Competition From All Sides

Despite less-than-desirable pricing, competition for business remains strong. E&S carriers continue to adjust their strategy to compete with admitted carriers and other E&S facilities. In Florida especially, the lack of catastrophe storm events has blurred the line on which property risks are standard and which ones are not. Additionally, some E&S agents note that standard carriers are not as quick as they were a few years ago to cancel or non-renew accounts because of claim activity. Still others can give examples of incursions into what normally has been considered E&S territory, such as private and charter schools, airport and marine contractors, public livery vehicles, and bars and taverns.

Most E&S underwriters do not think rates can get any lower, and the carriers that seem to agree have found other ways to compete. Some have updated their policy forms by including new coverage or by enhancing existing coverage. On the E&O side especially, technology and/or EPL coverage enhancements are more prevalent than ever. Claims expense outside the limit is becoming easier to find or to negotiate into the policy. Some E&O carriers have refocused their underwriting approach to take advantage of opportunities in areas such as real estate-related exposures and the environmental insurance market.

Much of what drives the market's pricing structure, especially regarding binding authority business, is to a great degree based on what happens in the reinsurance market. There is not much hard data yet on how reinsurance renewals are faring and where rates are headed; as of this writing, next year's reinsurance treaty negotiations are still being conducted.

However, those willing to speculate on Jan. 1, 2011, renewal dates and later do not expect much movement in the rates, with the possible exception of property risks, especially coastal property and property with inferior construction and higher protection classes.

Almost everyone — agents, brokers and carriers — would like to see meaningful rate increases, but few believe it will happen. One significant voice willing to offer a different view is William R. Berkley, chairman and CEO of the W.R. Berkley Corp. Berkley was the featured speaker for the Derek Hughes Education Foundation series at the National Association of Surplus Lines Offices (NAPSLO) annual convention in Atlanta in October. A self-proclaimed optimist, Berkley said that the market is about to see some positive rate movement.

Berkley based his upbeat prediction on insurance companies' overall performance in the past several years. He noted that insurance company profitability peaked in 2006, and the market has been steadily losing ground since that time. He speculated that current E&S rates are off on average by about 30 percent, with that number much higher on some classes. Berkley said that the industry's combined loss ratio will be 110 or higher for 2010. Those facts alone caused him to speculate that the pricing cycle is poised to correct itself.

Opportunities Still Exist

Unlike pricing, merger and acquisition activity has been fairly robust. Companies in need of growth to meet performance and shareholder demands continue to look for and find acquisition candidates, both in insurance agencies and E&S facilities. Observers expect that to continue as a large pool of buyers seek out opportunities and agency and brokerage principals decide it is time to cash out. There may be increased activity in the final quarter of 2010 as financial advisors and business brokers remind clients of the anticipated changes to the capital gains tax in 2011.

Some carriers continue to make their own opportunities. Jimmy Clark, who heads up the Tampa office of Harden, said, "We have seen the E&S casualty marketplace getting aggressive, particularly on construction and product liability. They are putting up large chunks of excess casualty and even playing on the primary layers," he reported. "The E&S carriers are stepping up to the plate on new business, giving broader terms, the ability to select counsel, and lower pricing. This has been a win-win for our clients who are looking to transfer as much risk as possible off their balance sheets while managing the cost of the risk transfer."

Opportunities in the E&S market can still be found as carriers adjust their appetites and underwriting criteria to the new normal. Cycle or no cycle, competition remains keen, and we will see more of the same for the remainder of 2010 and into 2011.

Related stories: FSLA President Bruce Bowers Expresses Optimism for E&S Market, Florida's Current E&S Market – Not a Pretty Picture