Anyone who has been in the insurance industry long enough has heard it before: “This market cycle is different.” This time, though, even veteran Excess and Surplus (E&S) Lines professionals believe it might be the case.

A combination of excess capital, much of it from non-traditional sources, and, to a lesser extent, the ability to put data and analytics to better use means the industry can absorb larger losses than ever before. With continuous new entrants armed with so much capital trying to get a return for their investors, a competitive market has taken root that would require a major catastrophic loss event to alter the current playing field.

“What I'm telling my folks is this is the new normal,” says Bob Greenebaum, executive vice president, Casualty Practice Group Leader at Swett & Crawford. Speaking to the abundant capital in the marketplace and what that has meant for the ability to withstand larger losses, Greenebaum notes the industry hardly flinched after 2012's Superstorm Sandy—which caused $19.3 billion in insured losses in 2014 dollars. “Sandy didn't even move the needle, and it was a massive loss,” he notes.

“Ten years ago, think what something like that would have done,” Greenebaum adds. “And what it didn't do is probably the biggest example of the 'new normal.'”

“Those kind of events are manageable now based on our capital structures. I think the traditional market cycle has changed dramatically,” Michael Miller, president and chief operating officer of Scottsdale Insurance Co., says of losses like Sandy. “I think it would take a much larger event to create what we would typically call a hard market,” he adds, and he expects the market to ebb and flow going forward, rather than cross a line in the sand from soft to hard.

Daniel J. Kaufman, corporate vice president/managing director at Burns & Wilcox's Chicago office, likewise believes the market cycle going forward will have fewer high peaks and low valleys. There will still be hardening and softening, he says, but not as severe as in the past: “The industry is well prepared for a much larger event because of both capitalization and smarter underwriting.”

Bob Rheel, president of Aspen U.S. Insurance, acknowledges the market is going through “fundamental changes,” but he says it's too early to tell if the future will see flatter cycles emerge as a new norm. “The industry could shrug off one major event,” he says. “The question is, if we had two or three or four major events, would the industry shrug those off and move forward?”

State of the market

Barring a series of events, or perhaps one truly cataclysmic event, E&S professionals generally expect the current conditions to persist. They characterize the market today as competitive, with rates flat-to-down for most lines.

E&S Property is seeing sharper rate decreases than Casualty, experts say, but capacity remains high across both sectors. There is some disagreement about whether that capacity includes a greater presence of standard carriers in the surplus-lines space.

Kaufman says he sees more activity among standard carriers. Greenebaum agrees, noting, “There's no rhyme or reason. You find real traditional players treading in areas you think they'd never go, and then you lose an account.”

Still, other professionals say they're not seeing a significantly increased appetite from standard carriers at the moment. “We have not seen a flooding of business out of E&S back into standard lines,” says Scott Culler, regional president of Markel's western E&S operations. “In that regard, I think it's business as usual.”

“I actually see them stepping back,” says Hank Watkins, president of Lloyd's North America. He says there are new exposures and growth in standard lines like Workers' Comp, and if admitted carriers are making money there, they're less inclined to tread into the E&S space.

New capital, benign losses drive Property competition

On the Property side, the game has changed because of new capital entering the market from alternative sources such as hedge funds and pension funds. This capital is competing with traditional reinsurance, and most professionals agree the effects have been felt in the primary market. Kyle Sliwerski, a vice president at Lockton, says the increased capacity supported by alternative-capital sources has “influenced pricing in the retail client's favor.”

Culler adds that the alternative capital entering the market “is probably the most dramatic change in the marketplace. You're now getting new competitors popping up that are doing some things a little different than what we're used to.”

Miller, however, believes this influx is a bigger issue for reinsurers than for primary carriers. “We're looking at risk-transfer mechanisms no differently than we ever have,” he says. “When you have an option of reinsurance versus, say, a cat bond, you're going to evaluate the overall cost of doing those two transactions and figure out where you're best advantaged to buy that kind of protection.”

There has been some talk in the industry about whether this alternative capital will stick around if a major loss were to occur, but E&S experts who spoke with NU say these investors have done their homework and will not run scared at the first sign of trouble. “I don't see them blinking even if there is a major hurricane,” Watkins says.

For now, alternative capital is here to stay, and E&S professionals mostly see this presence, along with relatively benign weather over the last few years and plenty of capacity, as key factors in keeping the Property market competitive. “Property, on the cat side, we're feeling an impact there both on wind and quake,” says Culler. “We were thinking that we were close to the bottom of the barrel [for rate decreases] at the end of last year, and it continued. I think the stress on the marketplace continued at an even more rapid pace than we expected. Property is definitely under pricing pressure.”

James Drinkwater, division president of AmWINS Group, agrees, stating, “The property market continues to be incredibly soft. And absent a catastrophe, I think the trend will continue for some time. We're not expecting any increase in pricing anytime soon, because there is an abundance of capacity out there.”

Watkins, though, is hearing the end of rate decreases may be near. “Property, for all intents and purposes, seems to be leveling at the bottom,” he says, basing his assessment on market reports as well as conversations with E&S professionals at the Texas Surplus Lines Association Meeting in July.

“The general sense is that Property has bottomed out, and that it really can't get any lower,” he notes, regarding conversations he's had with wholesalers and binding-authority brokers. “Having said that,” he adds, “in any market, there will always be insurers who sneak in, and, for a couple of years, write exorbitantly cheaper rates than everyone else.”

Others aren't quite so sure the bottom is visible. “As long as underwriting companies are still making that underwriting profit, we haven't seen the bottom yet,” says Sliwerski.

Casualty remains competitive

While Casualty is not seeing the same level of pricing pressure as Property, it's still a competitive market. Professionals say the amount of competition tends to vary more by individual risk, although there are still identifiable trends by line.

Kaufman says pricing is down across the board, although “nowhere close to Property.” He adds, “I will note that the economy overall has improved, receipts have gone up, staffing is up. So while rates have gone down, overall premiums have gone up because of more insurable risks.”

Both Culler and Greenebaum mention construction as particularly competitive, and Culler says construction tends to lead the way for other casualty lines: Pricing pressure there leads to pressure elsewhere.

Some classes remain tougher to write, however, and are seeing firmer pricing. New York City construction remains difficult, as do certain habitational markets. Miller says Commercial Auto is also seeing some rate increases, and needs to see more.

Greenebaum mentions an interesting phenomenon he's noticed in the casualty market: “Carriers, certainly in the E&S space, are trying to be very discerning about their renewal book, and not so discerning about new business.” He called this behavior “counterintuitive,” because carriers would be more knowledgeable about risks they've written. He also notes that “everyone's renewal is someone else's new business,” resulting in “this sort of feeding frenzy for business we haven't seen in a while.”

Opportunities in E&S

Despite the challenges in the marketplace, E&S professionals are mostly optimistic. Playing in the E&S space comes with some advantages: freedom of rate and form, and constantly emerging new business to write in the form of risks the standard market cannot write.

“There's always something, or multiple things, coming around the corner that the standard market doesn't understand,” says Watkins. Cyber coverage, he explains, is a no-brainer for the E&S industry, and he also mentions the slowly growing trend of private flood coverage. Other opportunities on the horizon, he adds, include coverage for autonomous vehicles and drones.

E&S professionals recognize the potential of Cyber, but also acknowledge the challenges with this line. “I think there's opportunity there,” says Culler, “but the business is changing so rapidly, technology is changing so rapidly, the needs in the marketplace are changing so rapidly. But it's an E&S play, and we've probably just scratched the surface as far as exposures and opportunities.”

Watkins notes that take-up has not been robust, despite high-profile cyber breaches in the news. Greenebaum adds that buyers may see the coverage as too expensive relative to their budgets, and they might mistakenly believe a cyber breach will not happen to them.

Drinkwater at AmWINS feels that interest in Cyber protection is beginning to increase: “People are asking about it more now,” he says. “More and more are buying coverage.”

Stay relevant by specializing

As the E&S marketplace continues to evolve, Aspen's Rheel says E&S carriers and brokers will need to deliver more expertise and knowledge to their customers to remain relevant. “I think the demand being placed on the traditional E&S market is to become more of a specialty market, and deliver expertise and solutions to an increasingly complex world,” he says.

Greenebaum agrees. “Adapt or die,” he says. “We are being asked by our retail customers to become specialists. The role of the generalist is not nearly as important as it may have been 10 or 20 years ago. And [our retail customers] want specialized expertise on specialized products.”

Ultimately, it comes down to providing value in a market where buyers and retailers have more information and capabilities than ever before. “Companies need to understand this and deliver strong value to the marketplace, and sell that value and achieve a fair return for the value they bring,” adds Rheel. “Companies that focus on specialty areas and delivering expertise will win. Those who focus on the expense side and deliver a montage approach will lose.”

Special Reports /

E&S market update: Wrestling the &lsquo;new normal&rsquo;

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