A marketplace with a $34 billion vote of confidence

The world of insurance constantly changes, and it will continue its dynamic course of developing and responding to risk. The conventional wisdom and practices that affect behaviors and cultures in agencies, brokerage firms, and insurance and reinsurance companies continually give way, as we challenge what worked yesterday and try to improve upon it for today and tomorrow.

The surplus-lines market has witnessed rapid growth and development, in accordance with opportunities for its underwriting expertise and discipline to address market needs. In 1981, $2.2 billion of direct written premium was placed in the E&S market. As confidence in the stability of that market and policyholders' needs continued to grow, the surplus-lines industry responded. Today, it is responsible for more than $34 billion in direct written premium, according to the A.M. Best Special Report on the Excess and Surplus Lines Market. This accounts for approximately 15% of the direct premium written in the entire property and casualty market, compared with approximately 3% in 1981.

To place the importance of this in context, one must also look at the quality of the business being underwritten. According to the A.M Best report, the combined ratio of the surplus-lines composite market continues to outperform that of the admitted market. The market's strong performance is further evidenced by the surplus-lines composite's better-than-average pretax returns on net premium earned. The market also boasts balance sheets strengthened through operating profitability brought about by the recent hard market, entrepreneurial accountability for results, and a relentless commitment to professional development and underwriting discipline.

Against this backdrop, the American Association of Managing General Agents has been working through its membership and committees on issues confronting the marketplace. The goal is to provide continued leadership to ensure the industry's strength is maintained and fostered.

In 2004, the 283 managing general agent members of the AAMGA were responsible for $23.9 billion in direct written premium, or approximately 70% of the industry's total. Insurers confidently entrust the underwriting pen to AAMGA members, who are specialists in underwriting niche lines of business and programs in all 50 states, through both domestic and international markets.

However, the landscape is changing. Federal and state legislators are showing increased interest in the industry. That gives us the opportunity to educate elected officials and appointed regulators on the most appropriate ways to enact essential reforms for modernizing the market. For many years, the AAMGA has been involved on Capitol Hill, as well as in state capitals, on a variety of matters including the Nonadmitted and Reinsurance Reform Act of 2006, which is pending in Congress; the National Insurance Act/Optional Federal Charter pending in the Senate; and various state reforms on producer licensing, regulatory uniformity, the collection and payment of premium taxes on multistate risks, and fingerprint and other model acts proposed by the National Association of Insurance Commissioners, the National Council of Insurance Legislators and other industry colleagues.

We must continue to work with state and federal legislators and regulators to find the most appropriate ways to stimulate competition and entrepreneurship in the market, to foster investor confidence through greater returns on equity, to adapt to changes in market and policyholder needs and to enhance consumer protection. Otherwise, one day we may recall with regret the warning issued July 11 by U.S. Sen. Tim Johnson (D-S.D.). In a Senate Banking, Housing and Urban Affairs Committee hearing on modernizing state-based insurance regulation, Senator Johnson said, “My message to the NAIC and the states is that if you can't do it, we'll do it for you.”

There is more on which to comment than just regulatory issues. The surplus-lines industry responded well to the catastrophic storms of 2005 and quickly helped abate the capacity crunch. Expert claim professionals adjusted losses quickly and efficiently, allowing policyholders to lessen business interruption and rebuild their infrastructures.

We have observed a retreat by the standard markets from coastal and wind-prone areas, and from other properties having high frequency and severity exposures. As it has in the past, the surplus-lines market has responded by crafting unique, manuscript and risk-based solutions for those requiring protection in more loss-prone areas.

As the response of reinsurers around the world to last year's hurricanes remind us, the insurance industry has become global. It is affected not only by hurricanes, wildfires, floods, mudslides and other events in the U.S., but also by tsunamis, typhoons, earthquakes and terrorist bombings in Asia, Europe and South America. As supply attempts to meet demand in the E&S marketplace, the impetus will be on having domestic and international quality capital fill the potential voids. This will lead to the strengthening of MGAs' relationships with U.S. carriers and with Lloyd's underwriters and the London market companies.

Much like nature, insurance abhors a vacuum. Thus, many will rush in to fill the gaps in coverage and service. Those who will differentiate and distinguished themselves will be those with a commitment to continuing education and professional development. Here, too, AAMGA is responding to the industry's needs. In the past year, more than 5,700 insurance professionals from more than 470 companies, agencies and brokerage firms have attended AAMGA University classes in the U.S and England.

In addition to knowledge, integrity has become essential. It is more than a corporate sales pitch or best practice; rather, it is an essential component of every insurance transaction, relationship and business practice. Aside from results, integrity is what drives marketplace advantage, public trust and customer confidence.

For 80 years, the AAMGA's Code of Ethics has been acknowledged annually, and the association's 503 current members serve as models for others to follow. Integrity is the single most important benchmark by which we can measure performance and our commitment to reforming the industry. Through the heightened due diligence and membership-selection process they must undergo, AAMGA members have earned the trust of their peers, customers and markets.

Notwithstanding the foregoing, some still may not fully appreciate the value of surplus-lines insurance professionals. But $34 billion is being invested in our market by those whose livelihoods and businesses depend on our experience and expertise. We don't take our responsibility to them lightly. Our commitment to driving professional development, change, modernization and reform reflects our desire to demonstrate to those investors that their confidence is well-placed, as we meet the challenges and opportunities to come.