"The augmented flow of business into the surplus lines market has made it more complicated for surplus lines intermediaries to cultivate relationships with new or previously underutilized insurers," noted Best in its report, "Annual Review of the Excess & Surplus Lines Industry, September 2002."

"Carriers are able to generate desired production from their core producers because of the higher premiums, and are primarily focusing on conducting business with those agents and brokers that stood by them during the soft market," added the report, released here this week during the annual convention of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Ltd.

As a result, "some surplus lines intermediaries are therefore finding it difficult to place business despite the price firming," the report said. "For many, they can truly count on only those carriers with whom they maintained solid, productive relationships through the soft market years."

Meanwhile, although it is said that a rising tide lifts all boats, soaring premiums have offered no safe harbor from cost-cutting insurers for wholesale or retail brokers, the Best report warned.

Indeed, despite the fact that direct premium volume for surplus lines increased by nearly 35 percent last year, compared to 11 percent for the overall property-casualty industry, E&S broker revenue is not necessarily growing at the same pace, as Best reported that insurers are scaling back commission rates.

Inevitably, commission cuts by profit-conscious insurers are putting more stress on the relationship between E&S brokers and their retail agents, Best reported.

"Surplus lines intermediaries are experiencing a reduction in their commission structures as insurers take critical actions to improve earnings," Best noted. Commissions are being cut "especially on the larger, six-figure-and-up premiums," the report added.

In pure dollar terms, some of these cuts are "more than offset" by the effect of price increases, Best noted. However, E&S intermediaries are also looking to share the pain by cutting the commission rates paid to their retail agent clients, the report warned.

"Surplus lines intermediaries may be successful in passing on a portion [of the commission cut] to the retail agents, but there is a bottom line on just how much of a cut the retail agent will withstand," Best added. "The intermediaries are sensitive to this issue, and are hesitant to try passing their entire reduction onto the retail producer."

E&S brokers are also coping with operational challenges galore in the hard market, noted the Best report, which was commissioned by the Derek Hughes/NAPSLO Educational Foundation. "The sheer volume of increased submission activity has made it tougher to quickly and effectively identify those offering true opportunities," Best said.

While working harder than ever to handle an avalanche of submissions from retail brokers, E&S intermediaries might run into problems getting accounts processed given the dearth of underwriting talent in the industry, Best added.

The general lack of experience among underwriters--particularly the shortage of those who have worked in hard markets--"presents a major challenge," Best said.

"The lack of investment by the industry as a whole in the underwriting discipline has led to a diminished pool of underwriting talent available to handle the influx of business," Best added.

"At present, the recruitment of professionals is at all-time low levels, and when new brokers are hired, finding the time to perform necessary training is trying," Best said.

Being flooded with business also increases E&S broker liabilities, Best warned.

"Handling the increased pressure from policyholders to find adequate coverage while being pressured by carriers to make quicker decisions confront the intermediaries with an increased E&O exposure," the report said.

So while E&S brokers are undoubtedly pleased to see rates and revenues rising, they are going to earn every extra penny they make, the Best report indicated.

"Surplus lines intermediaries face operating with limited resources, increased submissions, and reduced commission rates," Best said. "The fact is that intermediaries will have to expend more energy managing the relationship with insurance carriers on one side and retail agent customers on the other."