NAPSLO Members Brace To Weather Economic Storms Ahead

What do you believe will be the most important events or major trends that will impact the E&S/specialty segment in 2009? How will each event or trend impact your business and the E&S segment generally?

How is your firm prepared to deal with it? What advice would you give to other market participants on dealing with the potential impacts?

NAPSLO members attending the NAPSLO Mid-Year Educational Workshop in Indian Wells, Calif., this week shared these views on these questions with NAPSLO Convention Daily:

Robert Sargent, executive vice president of Mercator Risk Services in Hartford, Conn., said, "The specialty lines market has been and will continue to be impacted by the credit crisis along with the rest of the insurance industry."

"After seeing what can happen to a strong company like American International Group, solvency concerns will continue to be top of mind," he added. "We are not through this crisis yet."

He also cited the potential impact of the economic downturn on his list of key developments for 2009, noting that his firm has already seen signs of buyers beginning to cut back on coverage to save money.

As always, he added, the specialty lines business could face unanticipated events in 2009. "In addition to the risks we expect and price for, we are always faced with the unknown and unanticipated risks, and our industry may not price for these. We have seen this before [with] terrorism, hurricanes and credit default swaps, but we cannot anticipate when, how or where something may occur that tests our financial structure."

"This is the environment where we do our best," said Mr. Sargent, who is co-chair of NAPSLO's Communications & Technology committee, referring to the wholesale broker community.

"The wholesale insurance business is based on providing specialty solutions for retail agents and brokers and their clients. From that perspective, this market is no different," he said.

His firm, Mercator, relies on a business model of specialty teams, utilizing "some of the most experienced brokers in the industry to provide unique and creative solutions for...retail clients."

"Mercator has been fortunate that our clients value our expertise, and therefore we continue to provide specialty lines solutions to [them] and to grow in this competitive market," he said.

Laura Corwin, vice president of primary casualty for Liberty International Underwriters in Boston, pointed to the inauguration of President Obama and the volatility of the stock market as the key news events likely to impact E&S insurers in 2009.

"Jobs created from the stimulus package should help reverse the current trend of businesses cutting back on projects and operations and help revive construction projects that are currently being cancelled or postponed," she said. "Businesses and construction projects need insurance coverage, so demand will increase for our services."

"On the other hand, decreased projections from a volatile stock market are causing businesses to reduce their revenue forecasts, which could result in lower premium writings for insurance companies on existing business."

"It's a good news, bad news situation" for insurers, she concluded.

Paul Springman, president and chief operating officer of Markel Corp. in Glen Allen, Va., listed the prospects of federal insurance legislation and hardening markets in some key specialty lines ahead of the economic downturn on his list of top stories, but like other members, he said his firm was prepared to tackle the challenges of all three developments.

"Federal legislation will be passed to regulate at least some if not all segments of the now state-regulated insurance industry," he predicted. "In fact, you could argue the government has essentially socialized significant segments of our financial institutions and enhanced governance and oversight will come with those decisions.

Turning to the prospect of a harder market, Mr. Springman said employment practices liability insurance, directors & officers liability, catastrophe-exposed property, marine and energy will be leaders in the hardening of the market.

"Pick any measure you wish--climbing unemployment, security class-action lawsuits, and negative developments for 2008 [from Hurricanes] Gustav and Ike, as well as further development on Katrina. The price compression of the last five years, absence of investment options and loss development portend the bottom of the soft market now," he said.

Like others, Mr. Springman said the overall economic environment will adversely affect commercial insurance buyers. "This is the front end of an unprecedented economic downturn," he warned, noting that in this environment, Markel "will continue to be conservative and cautious, [to] live within our means, and run the business as intelligently as possible."

"We will stick to our strength--providing a unique solution to the unique needs of our E&S customers with our wholesale broker partners, and to remain a financially viable company in which our customers can place their trust," he said.

Mr. Springman also noted that Markel restructured its underwriting customer service centers to five regional locations in order to be closer to broker partners and their customers. The restructuring also allows the insurer to understand the local environment while hopefully being more efficient, he said.

Turning to the broader E&S segment, Mr. Springman advised members to support NAPSLO initiatives to fend off any potential negative consequences that his prediction of federal legislation might have.

"Congress looks from all perspectives to be focused on restructuring the regulation of the financial services industry. All indications are that this will include the property-casualty insurance business. The state-based system of p-c insurance regulation could be considerably altered by Congressional action in favor of federal oversight of all insurance transactions."

"Our plan is to continue to support and advocate the preservation of the primary foundation of the E&S industry--freedom of rate and form," he said, urging others to financially support initiatives NAPSLO has in place "to get our voice heard by this Congress."

At Burns & Wilcox in Farmington Hills, Mich., David Price, executive vice president and chief underwriting officer, also put regulation and the hardening of the market on his list of potential top stories in 2009, while President & CEO Alan Jay Kaufman listed the state of the world economy, the recessionary climate of the United States, lagging investment returns and solvency, as well as the reduced amount of surplus and new capital into the market.

While the hard market will help the E&S segment overall, Mr. Price said complying with new regulation brings difficulties, highlighting, in particular, California regulations increasing the responsibilities of agents and brokers.

"NAPSLO assistance is going to be essential for all members to properly steer through all the new regulations," said Mr. Kaufman.

Mr. Kaufman also said Burns & Wilcox has been positioning itself for the return of the hard market while conditions remained soft. "Because we are a privately owned company, we have the advantage of being able to dedicate resources and make investments in growing our business and technology edge," he said.

Mr. Price said: "In regards to the hardening of the market, it is important that NAPSLO members maintain high integrity and work with carriers that are financially strong. Despite the developments in the financial services industry and related concerns about stability of the U.S. insurance industry, specialty lines is strong and solvent."