With AIG subsidiaries and Lloyd's syndicates dominating the market, the U.S. excess and surplus (E&S) sector is experiencing strong, competitive growth and profitability due to rate increases and an improving economy.
In a new Moody's "Excess and Surplus Sector Profile," analysts found that although AIG, Lloyd's and 25 other top insurers controlled three-quarters of the market, E&S was a robust insurance market segment with room for growth as players can set their own rates for the unique risks they cover. This puts E&S companies in a solid position to weather changes in the property-casualty insurance cycle with strong balance sheets, in spite of challenges from cat losses and low interest rates.
Major findings include:
Two big players. The E&S market is dominated by AIG subsidiaries and Lloyd's syndicates, which control 35% of the market, along with another 25 top insurers that together comprise more than three-quarters of the market.
Wide ranging premium volume. In tandem with the standard property-casualty underwriting cycle, E&S premium volume fluctuates significantly, ranging from 4.5% and 6% of total industry premiums over time (6% for 2013). E&S carriers will continue to increase their top line in 2014 and into next year commensurate with earned rate increases and economic growth.
Rising casualty rates. Moody's expects E&S casualty rates to rise moderately into next year while commercial property rates will continue to decline, given increased competition and barring a major catastrophe. The analysis predicts a slowing of casualty business into the E&S market as standard commercial insurers seek to retain existing profitable business and expand their risk appetite for new business but not necessarily higher risk E&S lines.
Rate freedom means more flexibility. Because E&S carriers are free to set their own rates and coverage terms, they can quickly navigate market fluctuations, although with generally lower retention rates compared with the standard market. E&S players continue to emphasize underwriting profitability, particularly with still low interest rates.
More hiring, more expansion. Favorable E&S market conditions have spurred standard insurers to expand into the sector through Lloyd's syndicates, hiring underwriting teams, or making acquisitions. Pressure in the sector from alternative capital and the attractiveness of the sector's potential could lead to more M&A activity.
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