ONE OF the key roles of the excess and surplus-lines marketplace is to function as a “relief valve” during hard markets. When standard insurers start restricting their underwriting or pull out of certain states or classes of business altogether, affected risks have always been able to turn to the E&S markets. The relief-valve role was amply demonstrated during the recent hard market, when direct premiums for E&S insurers rose by 62% in 2002 and a still-healthy 28% in 2003, according to A.M. Best. At the end of that year, the E&S market accounted for 13.1% of commercial-lines premiums, Best's noted, up from 6.1% a decade earlier.

In some states, the move to the E&S marketplace was even more pronounced. In California, the leading state in the country for E&S business, E&S premiums were up 104.5% in 2002 and 43.1% in 2003, according to the Surplus Lines Association of California. But in 2004, growth dropped sharply to 8.4%, according to information the association released in January. Undoubtedly, E&S business was off substantially around the country, as standard carriers, in better financial shape after several years of hard-market premiums, began to once again eye business they'd let go three or four years earlier.

Where will the E&S market go from here? One place to start looking for an answer is with the reinsurance community. Traditionally, Jan. 1 has been the big date for renewals. After receiving them, insurers get a clearer picture of a key factor affecting their costs and capacity for the year ahead. Tom Leonhardt, senior vice president of Towers Perrin Reinsurance, a major reinsurance broker, said that when he entered the business 30 years ago, practically all reinsurance treaties renewed on Jan. 1. Today, renewals take place pretty much throughout the year, he said, but Jan. 1 remains the single largest day for them.