Risks Slip Out Of The E&S Markets' Grasp

"Products business that the standard market avoided for the past five years is now going back. Even construction," said Mr. Newton, who is the incoming president of the National Association of Professional Surplus Lines Offices, Ltd. "Some standard carriers that did not do well in construction–and got out–are now coming back in. We are losing some commercial contractors."

Frank Seigel, branch manager for the Northern New Jersey office of Jimcor Agencies in Montvale, N.J., agreed that pure products liability is an area that the standard markets are starting to move into. "They're writing larger accounts that in the past they shied away from," he said.

He added that "the standard markets are now starting to move into inner-city areas. They're now writing apartment buildings, habitational risks," which they didn't do previously, he said.

More typically, he said, inner-city buildings, operations that don't have sufficient experience (such as newly formed operations in business less than three years) tend to be the domain of the E&S market. Standard markets also tend to avoid operations that have had losses, he said, adding: "That's where we come in."

Distinguishing between pure E&S business and specialty business written in admitted companies of surplus lines insurance groups, he said, "most professional liability lines are surplus-lines related, even though many of the classes might be written by admitted companies. Directors and officers, employment practices liability, miscellaneous E&O are still specialty coverages, and typically not written by standard markets."

Turning to personal lines, William McCord, a senior vice president for Burns & Wilcox, reported "a sizable migration back to the standard markets for homeowners. It's not purely price based as much as it's underwriting-criteria based," he said, explaining that standard markets are broadening their underwriting guidelines.

"Certainly in the Midwest, California and places like Arizona that are similar to California, there's been a real big shift over the last 24 months especially, but it continues to accelerate in 2006," he added.

Mr. McCord said Burns & Wilcox places business for four types of homeowners: low-valued (Coverage-A amounts under $100,000); midrange ($100,000-$500,000); high-valued; true nonstandard risks with multiple claims (three or more) or poor credit; and standard homes in nonstandard locations.

The widespread use of credit-scoring will kick "true nonstandard" risks out of a number of standard markets, he said. "We continue to see those folks," as well as those with claims, he noted, "but the number of people with three claims is probably 2 or 3 percent of the entire homeowners population."

Coastal properties fall in the fifth category–standard homes in a nonstandard location. "If we have capacity–and we do–to write that business, it's still coming to us," he said.

Mr. Newton said catastrophe-driven property generally is the toughest business to place right now in the surplus lines market–whether it's wind or earthquake. "It's very difficult if not impossible to get some large insureds the limits they want, and for the small-to-medium-sized insureds, premiums are pretty much doubling, tripling, quadrupling," he noted.

"The big question is: 'How much longer can they afford to pay those kinds of premiums?' Quite often, in California, they stop buying earthquake [coverage] because they can't afford it–and that's unfortunate, because they rarely come back to the market once they stop buying," he said.

James Roe, president of Arlington/Roe in Indianapolis, said earthquake is the only coverage area for which Midwestern wholesalers face capacity issues. With the New Madrid fault lying in the western Kentucky, Memphis, Tenn., and southern Missouri areas, financial institutions are demanding that earthquake coverage be carried, he said, noting that his firm just recently put together a facility to write some more of that business.

Mr. McCord said there have been no real new entrants to the catastrophe-exposed property market. "We're hoping, as an industry, if we can get through the next few weeks without a major windstorm that makes landfall, we might see additional capacity come to the table. In fact, that's a lot of what our conversations at NAPSLO will be about," he added.

For coastal property in the Carolinas, Mr. Allen reported, "we basically have no markets right now. We have nowhere to go."

While homeowners business outside of coastal areas is moving back to the standard markets across most of the country, other lines continue to work well in the E&S market, according to Mr. McCord, listing standalone personal umbrella and coverage for vacant property among them.

"The driving factor is the economy," he said, explaining a growing amount of vacant property business. Mortgage rates have risen from the all-time lows of four years ago. Michigan, specifically, has the highest unemployment rate in the 50 states, where challenges in the auto industry ripple through the local economy, he reported.

People who might have been thinking of trading up to newer, bigger houses are staying put, leaving empty homes under builders risk policies. Longer timeframes associated with estate sales also are leaving properties vacant. A high-valued home in Michigan might be on the market for up to a year or more, Mr. McCord noted.

The resulting increased demand for vacant property coverage is not specific to Michigan, although Michigan is probably the leading example, he said.

But even with increased demand, it's not a given that the E&S market will write the policy. "In the past, vacant buildings had been very difficult for standard markets to write, but we're seeing standard markets take vacant buildings," said Mr. Roe, adding that "just about everything is moving back"–with the exception of coastal property.

Also moving are companies and residents themselves–from Florida to the Midwest, he noted.

"We have more and more capacity in the Midwest," according to Mr. Roe. "Not only has property become extremely competitive, but we're seeing casualty, products liability and workers' compensation. Most companies that a couple of years ago wouldn't do any comp [are] now doing monoline comp, [and] it's becoming more and more competitive"–adding that "any account that is over $100,000 is heavily competed for."

David Price, executive vice president and chief underwriting officer at Burns & Wilcox, said that away from coastal regions–in the Midwest, Mid-Atlantic, Southwest, California and Northwest–"the property market is exceedingly soft."

Large-account casualty business is being "actively solicited by standard markets again. That's nationwide," he said. "The middle-market casualty business is a bit of a mish-mash," he added, referring to business in the $10,000-to-$75,000 premium range.

"We're keeping some of it. It depends on what it is more than anything," he said–noting, for example, that standard carriers "don't really like contracting business, particularly residential contractors."