Scottsdale, Ariz.

As the economy goes, so goes the insurance market, excess andsurplus lines experts agreed at a meeting here.

While there were some differences in opinions about whether theeconomy is starting to rebound, representatives from wholesalebrokerages and an E&S insurer said that an economic recoverywould help to turn around soft market conditions that have led toincreased encroachment by standard carriers into traditionalE&S lines.

The comments were made to National Underwriter duringthe 2010 Mid-Year Leadership Forum of the Kansas City, Mo.-basedNational Association of Professional Surplus Lines Office Ltd.

Michael Miller, president andchief operating officer of Scottsdale Insurance Company, said hebelieves the economy “is a big contributor to the soft market.” Henoted that there are just as many players in the market, but theyare competing for risks in a shrinking economy, which is helping todrive competition.

“Everyone's reacting to what the economy is doing,” headded.

Jim Roe, president of Indianapolis-based wholesaler and managinggeneral agency Arlington/Roe & Co., agreed. “Obviously anymarket is a measure of supply and demand. So right now, we've had,for the last number of years, a lot of supply, and with the economybeing down, there's less demand for insurance,” Mr. Roe said.Participants in the specialty and surplus lines area “just try tobe that relief valve for agents and customers that have a specialtyneed or a surplus lines need,” he said.

Standard carriers, Mr. Miller noted, started dipping intoE&S lines about three-to-four yeas ago. Typically, heexplained, standard carriers will write E&S lines in softmarkets, and then back out again as combined ratios rise and theyre-examine their books.

But so far, Mr. Miller said, the standard companies arecontinuing to see manageable combined ratios and rates of return inthe traditional E&S lines.

Mr. Roe said insurers' loss ratios are up, but they're writingmore premiums to fuel top-line growth. He added that, for manyinsurers, it is about “premium, not profit.”

A lack of hardening in reinsurance rates is compounding theproblem, he said.

While there may be unique aspects to this soft market because ofthe economy, Mr. Roe and Mr. Miller both noted that soft marketconditions are nothing new for the insurance industry.

Mr. Roe said that in the Midwest,where his firm is based, there are so many regional and mutualcompanies that take care of most agents' needs that there are neveras many E&S opportunities there as compared to coastal areas.He said capacity seems to come to the Midwest “anytime the windblows or the earth shakes” on the coast.

“We have a perpetual soft market there,” Mr. Roe said, addingthat the market never gets hard, just less soft.

Mr. Miller said this soft market has actually been relativelyshort compared to other soft markets, and he added that theindustry spends the majority of its time in soft marketsanyway.

Alan Jay Kaufman, chairman, president and CEO of Burns &Wilcox in Farmington Hills, Mich., also said this soft market hasbeen about on par with previous ones. He added, though, that thecurrent market has been a “perfect storm” of no major hurricanes, alot of available capital, and a struggling economy. He predictedmore hard times ahead.

For E&S insurers in this market, they have a choice whetherto try and compete with standards, or to back off and move to otherareas, according to Mr. Kaufman. The prudent companies, he noted,are stepping back and not going toe-to-toe with the standardmarkets.

As for strategies employed to cope with the market and economy,views were mixed.

Mr. Miller said: “I don't think we change our strategy during asoft market. We're always working hard to deliver products andservices to meet the needs of our insureds and agents.”

He added, “One thing we're making sure we do is we're outvisiting our agents, and talking to them about what they do to meet[customers'] needs.”

He said he is also payingattention to the economy to see if there is a need to change ormodify programs. With the economy down, he said, some accounts incertain areas, such as construction, have lost volume. That, Mr.Miller said, will affect pricing, as general liability premiums arebased on payroll or sales.

Another difference between hard and soft markets, he said, is ina hard market, an insurer can put out a quote and move on to thenext opportunity. In a soft market, “once you put a quote out, youhave to keep working at it.”

It is important, he said, for companies competing in a softmarket to be able to draw a line in the sand and have a walk-awayprice.

Mr. Miller acknowledged the dilemma companies face when fightingto retain risks they like, but he said in the end, discipline mustprevail. “If it's an account you really like, obviously you'regoing to work to retain it,” he said. “And you understand thataccount better than many other accounts because you've had it for awhile… But I still think at the end of the day, if someone else isgoing to price it in what we would consider to be a ridiculouslylow price, no account is worth writing at a point where you believeyou don't have a chance to earn any profit.”

Outlining his strategy in this soft market, Mr. Roe said, “We'refocusing on aggregation for retail agencies.” He said retailagencies are looking for more revenue in an environment whereprices are dropping and competition is high.

“What we do,” he said, “is go in there and say, 'Why don't youtake a look at all the wholesale intermediaries–MGAs, programmanagers–all the intermediary business you do? And what we can dowith all the specialties and markets that we have, is help youaggregate that business with fewer MGAs and wholesalers.'”

Mr. Roe said, “We've been fairly successful with that.”

For Mr. Kaufman, the strategy is to stay ahead of the market andget involved in growing areas. He said Burns & Wilcox isfocusing on recreational products, where there are still insuranceneeds to be filled. The wholesaler is also expanding offerings inmedical niches such as spas, clinics and plastic surgery, hesaid.

Identifying and growing in these areas, he said, is importantrather than focusing on an area such as manufacturing “which isdying.”

To identify growing areas, Mr. Kaufman said Burns & Wilcoxdraws upon its presence around the country.

He said Burns & Wilcox is also focusing on bringing moreexpertise in certain areas, noting as an example that thewholesaler has hired people with more expertise in certainprofessional liability niches.

Ultimately, Mr. Kaufman said the strategy is to remainactive–making acquisitions, investing in technology and hiring newpeople–rather than pulling back and waiting for the market andeconomy to change.

When will the economy recover? Experts had differing views.

Mr. Kaufman and Mr. Roe both said they have seen no change inthe economy. Businesses are still struggling, they said, and Mr.Roe–speaking for the Midwest–said Michigan in particular remains introuble.

Mr. Miller, though, said he has seen some signs ofrecovery–pointing to more visitors in the Scottsdale area, and morepeople in general in restaurants and airports.

“Attitudes are improving,” he said, and added that the economyis driven by attitudes.