E&S Execs See Growth Opportunities Despite Recession, Fin'l Turmoil

Scott H. Smith, president of S.H. Smith & Company in Hartford, identified the "impact of the financial meltdown on the insurance industry" as the top story for 2009 "and beyond."

"We are predicting this monumental event will stagger not only the predictable lines of insurance, such as E&O and D&O, but also other major areas," he added.

Explaining the less predictable impacts to lines other than professional liability and directors and officers insurance, he noted the potential for foreclosures and arson to impact the property line, and for inflated awards and crime to hit general liability.

"The insurance industry needs to reserve for the usual type of activity that accompanies recession in the extreme, in addition to the predictable claim activity for financial setbacks," Mr. Smith warned.

Taking a cue from a recent political campaign slogan and the objective of the new Obama administration in Washington–to follow a blueprint for change–responses from many longtime NAPSLO members expressed hope that a top story in 2009 might be a changed insurance market with regard to pricing and competition.

While every broker and insurer responding to a direct question about whether the market would harden this year answered that it would, several doubted the lessons of 2008 or of past soft markets would be heeded by all.

Some respondents, echoing the promise of real change in Washington from President Barack Obama's administration, predicted federal regulation of the industry in one form or another. Others eyed the economic stimulus package, with its investments in the nation's infrastructure, as a potential boost to commercial construction activity and to the demand for E&S insurance.

But Michael Miller, president of Scottsdale Insurance Company, isn't that optimistic. "The stimulus package from Congress will have a lag effect as it will take time to roll it out," he said. "This would seem to indicate that there will be businesses that will continue to struggle and that the number of new companies will be lower."

Mr. Miller and other carrier executives, however, did foresee one development that could push business back onto the books of E&S carriers in 2009–a potential retrenchment of standard carriers from the E&S business, precipitated by impaired capital positions.

"We are seeing a significant reduction in capital across the industry, and the ability to attract new capital is lacking. [Standard] companies will have to evaluate the risk profile of their books of business," he said.

Nathan Warde, president of Aspen Specialty in Atlanta, said capital markets "remain very constricted." While they may not be entirely frozen, he said he believes the inability "to recharge [an insurer's] capital base following a significant loss event…is forcing some management teams to rethink how they have put their capital to use."

"Those carriers with significant catastrophe accumulations are already moving to reduce them," said Mr. Warde. "Others are looking at their more volatile lines of business, which could potentially lead to some carriers shedding books of business deemed either as being too volatile or non-core."

"Either trend will push more business into the E&S market," he said, echoing the sentiments of Christopher Timm, president of Century Insurance and executive vice president of Southfield, Mich.-based Meadowbrook Insurance Group.

Mr. Timm also predicted a reversal of the "soft market-induced expansion" of standard carrier risk appetites into surplus lines, noting the combination of storm losses and investment write-downs in the past year caused an overall loss of industry surplus.

He said the standard markets entered traditional surplus lines niches in recent years with standard forms, underwriting and rates. As a result, "the experience on this portion of their business cannot be good," he added. "Many company executives are seeing a need for rate increases. A simple analysis would show a relatively easy ability to effect a gain in rate adequacy by excising such risks from their books."

This, Mr. Timm added, "should be especially evident to those executives who take the time to look in the small-account and [businessowners policy] segments of their business. We expect this business to start returning to the surplus lines market near the end of this year."

No matter which of the seven stories executives picked as the potential biggest to impact their business in 2009 (see accompanying listing), NAPSLO members said they are well-equipped to weather the storms ahead.

"Widespread loss of jobs and loss of opportunities will encourage most [members] to revisit and implement the fundamentals of success," according to NAPSLO President John Wood.

"As strange as it may appear, this type of environment could produce more opportunities for the E&S business," said Mr. Wood, who is also president of Specialty Risk Associates in Shreveport, La.

"We are ready to step in and serve our customers," he said, noting that NAPSLO is conducting a media campaign to "inform our retail customers of the value of wholesale brokers and that, through their knowledge, experience and expertise, we bring value to retail insurance agents and corporate risk managers in placing specialty insurance."

Giving the carrier perspective, Peter Eastwood, the new CEO of Lexington Insurance–ranked as the largest E&S insurer in 2008–explained how his company is preparing to deal with the challenges an economic downturn will create.

"For our part, we need to understand that we cannot control that which we cannot control. We must stay focused on what is within our control," he said, predicting that "2009 will be the year of the underwriter."

"The carrier that is nimble and executes well will weather the storm. Those that do not may flounder." Mr. Eastwood said.

"We must be nimble and focus on those areas where we believe that we have a competitive advantage both in capacity and expertise. It is those qualities that we will rely on to maintain our underwriting integrity, rather than engaging in expedience-motivated underwriting that surely will come home to roost in future years," he concluded.