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

A combination of excess capital, much of it from non-traditionalsources, and the ability to put data and analytics to better usemeans the industry can absorb larger losses than ever before. Withcontinuous new entrants trying to get a return for their investors,a competitive market has taken root.

“What I'm telling my folks is this is the new normal,” says BobGreenebaum, executive vice president, Casualty Practice GroupLeader at wholesale broker Swett & Crawford. Speaking to theabundant capital in the marketplace and what that has meant for theability to withstand larger losses, Greenebaum notes the industryhardly flinched after 2012's Superstorm Sandy—which caused $19.3billion in insured losses in 2014 dollars. “Sandy didn't even movethe needle, and it was a massive loss,” he notes. “Ten years ago,think what something like that would have done. And what it didn'tdo is probably the biggest example of the 'new normal.'”

“Those kind of events are manageable now based on our capitalstructures,” Michael Miller, president and chief operating officerof Scottsdale Insurance Co., says of losses like Sandy. “I think itwould take a much larger event to create what we would typicallycall a hard market,” he adds, and he expects the market to ebb andflow going forward, rather than cross a line in the sand from softto hard.

Bob Rheel, president of Aspen U.S. Insurance, acknowledges themarket is going through “fundamental changes,” but he says it's tooearly to tell if flatter cycles are the new norm. “The industrycould shrug off one major event,” he says. “The question is, if wehad two or three or four major events, would the industry shrugthose off and move forward?”

Barring a series of events, or perhaps one truly cataclysmicevent, E&S professionals generally expect the currentconditions to persist. They characterize the market today ascompetitive, 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. Thereis some disagreement about whether that capacity includes a greaterpresence of standard carriers in the surplus-lines space.

Daniel J. Kaufman, corporate vice president/managing director atBurns & Wilcox's Chicago office, says he sees more activityamong standard carriers.

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

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

Capital, benign losses drive Propertycompetition

On the Property side, the game has changed because of newcapital entering the market from alternative sources such as hedgefunds and pension funds. This capital is competing with traditionalreinsurance, and most professionals agree the effects have beenfelt in the primary market. Kyle Sliwerski, a vice president atLockton, says the increased capacity supported byalternative-capital sources has “influenced pricing in the retailclient's favor.”

Culler adds that the alternative capital entering the market “isprobably the most dramatic change in the marketplace. You're nowgetting new competitors popping up that are doing some things alittle different than what we're used to.”

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

For now, alternative capital is here to stay, and E&Sprofessionals mostly see this presence, along with relativelybenign weather over the last few years and plenty of capacity, askey factors in keeping the Property market competitive. “Property,on the cat side, we're feeling an impact there both on wind andquake,” says Culler. “We were thinking that we were close to thebottom of the barrel [for rate decreases] at the end of last year,and it continued.”

James Drinkwater, division president of AmWINS Group, agrees,stating, “The property market continues to be incredibly soft. Andabsent a catastrophe, I think the trend will continue for sometime. 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 benear. “Property, for all intents and purposes, seems to be levelingat the bottom,” he says, basing his assessment on market reports aswell as conversations with E&S professionals at the TexasSurplus Lines Association Meeting in July.

“The general sense is that Property has bottomed out, and thatit really can't get any lower,” he notes, regarding hisconversations with wholesalers and binding-authority brokers.“Having said that, in any market, there will be insurers who sneakin, and, for a couple of years, write exorbitantly cheaper ratesthan everyone else.”

Casualty remains aggressive

While Casualty is not seeing the same level of pricing pressureas Property, it's still a competitive market. Professionals say theamount of competition tends to vary more by individual risk.

Kaufman says pricing is down across the board, although “nowhereclose to Property.” He adds, “I will note that the economy overallhas improved, receipts have gone up, staffing is up. So while rateshave gone down, overall premiums have gone up because of moreinsurable risks.”

Both Culler and Greenebaum mention Construction as particularlycompetitive, and Culler says pricing pressure in Construction leadsto pressure elsewhere.

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

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

Opportunities in E&S

Despite the challenges in the marketplace, E&S professionalsare mostly optimistic. Playing in the E&S space comes with someadvantages: freedom of rate and form, and constantly emerging newrisks the standard market cannot write.

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

E&S professionals recognize the potential of Cyber, but alsoacknowledge the challenges with this line. “I think there'sopportunity there,” says Culler, “but the business is changing sorapidly, technology is changing so rapidly, the needs in themarketplace are changing so rapidly.”

Watkins notes that take-up has not been robust, despitehigh-profile cyber breaches in the news. Greenebaum adds thatbuyers may see the coverage as too expensive relative to theirbudgets, and they might mistakenly believe a cyber breach will nothappen to them.

Stay relevant by specializing

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

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

Ultimately, it comes down to providing value in a market wherebuyers and retailers have more information and capabilities thanever before. “Companies need to understand this and deliver strongvalue to the marketplace, and sell that value and achieve a fairreturn for the value they bring,” adds Rheel. “Companies that focuson specialty areas and delivering expertise will win. Those whofocus on the expense side and deliver a montage approach willlose.”