E&S Expects To Prosper Despite Softer Market

"The same conditions that led the industry into a prolonged soft marketpersist in today's environment," Oldwick, N.J.-based A.M. Best reported in its 11th annual E&S study, titled "2004 Annual Review of the Excess and Surplus Lines Industry." Specifically, the report cited conditions in the overall property-casualty market that include market fragmentation, excess capital and "too many players."

Noting that the surplus lines industry has been more profitable and garnered better financial strength ratings both in recent hard-market years and over the long haul the report predicted that despite the softening market, "solid profit opportunities" would continue to exist in the near term (in early 2005) for surplus lines players.

However, some newer market entrants "are likely to compress future profit margins by selectively competing onextremely attractive accounts," the report added, listing specialty operations of Bermuda holding companies (Quanta, Aspen Specialty and Arch), as well as two U.S. companies (Richmond, Va.-based James River Insurance Co. and Maxum Indemnity Co. in Duluth, Ga.) among new market entrants.

As competition sets in, Best said that successful surplus lines insurance companies will focus on value-added services. "Over the long term, this focus can combat the tendency of policyholders to return to the cheaper admitted market when the cycle turns softer," Best said.

Scott Bayer, senior vice president of the general liability division of New York-based Liberty International Underwriters, said "managing the market cycle is a constant process."

"We try to build a book of business that is as immune to market cycles as we can make it," he said, explaining that the company tries to balance its book with accounts that stay in the surplus lines arena.

"How far the line between admitted and non-admitted moves depends on how soft the market gets," he said adding, however, that very volatile product liability business, certain types of commercial contractors, bridge contractors or New York state contractors, and residential contractors are among the classes that tend to stay in the nonadmitted market. (Liberty International Underwriters, he said, entertains all but residential from that group.)

Like Best, Mr. Bayer subscribes to the view that valued-added service is a key to retaining business and distinguishing a surplus lines insurer from competitors in soft and hard markets.

He noted that Liberty International Underwriters (formed in 1999 when Liberty Mutual combined its global specialty businesses) is distinguished by the financial stability of Liberty Mutual, as well as by its level of service measured in terms of how quickly policies are issued.

"We don't overcomplicate the process," he said, explaining how quick turnaround is achieved. In addition, he noted that his company adds value through loss control and risk control expertise and with the presence of an in-house claims staff.

Liberty International Underwriters also plans to get closer to its clients through geographic expansion, according to Mr. Bayer. "We opened up an office in San Francisco in March, which complements our offices in Boston and New York," he said, noting that additional expansion throughout the country is planned.

"I think a lot of us tend to rely on technology and e-mails. You can't walk around here without seeing Blackberry's and cell phones. But really it's the face-to-face that people value," he said, adding that having a presence in more cities allows for better communication with wholesale brokers and for more growth. "We'll see opportunities we never saw before," he said.

On the distribution side, Burns & Wilcox is using technology to fuel local expansion, according to William McCord, a senior vice president for the Farmington, Hills, Mich.-based managing general agency and wholesale brokerage.

Explaining the firm's "service center initiative," he said that four new centers in Reno, Nev., Baton Rouge, La., Las Vegas, and Livingston, N.J., are akin to satellite offices where employees can underwrite and service accounts, while processing and backroom functions such as filing, printing of the policies and policy distribution are all done through the firm's 27 full branch offices.

"Technology allows us to do this," he said, noting that Burns & Wilcox has built a wide-area network that connects all the facilities together?allowing the service centers to work on the same system as the branches.

The service-center approach "enables us to go out and find talented people who know how to underwrite" and have relationships with retail brokers in the cities where they operate, he said, also highlighting the fact that heavy upfront costs of committing to big leases and large support staffs are eliminated. "And they're ready to rock in the course of a week."

The key benefit of just having employees with relationships in these areas fits well with a model geared to small and midsized retail agency clients. "It's that local connection" that's important "where we have that ability to talk their language."

"It's not like someone from Louisiana talking to me. They clearly know I'm not from Louisiana," the Midwesterner said, noting that he would be lost if a retailer told him about a property in Orleans Parrish, while his Baton Rouge service center staff would understand immediately.

One growth driver for Burns & Wilcox has been a product focus initiative a combination of external advertising and an internal competition, with monetary rewards focused around five selected products last year, and another five this year. While the products are not new offerings, "there's really been a big payback in terms of the volume of business we write in the individual lines," he said, noting that growth ranged from 35 percent to 500 percent.

"Vacant property was the product with the biggest growth, and it just surprises me because I thought all our [retail] customers knew that we did that," he said.

Executives at GE Insurance Solutions told National Underwriter that giving wholesalers a clear view of the firm's risk appetite has fueled growth in its E&S Individual Risk unit, which writes specialty business through wholesale brokers. Although Michael Gill, president of the unit, said that GE Insurance Solutions remains "a small player" in this arena, he noted that "before two years ago, we had $10 million [in premium]. Now we've got $100 million plus." He added that the unit has "been building a small slice of the huge E&S marketplace."

Brian Evans, vice president and underwriting manager for the unit, said at last year's NAPSLO meeting "we rented a ballroom and did a dog-and-pony show about who we are and what we like to do, and ever since then, our submission count has tripled," attributing the growth to continued communication. "We have given clarity about what our risk appetite is, what we want to do and how we want to do it."

Reproduced from National Underwriter Edition, September 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.