The overall health of the excess and surplus lines market could be viewed as a microcosm of the current national condition — some good news, some bad news, some mixed news, and some lingering questions.

Anecdotal information from agents and carriers throughout the industry indicate that premium writings are down overall this year, as everyone continues to slog their way through a soft market cycle. However, there are a few bright spots and some glimmers of hope.

Bryan Sanders, COO of Max Specialty Insurance Co., said of 2009, “We look at it a couple of different ways. From a property perspective, in critical catastrophe areas, at the beginning of the year we were seeing some increases, but as you go through the year the increases are now minor increases or flat. By comparison, in the balance of the country (where earthquake and cat wind issues do not exist), rates have been competitive and consistent throughout year, and it is what we expected. On general liability business, we have had to remain very selective throughout the year because it has been competitive throughout.”

According to Chris Timm, president and COO of the Century Surety Co. headquartered in Ohio, “The 2009 market is continuing to stay soft and is resisting any hardening effect. For Florida specifically we had expected to see rate increases, especially from what we heard from Lloyd's reps in catastrophe exposed areas in Florida. We see continued competition on all property, including mono-line wind.”

That competition is spread across most lines of business, and standard lines carriers are also in the mix. “Our binding authority general agencies continue to report standard market incursion countrywide,” Timm added.

Some Bad News

Based on data gathered from the Florida Surplus Lines Service Office (FSLSO) at www.fslso.com, Sanders' and Timm's take on the market is right on the money here in Florida.

FSLSO maintains an impressive and comprehensive database of Florida's surplus lines market activity. Current reports show that surplus lines premium and policy count are down in 2009 when compared to 2008. Taxable premium for all classes of business (excluding independently procured coverage) through the first three quarters of 2009 is approximately $200 million less than 2008. Policy count is also down by slightly more than 65,000 (2009 versus 2008). Other states are experiencing even lower numbers. In fact, for the first six months of 2009, Florida reported the most surplus lines premium of any state, topping California and Texas for the first time.

However, it should be noted that Florida's full-year premiums in 2008 were down from 2007, which represents the first time that year-over-year taxable premiums were less than the prior year since FSLSO began keeping statistics in 2000. All of this tracks with countrywide results for this year. Total surplus lines written premium in the U.S. is off by 6.2 percent, according to a recent report released by A.M. Best (State of the Market, Sept. 14, 2009).

In terms of carrier activity, however, FSLSO market data reports show that the top surplus lines writers have remained fairly consistent over the past several years. As of early October, the top five surplus lines premium writers in Florida (agents-only data) were:

1 Lloyd's of London – $532 million

2 Lexington Insurance Co. – $321 million

3 Scottsdale Insurance Co. – $126 million

4 QBE Specialty Insurance Co. – $116.9 million

5 Empire Indemnity Insurance Co. – $116.1 million

The top five carriers by policy count (agents-only data) were:

1 Lloyd's – 218,040

2 Scottsdale – 37,844

3 Geovera Specialty Insurance Co. (formerly USF&G) – 26,405

4 Mount Vernon Fire Insurance Co. – 16,053

5 Nautilus Insurance Co. – 12,439

A complete list of reports in various configurations is available at the FSLSO web site by clicking on “Market Data Reports” in the lower right-hand section of the home page.

Some Good News

Although premium results are down overall, some coverages have experienced increases in total premium written over the past 18 to 24 months. Commercial Package premium increased by more than 19 percent and some 7,400 policies from 2006 to 2008, while Commercial Property premium was up over nine percent and 15,000 policies for the same two-year period.

However, for many people working in the industry day-to-day, any good news is often overshadowed by the feeling that everyone is doing a great deal more work for much less premium and/or commission. The statistics most surplus lines carriers and brokers relate to show an increased (or flat) policy count accompanied by a reduction in premium volume.

Sometimes that reduction is drastic, such as in the state's Commercial GL market. Policy count from 2006 to 2008 increased by 4,000 (134,028 to 138,054), but premium decreased by $10 million. Average policy premium went from $5,427 in 2006 to $3,840 in 2008, a 30-percent decrease.

Not surprisingly, premium writing is heaviest in the most populous metropolitan areas. Over the past several years, Florida's top premium producing counties have been Miami-Dade, Broward, Duval, Palm Beach, Pinellas, Hillsborough, Orange and Lee, each having at least $100 million in premium in 2008. The disparity at the top is significant, however, with Miami-Dade consistently garnering the most premium. In 2008, it reported in excess of $625 million in premium, more than twice that of the next two largest counties combined.

Some Legal News

The 2009 Legislature sought to put an end to the Essex v Zota debate by passing a bill to straighten out the confusion generated by the Florida Supreme Court ruling in the case. Several developments have arisen from this legislation, including a new form and new notices required on surplus lines policies as of Oct. 1, 2009. Two of those notices are mandatory on every surplus lines policy, a third applies to all Personal Lines Residential Property policies containing a separate hurricane or wind deductible, and the fourth applies to all Personal Lines Residential Property policies containing a separate hurricane or wind deductible, plus a coinsurance provision applicable to hurricane or
wind losses.

Despite the Legislature's intent to be the final word on Essex v Zota, it is possible we have not heard the last of it. Legal challenges are expected regarding the suits that were prohibited by that 2009 legislation, and stakeholders continue to keep a close watch on this issue.

There also have been rumblings lately about proposed legislation for the 2010 session that would eliminate the diligent-search requirement. Proponents of such legislation believe the due-diligence process has become less effective over time and that resources now spent policing this requirement could be better utilized. Additionally, some think that the elimination of the diligent-search mandate could serve to improve the competitive position of surplus lines markets and brokers.

On the national front, the federal Non-Admitted and Reinsurance Reform Act of 2009 (NRRA) has broad implications for all the states. Also known as H.R. 2571, the bill passed the House Sept. 9. A companion bill, S. 1363, was introduced in the Senate in June, but it still awaits passage.

According to the Risk and Insurance Management Society (RIMS), the NRRA does the following:

1 Allows brokers representing large policyholders to go directly to the non-admitted market to purchase insurance (for a commercial insurance purchaser to gain expedited access to the non-admitted market, an insured must employ a “qualified risk manager” to work with a broker).

2 Requires all surplus lines carriers to meet certain financial, capital, and other criteria in order to be eligible to provide surplus lines insurance in states.

3 Pre-empts state insurance regulators from intervening in reinsurance agreements of ceding insurers domiciled in other states.

What is missing from the RIMS summary is the idea that the NRRA was written with the intent of streamlining conflicting state regulation of surplus lines and reinsurance. The bill attempts to eliminate poor or inappropriate application of state laws across and between states, and to promote more efficient solvency regulation of reinsurers by providing for a single regulator (home state) for financial solvency.

Of more immediate importance to retail insurance agents, H.R. 2571 seeks to improve regulation and taxation of non-admitted or surplus lines insurance by vesting the home state of the insured with the sole authority to regulate and collect the taxes on a surplus lines transaction. State taxing entities and retail insurance agents will have some concerns as to the rules and especially how “home state” is defined, as this could help determine, among other things, which agent controls an account with multi-state exposures.

The Unkown

Almost everyone in the business has stories of lost premium volume and revenue. Causes of reduced premium writings are numerous, but the reasons most often cited include those given by Timm and Sanders — increased competition from standard lines writers and continuing pressure for top-line growth by all carriers; business owners/insureds reducing limits or coverage or not maintaining insurance at all; and businesses failing. It is too early to tell if rates and premiums will increase in 2010, but the likelihood is that the industry is in for more of the same for the immediate future.

Although many writers appear to be dropping rates in an effort to garner or retain business, some are urging and practicing caution. “It is important for us to be consistent with rates and underwriting, as our goal is to have capacity available at the end of the year, not just at the beginning,” said Sanders. “That is true on the casualty side as well, and is evidenced by our risk selection, among other factors.”

Without question, it is a tough market. Everyone intending to remain in it has to determine how to balance all of the competing elements. “The market screams for discipline, but also for creative and innovative products and tools,” said Timm. “The market is simply the market, and our responsibilities do not change: To provide a superior product to our customers and a profitable return to our shareholders. It is a competitive marketplace full of opportunities, but we have to better than ever.”

Special Reports /

The Faces of Excess & Surplus Lines in 2009

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