NU Online News Service, Oct. 13, 1:10 p.m. EDT

SAN DIEGO—While property and casualty pricing seems to be flattening and even improving in some lines, excess and surplus-lines professionals say they are hesitant to declare a market turn due in part to the ongoing heavy presence of standard-lines carriers in traditional E&S business.

In an interview here at the National Association of Professional Surplus Lines Offices annual conference, Judy Patterson, a property underwriter at specialty-insurer Beazley says that for the market to turn business needs to come back to E&S carriers, and standard insurers have to start pulling back.

“That, to me, is really what we need to see before I'll say it looks like a hard market's coming,” she says. “It's nice to get some rate increases, but it's not a hard market until we have that influx of new-business opportunities, and we haven't seen that.”

Linc Trimble, senior vice president, head of Excess Casualty (U.S.) for Bermuda-based Torus Insurance Holdings Ltd., sees the same standard-carrier activity in the casualty space. “I absolutely see the standard markets heavily into the E&S space,” he says.

Trimble says as the economy improves, there will be enough premium and profit in standard carriers' traditional markets and they will begin to pull back.

“There's a lot going on,” he notes. “There's a soft insurance market, it's a bad economy, and you have an insurance industry that's still a little bit overcapitalized. So if you think in terms of the investment-return equation, you have a denominator, which is the capital base, that is a little artificially big right now, and the numerator is the underwriting profit you can write from your insurance operations and a little from the investment side. In order to generate the returns, you have to generate premium.”

Insurers need premium, Trimble notes, to at least have a chance at making an underwriting profit, and that is driving the heavy competition. He also says insureds are buying less insurance because of the economy, complicating the equation.

The solution for the insurance industry may well be the solution many Americans in all walks of life are looking for: an improvement in the overall economy,” says Trimble.

Beazley's Patterson believes the sheer amount of losses standard carriers are taking will begin to add up and the market may begin to turn by next year.

Speaking to why standard carriers have not reacted to the catastrophe losses they have taken this year, she says some of those companies are so enormous that it is like trying to turn a tanker ship on a dime. “You can't do it,” she notes.

But she adds that between the second-quarter tornado losses, Hurricane Irene and other losses, the time may be coming for standard carriers to re-evaluate the lines of business they are in.

Torus' Trimble adds, “2011 has just been a continuing saga of disasters.” But he says the insurance market has been absorbing the losses so far.

Both he and Patterson do not believe the market will take a fast turn like what happened after 9/11 in the previous cycle.

“I think 9/11 was unique and unsettling in ways even beyond financial loss,” Trimble says. “For a lot of reasons, that was a different market change.”

As Patterson says, barring a dramatically huge event, the industry will likely undergo a slow turn due to a series of events.

Another factor that may be prolonging the soft market is the intelligence of insurance companies now vs. past cycles.

“I think people are smarter,” Patterson says, noting there is more control, scrutiny and rigor in all financial markets.

Trimble agrees, saying “companies are getting smarter—which is good and bad. They're better in that insurance companies are improving in their ability to assess a line of business against the capital that's allocated to that class of business.”

Because of this, Trimble says market cycles in the future may be unlike those of the past. “My personal opinion [stressing this is not Torus' philosophy] is I think market cycles will be product and segment oriented, not broad brush. In the past, there was a sea-level rise of rate movement. In the future, if it's a good class of business with good results in a certain sector, I think the competition will remain until the potential is evaporated. However, if there are lines underwater, you'll see a hard market in those sectors.”

The soft-market cycle continues for now. But its impact varies according to account size and even region.

Darren Marsh, managing director of Florida-based wholesaler SLB Insurance Group, says he has not seen the standard markets encroach as much on the smaller risks he deals with.

“I think that [standard carriers] have gotten burnt by some small accounts where they have big claims. And that's lost its flavor for them now.”

Patterson agrees that account size impacts the level of competition. She says generally the smaller accounts tend to hold rate better while the larger ones are more competitive, although she says that distinction could fade this far into a soft market.

Special Reports /

E&S Pros Look for Sign of Market Turn: The Exit of Standard Carriers

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