E&S: More than a market of last resort

THE SURPLUS-LINES market, once thought of primarily as the home of unwanted insurance risks, has prospered in the current hard phase of the insurance cycle. If one compares the $2.2 billion in direct written premium placed in the E&S market in 1981 with the $25.6 billion written in 2002, the strength and vitality of this marketplace clearly becomes evident. Not only has the premium base of the surplus-lines market grown, but its combined ratio also has consistently outperformed the admitted markets'-by nearly 15% in 2003, according to A.M. Best's annual report on the excess & surplus lines market, and the gap continues to widen each year.

In the past, retail agents and brokers might have looked upon the E&S marketplace as the market of last resort, to be considered only if all else fails. However, thanks to a consistent application of underwriting discipline in niche lines of business, an entrepreneurial accountability for results, and a relentless commitment to professional development, the E&S marketplace is now home to many programs and classes of business that were once written mainly by admitted insurers.

Furthermore, in today's competitive market, where insurance buyers are looking for security as well as innovative solutions, the composite A (Excellent) rating A.M. Best has assigned to the professional surplus lines market compares well with the industry's composite A- rating. Why have retail agents, so wary of this market just a few years ago, turned to it as the answer to many of their problems and, further, a means to growth? One reason may be that many large, standard insurance carriers, prompted by market changes, low interest rates, reinsurance problems and reserve issues, have reallocated resources back to core business over the past five years, abandoning many small retail agents, programs and territories. Gone are the days when insurance companies were desperately trying to be all things to all people.

Insurance companies also are merging, leaving retail agents with fewer markets in which to place their business. Even worse, some agents are terminated following a merger, because the combined entity becomes over-represented in a given territory or because agents cannot satisfy minimum premium volume requirements with the new entity. The days when a small retail agent could represent five or six large commercial property-casualty markets also are over.

Insurer branch offices are closing, and the local marketing representative and local underwriter, who visited retailers regularly, went to see their accounts with them and developed personal relationships with them, also are vanishing. They have been replaced-at best-with a regional underwriter now located states away-someone who doesn't know why business in Wisconsin is different from business in Texas or Massachusetts.

The large insurance carriers are expected to produce returns on equity of at least 12% to 15% but find it difficult to do so because of the tremendous overhead they have been carrying. A study by Conning Research and Consulting states that P&C insurers' cost of doing business "has stagnated over the last 20 years, contrasting with the remarkable efficiency gains achieved by many other industries." While the banking industry has improved its efficiency ratio by 20% since 1982, the P&C industry's has remained fairly flat. Insurance carriers must streamline by focusing on the business that gives them the best likelihood of attaining an acceptable return for stockholders. When they do so, they may not always take long-term relationships into account, often leaving retailers and their insureds out in the cold.

Fortunately, the business that no longer fits within the target profile of standard P&C carriers has a welcoming home. Managing general agents, with their access to the E&S market, have always been around, but lately they have redoubled their efforts to serve retail producers. MGAs, which do not have the huge infrastructure and overhead of the large P&C companies, can underwrite business more efficiently and cost-effectively than insurance carriers can. In short, they are poised to become the "branch office" of the future. They offer the latest in technological and automated services, have efficient internal operations and know the local and regional marketplace. Many also are highly specialized in specific classes of business. Like branch offices, MGAs often offer loss control and claims service, and on occasion will even accompany an agent on a visit to a prospect to help sell an account.

Almost every MGA is a partner with its insurance company market and often with reinsurers and rent-a-captive facilities, too. Being a trusted business partner means MGAs must continue to offer value to their carriers as well as to their retail agents. Long-standing relationships with both agents and insurers provide security and predictability through difficult market cycles. MGAs achieve this stability by having a number of potential markets in which to place retail agents' business. That stability and flexibility are among the reasons for the profitability and growth of the surplus-lines market.

Retail agents should regard the surplus-lines market as more than an alternative for displaced business. Agents who want to expand their business need look no further than their local MGAs. They'll find them the perfect resource for helping them enter niche markets. MGAs are capable of providing coverage guidance and education about potential loss concerns in specialties of interest to producers. Such resources are essential to retailers when selling new types of clients on the value of their services, and when looking for consistent, committed partners with unique solutions to business risks.

A list of MGAs for any state can be obtained by visiting the Web site of the American Association of Managing General Agents, www.aamga.org, or by calling AAMGA headquarters at (610) 225-1999.