NU Online News Service

SCOTTSDALE, ARIZ.--An economic recovery could halt the movement by standard carriers into markets traditionally served by excess and surplus lines insurers, industry experts said.

They made that prediction in interviews during the 2010 Mid-Year Leadership Forum last week of the Kansas City, Mo.-based National Association of Professional Surplus Lines Office Ltd.

While there were some differences in opinions about whether the economy is starting to rebound, representatives from wholesale brokerages and an E&S insurer said that an economic recovery would help to turn around soft market conditions that have led to increased encroachment by standard carriers into traditional E&S lines.

Michael Miller, president and chief operating officer of Scottsdale Insurance Company, said he believes the economy "is a big contributor to the soft market." He noted that there are just as many players in the market, but they are competing for risks in a shrinking economy, which is helping to drive competition.

"Everyone's reacting to what the economy is doing," he added.

Jim Roe, president of Indianapolis-based wholesaler and managing general agency Arlington/Roe & Co., agreed. "Obviously any market is a measure of supply and demand. So right now, we've had, for the last number of years, a lot of supply, and with the economy being down, there's less demand for insurance," he said.

Participants in the specialty and surplus lines area "just try to be that relief valve for agents and customers that have a specialty need or a surplus lines need," Roe remarked.

Standard carriers, Miller noted, started dipping into E&S lines about three-to-four yeas ago. Typically, he explained, standard carriers will write E&S lines in soft markets, and then back out again as combined ratios rise and they re-examine their books.

But so far, Miller said, the standard companies are continuing to see manageable combined ratios and rates of return in the traditional E&S lines.

Roe said insurers' loss ratios are up, but they're writing more premiums to fuel top-line growth. He added that, for many insurers, it is about "premium, not profit."

A lack of hardening in reinsurance rates is compounding the problem, he said.

While there may be unique aspects to this soft market because of the economy, Mr. Roe and Mr. Miller both noted that soft market conditions with falling rates are nothing new for the insurance industry.

Roe said that in the Midwest, where his firm is based, there are so many regional and mutual companies that take care of most agents' needs that there are never as many E&S opportunities there as compared to coastal areas. He said capacity seems to come to the Midwest "anytime the wind blows or the earth shakes" on the coast.

"We have a perpetual soft market there," Roe said, adding that the market never gets hard, just less soft.

Miller said this soft market has actually been relatively short compared to other soft markets, and he added that the industry spends the majority of its time in soft markets anyway.

Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox in Farmington Hills, Mich., also said this soft market has been about on par with previous ones.

He added, though, that the current market has been a "perfect storm" of events leading to soft market conditions--no major hurricanes, a lot of available capital and a struggling economy. He predicted more hard times ahead.

For E&S insurers in this market, they have a choice whether to try and compete with standards, or to back off and move to other areas, according to Mr. Kaufman. The prudent companies, he noted, are stepping back and not going toe-to-toe with the standard markets.

The experts had differing views as to when the economy will recover.

Kaufman and Roe both said they have seen no change in the economy. Businesses are still struggling, they said, and Roe--speaking for the Midwest--mentioned that Michigan in particular remains in trouble.

Miller, though, said he has seen some signs of recovery--pointing to more visitors in the Scottsdale area, and more people in general in restaurants and airports.

"Attitudes are improving," he said, adding that the economy is driven by attitudes.