their state legislators. Membership in industryassociations provides opportunities for networking, sharingexperiences, learning about new trends and regulations, andoffering input on legislative issues affecting the market place.“It is important to encourage young professionals to get involvedby joining young professional groups and engaging with theirpeers,” noted Markel. Active groups on the rise are FAIA YoungAgents Council (YAC), the AAMGA Under Forty Organization (UFO) andRotaract.

Owners are reviewing budgets and staffing to ensure that theyare adequately prepared to meet customer demands today andtomorrow. This is a difficult time for agencies and brokers to moveforward with new projects because revenue is down, but the workloadremains the same and, in some cases, has increased. Markel said hiscompany measures the return on investment before committingresources and his office will continue this practice in the nextbusiness cycle.

Emerging Exposures

The surplus lines industry is aggressively responding to newlydeveloping voids in the marketplace. For example, the current stateof the economy has created more awareness for the importance ofdeveloping risk management practices to reduce losses. Discussingthese emerging exposures with customers provides an opportunity tocross-sell products.

The Lilly Ledbetter Fair Pay Act of 2009, which was signed intolaw by President Barack Obama on Jan. 29, brought the importance ofemployment practices liability into stark reality. The act statesthat the 180-day statute of limitations for filing an equal-paychallenge regarding pay discrimination resets with each newdiscriminatory paycheck. As a result of this new legislation,employers can expect to see an increase in wage discriminationclaims. One recommendation to avoid liability is to conduct astatistical and legal analysis of the company's compensation data.If statistical disparities exist and cannot be justifiablyexplained, the company should consider appropriate wage adjustmentsto eliminate disparities.

With the increasing number of property foreclosures in Florida,there is a demand for property preservation specialist'sprofessional liability coverage. Sanborn advised that, “We shouldexpect to see some different methods of structuring coverages aswell as competitive enhancements under various policies.”

The expanding global economy has created opportunities for smallto mid-size American companies to expand business interests abroad.These new foreign insurance exposures are being addressed byseveral surplus lines companies.

Advice for the Future

Moving into a new and hopefully improved business cycle, severalthings should be kept in perspective. “Think of this current marketas wealth building. You have worked really hard to write businessthat will increase considerably, due to your diligent efforts, whenit renews in a hard market,” advised Markel.

“Maintain the same service standards you established in the softmarket,” said Chaffin.

“Prioritize your opportunities by working first with thosecompanies and customers who have been regularly doing business withyou, qualify risks in regard to pricing and terms, and continue togive timely service,” noted Sanborn.

The Florida surplus lines industry represents many insurers withthe professional experience and financial strength to insure yourclients' exposures. As industry specialists, our customers andcarriers rely on us for our knowledge and expertise. Our successdepends on continuing to earn that trust every day.

Erin K. O'Leary is a vice president at Shelly, Middlebrooks& O'Leary, Inc., in Jacksonville and a director at the FloridaSurplus Lines Association. She may be reached at 800-342-2498 [email protected]. Company information is available atwww.shellyins.com.