E&S Industry's Fortunes Improve

The years 2001 up to the fourth quarter in 2007 marked exciting times in the excess and surplus lines industry. The market was in constant motion. The phone rang off the hook and the quote-to-bind ratio was phenomenal. There was a surge in technology. Insurers introduced new business models with single-key entry from the quote, to the binder, to policy issuance. To meet the market demands, insurers designed transparent 24/7 online rating systems that were added to both wholesalers' and producer agencies' web sites. Agencies began implementing paperless environments to streamline their workflows.

The economic realities of 2008 and the opening months of 2009, however, challenged most industries, and the E&S market was no exception.As we move into the second half of 2009, positive signs are emerging. Insurance experts are predicting that E&S's next business cycle will be one of controlled growth with a gradual progression of rate increases. Don Wurster, president of National Indemnity Company in Omaha, Neb., spoke about how the cycle will transition. “Markets harden when people stop talking about waiting for it to happen. It is the people hanging around waiting for the market to change that is causing it to not change. Hard markets occur when underwriters change behavior, not rhetoric.”

According to Todd Markel, vice president of National Specialty Underwriters, Inc., in Boca Raton, “The property markets are hardening due to higher reinsurance rates, but with Citizens Property Insurance Corp. competing in Florida, the existing property market will harden slower than the previous one. There are more markets now that will write business, so when one market raises its rates, there are others that will write that business for the expiring premium. The property market will continue to be competitive for some time.”

Also of consequence in recent years is the significant entrance of admitted carriers into traditional E&S lines. That trend may be reversing itself. According to Markel, “The calculated impact of reducing the property exposure has caused many admitted carriers to write more casualty risk than before in Florida. Eventually, the admitted market will realize this is not a good fit for their companies and will start to shed non-standard risks.”

Gary Sanborn, CEO of the Orlando division of Crump Insurance Services, Inc., concurred. “I believe we are on the verge of a changing market in Florida, and this change will be more about underwriting and capacity than simply pricing,” he said. “The current state of the economy will not permit a large rate increase; therefore, I do not believe that we will see rates increase at the same percentage as the previous hard market. All carriers will begin to re-underwrite their books of business and re-establish underwriting guidelines. These changes will generate more opportunities for surplus lines brokers.”

“Invisible” Hard Market

This new business cycle is being referred to as the “invisible” hard market. In an April 6 article by Mark Ruquet in National Underwriter, Marsh & McLennan Cos. President and CEO Brian Duperreault was quoted from a January speech: “We are in the beginning stages of a hardening market, but countervailing economic forces are turning this into our first 'invisible' hard market. When our market turns, it usually happens very clearly.” Duperreault explained that in today's economy there is a contraction in business operations; therefore, the amount of insurable exposure remains in decline. This decline in exposure offsets any volume gains from the premium increases, creating an “invisible” hard market, since insurers and brokers fail to see growth despite higher rates.

Additionally, the current economy has caused a tightening of capital in the market, and 2008 was the fourth most expensive year for insured catastrophe losses in the past 10 years. Reinsurance contracts for catastrophe-exposed property that renewed in April and July are experiencing a 15 to 20 percent rate increase [Al Slavin, "Calm Before the Storm," Best's Review, June 2009]. Though it is difficult to forecast when these rising reinsurance costs will trickle down to the customer, clients should be advised to prepare and budget for an increase in premiums.

On the legislative front, the Florida E&S market achieved a significant victory during the 2009 session with the passage of House Bill 853. The Legislature observed the insurance community, representing many interests, working together to preserve the surplus lines industry in Florida. HB 853 clarifies the ambiguity created by the Florida Supreme Court in the Essex v. Zota decision: That Chapter 627 of the Florida Statutes applies to surplus lines insurance. (The surplus lines industry is governed by Chapter 626 of the Florida Statutes.) The Essex v. Zota case addressed a simple question of whether or not Florida law required a copy of the surplus lines policy to be delivered to the insured, as opposed to the insured's retail agent. There was a collective sigh of relief when Gov. Charlie Crist signed the bill into law.

Laying the Foundation

As agents and brokers weather today's market, several industry leaders offered insight into how they are using this time to prepare for the next business cycle. “We must continue to build on long-term relationships,” said R.C. Chaffin, president and CEO of SeaCoast Underwriters, Inc., with offices in Coral Gables and Lake Mary, and chairman of the board for the Florida Surplus Lines Service Office. “Staying in contact with our insurance companies and keeping our customers informed is key. In addition to marketing calls, our agency schedules face-to-face underwriting visits with our customers that we plan to continue.” The last business cycle illustrated how growth could be achieved through the attrition of technology. Today, offices continue to evaluate their business models and train their staff and customers on new technologies. Technological systems under consideration for purchase or upgrade include business process intelligence, server virtualization, updated web sites, and new phone systems. Sanborn said, “Surplus lines brokers are well positioned to take on more business with an experienced staff and a paperless environment. In the past five years most brokers have improved their internal processing and IT support systems. If our business increases, there will be a need to expand our staff.”

Industry associations are focusing on membership campaigns and opening the channels of communication within their memberships. AAMGA and FAIA have utilized online networking systems such as Twitter and LinkedIn to keep their memberships abreast during annual meetings. The Florida Surplus Lines Association launched a grassroots program connecting their members' voices to support HB 853 directly to their state legislators. Membership in industry associations provides opportunities for networking, sharing experiences, learning about new trends and regulations, and offering input on legislative issues affecting the market place. “It is important to encourage young professionals to get involved by joining young professional groups and engaging with their peers,” noted Markel. Active groups on the rise are FAIA Young Agents Council (YAC), the AAMGA Under Forty Organization (UFO) and Rotaract.

Owners are reviewing budgets and staffing to ensure that they are adequately prepared to meet customer demands today and tomorrow. This is a difficult time for agencies and brokers to move forward with new projects because revenue is down, but the workload remains the same and, in some cases, has increased. Markel said his company measures the return on investment before committing resources and his office will continue this practice in the next business cycle.

Emerging Exposures

The surplus lines industry is aggressively responding to newly developing voids in the marketplace. For example, the current state of the economy has created more awareness for the importance of developing risk management practices to reduce losses. Discussing these emerging exposures with customers provides an opportunity to cross-sell products.

The Lilly Ledbetter Fair Pay Act of 2009, which was signed into law by President Barack Obama on Jan. 29, brought the importance of employment practices liability into stark reality. The act states that the 180-day statute of limitations for filing an equal-pay challenge regarding pay discrimination resets with each new discriminatory paycheck. As a result of this new legislation, employers can expect to see an increase in wage discrimination claims. One recommendation to avoid liability is to conduct a statistical and legal analysis of the company's compensation data. If statistical disparities exist and cannot be justifiably explained, the company should consider appropriate wage adjustments to eliminate disparities.

With the increasing number of property foreclosures in Florida, there is a demand for property preservation specialist's professional liability coverage. Sanborn advised that, “We should expect to see some different methods of structuring coverages as well as competitive enhancements under various policies.”

The expanding global economy has created opportunities for small to mid-size American companies to expand business interests abroad. These new foreign insurance exposures are being addressed by several surplus lines companies.

Advice for the Future

Moving into a new and hopefully improved business cycle, several things should be kept in perspective. “Think of this current market as wealth building. You have worked really hard to write business that will increase considerably, due to your diligent efforts, when it renews in a hard market,” advised Markel.

“Maintain the same service standards you established in the soft market,” said Chaffin.

“Prioritize your opportunities by working first with those companies and customers who have been regularly doing business with you, qualify risks in regard to pricing and terms, and continue to give timely service,” noted Sanborn.

The Florida surplus lines industry represents many insurers with the professional experience and financial strength to insure your clients' exposures. As industry specialists, our customers and carriers rely on us for our knowledge and expertise. Our success depends on continuing to earn that trust every day.

Erin K. O'Leary is a vice president at Shelly, Middlebrooks & O'Leary, Inc., in Jacksonville and a director at the Florida Surplus Lines Association. She may be reached at 800-342-2498 or ekoleary@shellyins.com. Company information is available at www.shellyins.com.