Lloyds No. 2, But Loyalty To U.S. E&S Market Undiminished

But while the 21 percent Lloyds growth figure is also below its 35 percent growth in 2001, its commitment is unwavering, according to Lloyds executives.

In an address here at the annual convention of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Chairman Lord Peter Levene said: "We are the second-largest underwriter of surplus lines business in this country, with a market share of 16 percent. Thats a tremendous achievement for what your regulatory system labels an alien insurer."

Prior to Lord Levenes address, Julian James, director of worldwide markets at Lloyds, told National Underwriter that the figures in the A.M. Best report for Lloyds revealed a "consistency" in its commitment to the U.S. E&S marketplace. Indeed, figures in Best report dating back to 1988 show that Lloyds market share has been in range, extending from the mid-teens to low-20s each year.

"Frankly, I was amazed to see some of the other numbers in the report," Mr. James responded when asked about the relative differences between the premium growth for Lloyds and some top competitors.

Kevin Kelley, chief executive officer of Lexington, pointed to the affiliation with AIG as a key reason for his companys substantial jump in volume. "We just have superior access to the business," he said, pointing out that a vast distribution network means that Lexington has sources of U.S. surplus lines business everywhere. "Were in London. Were in Bermuda. And were in the United States," he said.

Mr. James did point out that Lloyds underwriters have been looking more closely at relationships with coverholders (who place U.S. surplus lines business for underwriters) and that the number of coverholder relationships has shown some decline. At the same time, he said, the volume of business placed among those coverholders has increased, he said.

(While Mr. James said that the terms coverholder and binding authority are used almost interchangeably, some people make the distinction between those surplus lines brokers who can issue perform rating and issue documentationthe binding authoritiesand coverholders. Coverholders, he said, operate on behalf of Lloyds underwriters, while the rating is done by the Lloyds underwriters themselves.)

Mr. James described a market-wide effort to improve the quality of relationships between coverholders, binding authorities and Lloyds underwriters. There has been a process of "weeding out" some coverholders in situations where the relationships havent proved to be as strong as the underwriters would have liked.

"This is all in keeping with the overall drive in the [Lloyds] market to improve standards," he said. "We do value coverholders and binding authorities as an effective way to do business," he added, noting that there are three essential elements to a quality relationship.

"First, the relationship must be profitable for both parties," he said. "It must also be founded on good-quality practices on both sides." In addition, "it must be designed to be a long-term partnership," he said.

"So theres been a degree of rationalization that people have gone through" as Lloyds underwriters reviewed relationships in terms of these factors, he added.

Mr. James also discussed the essence of a "consultative document" on delegated underwriting at Lloyds reported on in a recent edition of National Underwriter (Sept. 8, page 2). The document, he explained, contains a series of questions and elicits feedback from the market, noting that Lloyds views this as an effective way to get things done. Mr. James said he did not know of the timetable for responses at this point, although a month or several months was a usual comment period.

"All of what were trying to do at Lloyds is all about improving the quality of the market, the quality of underwriting, the quality of capital supporting the market, and the quality of risk management practices to be sure that weve got a secure market," he said.

"Very simply, the future vision is to be recognized as the quality marketplace where the best businesses in the world are operating from," he added. "What were trying to do is to make sure weve got the building blocks in place" to be able to respond, if and when the external environment changes, he said.

In spite of strides the Lloyds market has made, when asked what issues keep him up at night, he responded in the same vein as his U.S. counterparts. (See NU, Sept. 15, page 44.)

"Were still living in a very, very risky world," he said, referring in particular to Hurricane Isabels path in the Caribbean. "We, as an industry, are only one event away from serious problems. And frankly, Im annoyed at all the soft market commentary thats being talked about," he added.

"Some people seem to have forgotten that this industry lost $50 billion in the space of six hours two years ago," he said, referring to the events of Sept. 11, 2001, and suggesting that the industry could not withstand a second similar event.

"The trend in our industry" to become what Lord Levene would later refer to as "a slave to cycles," Mr. James said, "just is not very helpful."

Insurers, he said, have to be mindful of rising tort costs that are a "drag on the economy. They need to account for those rising costs, rising product liability claims and rising medical malpractice claims" in their pricing.

The possibility of a major catastrophe and a repeat of "the stupidity that this industry has shown" historically are two of the most real threats facing the industry, he said.

"There is absolutely no reason for [prices] to fall," he said, also pointing to the industrys poor financial performance and long-term legacy issues. With regard to financial performance, Lord Levene, during his remarks to the convention, noted that last year, "for every dollarit took in, the U.S. market has paid out $1.07."

"Is that something to get excited about?" he asked. "I dont know which shareholders that could impress."

Mr. James said that one can "easily make the case" that the industry needs to go through a period of sustained profitability. "We shouldnt be embarrassed that we want to make returns for our shareholders," he said.

When asked to contrast the talk of a softening market reported on in the trade press with the reality he experiences when dealing with underwriters in London and at NAPSLO, he said, "I have yet to find one underwriter at Lloyds or outside that is prepared to admit that theyre reducing prices. They consistently say much the same–that the talk of prices softening is just not happening."

"If they are doing it [lowering prices], then they are forgetting the fundamentals of this market," he added. "We are in the wrong mindset as an industry" when we suggest that cycles are inevitable.

You dont have to be as big as Lloyds to share Mr. James view. Jon Saltzman, the chief executive officer of Penn-America Insurance in Hatboro, Pa., told NU: "Youre hearing about a lot of softening of prices on the margin. But the fact is that no one is in any moodreinsurers, direct or E&S companiesto change the market."

"What youre hearing is a lot of chatter. Its also not true. The structural damage thats been done to the industry is much greater than people think," added Mr. Saltzman, whose company wrote roughly $157 million of gross premiums in 2002, specializing in insurance for small business through a select group of 62 surplus lines brokers.

Mr. James said he is "optimistic" that discipline will persist in the market. "But we all need to keep our heads," he said.

At Lloyds, he said, current activity is devoted to the planning cycle for 2004, and the leaders are fixated on one goalmaking an underwriting profit. Neither Lord Levene nor Lloyds CEO Nick Prettejohn are worried about the size of the market, he said.

For those who are worried–or at least curious–about size, a comparison of this years A.M. Best report with two prior reports reveals the following noteworthy additions, omissions and movements:

Zurich Group, which ranked sixth two years ago, based on 2000 E&S premium writings, maintained its third-place spot for the second year.
Nationwide Group, ranked third two years ago, has been listed as the fifth-largest E&S premium writer for the last two years.
ACE INA Group jumped from a 16th-place ranking two years ago to eighth last year and seventh this year.
New players in the top 25 included Bermuda-based Arch Capital, the IFG Companies (including Burlington Insurance) and HCC Insurance Holdings.
Allianz Group (Firemans Fund), Swiss Re Group and PMA Group, which ranked 16th, 20th and 22nd, respectively, in last years report, are no longer among the top 25.

A.M. Best Surplus Lines Report Released

By Susanne Sclafane

While its interesting to see who ranks where in terms of premium volume in any segment of the industry, including surplus lines, the main thrust of a recently released A.M. Best report is not the ranking of major players.

As it has been for nine prior years, A.M. Best examines the market to compare the financial strength of the E&S market with the rest of the p-c industry. In that vein, Best concluded that a composite of surplus lines insurers had a higher average ratingan "A" rating–than the p-c industry in total, which has a median rating of "A-minus."

The report also noted that the combined ratio for a composite of 62 domestic surplus lines insurers has been 10 points better than the overall industry, on average, over the last five years.

Since 1973, Best also reports that surplus lines companies insolvency rates have mirrored those of traditional insurers with a frequency less than 1 percent. Noting, however, that surplus lines insurers had a higher rate of failure from 1988 to 2003, Best attributed this to the "increased failure of program writers that heavily used managing general agencies, to which they granted too much authority for binding business."

Bests "Annual Review of the Excess & Surplus Lines Industry" was commissioned by the Derek Hughes/NAPSLO Educational Foundationa foundation set up in 1991 to improve industry education about surplus lines.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.