Specialty Premium Growth Outpaces Other Lines

Specialty insurers increased premium at an average 4 percent annual-growth rate over the past five years, beating the industry average, which remained close to flat over that time, a Conning Research & Consulting report says.

Conning says almost 75 percent of insurers in the top underwriting-performance quadrant for the industry are specialty insurers.

The report also says that insurers are moving toward increasing their specialty capabilities. This expansion, Conning says, could improve insurers' risk diversification, underwriting results and premium-growth opportunities. But the firm notes that expansion without development or acquisition of expertise “misses the critical success factor associated with specialization.”

Additionally, Conning says newly minted specialty insurers may not have access to smaller specialty markets through their regular retail-distribution channels and may not receive adequate support from wholesalers and managing general agents.

“The third concern is that naive capital could disrupt these markets,” Conning says.

Conning acknowledges that “specialty insurance” is an “imprecise and inconsistently defined term and marketplace.” The report says, “Insurance professionals and industry analysts use this and similar terms to describe classes of insurers, classes of customer markets and distribution processes. These include, at times, excess and surplus insurance, high-risk insurance, customer niches and also insurance provided by single-product providers. These markets often overlap, a factor in the imprecise definition.”

Conning says the sum of specialty subsegments it analyzed for the report represented more than 40 percent of P&C insurance premiums in 2010, with the high-risk market accounting for about $70 billion, including $32 billion in E&S premium.

Addressing distribution dynamics in the specialty market, Conning says it has seen “an expansion in the channels, including one high-risk market insurer that expanded into direct online distribution. Some insurers are also offering specialty products and programs to retail distributors, bypassing wholesalers and MGAs. “The condition is exacerbated by a proliferation of online portals funneling business to a number of destinations and bypassing the multitiered specialty-distribution system,” Conning says.

The firm adds that the increase in specialty products and insurers is “rapidly adding to the complexity of specialty distribution,” although this is somewhat offset by regulatory modernization for the nonadmitted market, the rise of larger wholesalers with a global reach and better technology.

“We see compelling reasons to drive the growth of electronically supported exchanges for specialty insurance,” Conning says. “The future could have more transparent products and pricing and have faster and more cost-efficient processing.”