Lloyd's Takes Over Top Spot in Surplus-Lines Premium from AIG

American International Group has lost its long-held spot at the top of the surplus market in 2010 after a 13 percent decrease in direct-premiums written, says insurance rating agency A.M. Best Co.

A special report on the surplus lines market reveals Lloyd's of London has taken over as the leader in surplus-lines market share with 18.3 percent compared with 16.8 percent held by AIG companies. Direct-premiums written at AIG's Lexington Insurance Co. fell 15 percent.

Combined, Lloyd's and AIG account for more than one-third of the market.

Explaining some of the factors behind Lloyd's rise to the top, Hank Watkins, president of Lloyd's North America, says AIG “had their challenges, and Lloyd's more than in the past, has been pushing the U.S. market, trying to make [Lloyd's] less mysterious, trying to convince people to see us an alternative.”

After Lloyd's and AIG, next on the list in market share is Zurich Financial services, with 3.8 percent. The top 25 providers of surplus-insurance coverage accounted for about 74 percent of the market in 2010—down slightly from more than 75 percent in 2009, reports A.M. Best.

Overall, the top 25 groups of surplus-lines writers saw a 6 percent dip in direct premiums written in 2010. It was the fourth year of declining premiums, A.M. Best adds, as capacity exceeded demand once more.

Despite a drop in the exposure base due to the recession and increased competition from companies in the standard market, A.M. Best says it expects surplus-lines carriers to generate positive underwriting income due to the industry's overall underwriting discipline during the soft market, as well as favorable prior-year loss reserve development, which has been more favorable than the overall property and casualty industry.

The gap in difference between the overall P&C and surplus-lines industries has tightened as accounts at the borderline of the surplus-lines market have been written in the admitted market during the soft cycle, says A.M. Best, adding that it does not believe companies will be able to use prior-year reserves releases to make up for inadequate pricing.

“This makes it more incumbent upon insurers to be conservative and accurate with their loss picks,” the rating agency says. “If they succeed, reserve development should be a positive, not a negative factor impacting companies in the surplus-lines market during the near term.”

As they have for the entire P&C industry, higher-than-normal catastrophe losses will cut into operating results of surplus lines carriers—coverage providers for catastrophe-prone risks—and exposures remain depressed.