James Drinkwater, division president of AmWINS Group and NAPSLO treasurer, says, “The property market continues to be incredibly soft. And absent a catastrophe, I think the trend will continue for some time. We're not expecting any increase in pricing anytime soon, because there is an abundance of capacity out there. I think [the industry] can absorb cats in a way that they've never been able to before.” He suggests it might take an event with insured losses as high as $85 billion to $100 billion to change the current landscape.

Scott Culler, regional president of Markel's western E&S operations and NAPSLO director, says with so much capital and capacity in the marketplace, flatter cycles may be the reality in this new normal: “I think there will continue to be many choices available to the buying public, so you're not going to see the desperation in the consumer marketplace. I think there's just so much capital available.”

Even with more capital and data at their disposal though, the market going forward may ultimately come down what companies choose to emphasize. David Leonard, chairman and CEO of RSUI Group and NAPSLO secretary, says data, for example, has always been available to help companies to assess risks, “but it's a whole other thing to apply that information to make decisions. You can choose to ignore that information and continue to write business that is not going to be adequately priced for the risk.”

For example, he explains, if a company emphasizes top-line growth and incentivizes its people to that end, that is what that company's strategy will drive.

State of the market
Whether the market has changed permanently or just for the time being, E&S professionals generally expect the current conditions to persist over the next year, barring a truly cataclysmic event, or perhaps a series of major events. Professionals characterize the current market as competitive, with rates flat to down for most lines.

E&S Property is seeing sharper rate decreases than Casualty, experts say, but capacity remains high across both sectors. There is some disagreement, though, about whether that capacity includes a greater presence of standard carriers in the E&S space.

Data has always been available to help companies to assess risk, “but it's a whole other thing to apply that information to make decisions. You can choose to ignore that information and continue to write business that is not going to be adequately priced for the risk.”

— David Leonard, Chairman and CEO of RSUI Group and NAPSLO secretary

Greenebaum says he is seeing standards compete on traditional E&S business, adding, “There's no rhyme or reason to it. You find real traditional players treading in areas you think they'd never go, and then you lose an account.”

He adds that standard carriers are rounding out casualty accounts with supporting lines such as workers' comp and auto liability, and notes that while those are risks he can place, he places them mono line with his carriers rather than in combination.

Still, other professionals say they are not seeing increased appetite from standard carriers at the moment. “We have not seen a flooding of business out of E&S back into standard lines,” says Culler. “From that regard, I think it's business as usual.”

Marshall Turner, president and CEO of Maxum Specialty Insurance Group and NAPSLO director, says standard carriers are most active in casualty coverage in the Midwest, “specifically products liability and some construction. Their pricing is frequently aggressive relative to expiring E&S market pricing.”

Property-Competition Drivers
On the Property side, the game has changed because of new capital entering the market from alternative sources such as hedge funds and pension funds. This capital is competing with traditional reinsurance, and most professionals agree the effects have been felt in the primary market.

“I think the alternative capital that's coming in is probably the most dramatic change in the marketplace,” says Culler. “You're now getting new competitors popping up that are doing some things a little different than we're used to.”

Most professionals who spoke for this story believe this new capital is here to stay and that, along with relatively cooperative weather over the last few years, it is keeping the Property market highly competitive. “Property is definitely under pricing pressure,” Culler says, “on the cat side—we're feeling an impact there both on wind and quake. We were thinking that we were close to the bottom of the barrel [for rate decreases] at the end of last year, and it continued. I think the stress on the marketplace continued at an even more rapid pace than we expected.”

Watkins, though, is hearing the end of rate decreases may be near. “Property, for all intents and purposes, seems to be leveling at the bottom,” he says, basing his assessment on market reports as well as conversations with E&S professionals at the Texas Surplus Lines Association Meeting in July.

“The general sense is that the property has bottomed out, and that it really can't get any lower,” he continues, regarding conversations he's had with wholesalers and binding-authority brokers. “Having said that,” he adds, “in any market, there will always be insurers who sneak in and, for a couple of years, write exorbitantly cheaper rates than everyone else.”

Casualty remains competitive
While Casualty is not seeing the same level of pricing pressure as Property, it's still a competitive market. Turner says casualty has been increasingly competitive in the current year.

Other professionals say the amount of competition tends to vary more by individual risk, although there are still identifiable trends by line. Both Culler and Greenebaum mention construction as competitive, and Culler says construction tends to lead the way for other casualty lines. Greenebaum says projects have picked up since the recession, and while carriers in that space are trying to maintain discipline, new competitors are driving pricing down.

Greenebaum also says product liability remains competitive as carriers try to diversify their books from construction and habitational. Pricing in habitational, he says, has been see-sawing. “People dive into [habitational] because they think they can make money at it, and then they don't because it's always somehow underpriced, and then they get burned and get out,” he explains. Then new players come in and drive the price back down.

“I think there's opportunity [in Cyber coverage], but the business is changing so rapidly, technology is changing so rapidly; the needs in the marketplace are changing so rapidly. But it's an E&S play, and we've probably just scratched the surface as far as exposures and opportunities.”

– Scott Culler, Regional President of Markel's Western E&S operations, NAPSLO Board Member

A handful of classes, meanwhile, remain tougher to write, with firmer pricing. Harper says New York City construction remains difficult, as well as certain habitational markets.

Turner says E&O is becoming more competitive, but he says he is seeing rate increases in certain other management liability products, and in certain geographies.

Greenebaum mentions an interesting phenomenon he's noticed in the casualty market: “Carriers, certainly in the E&S space, are trying to be very discerning about their renewal book, and not so discerning about new business.” He called this behavior “counterintuitive,” since carriers would be more knowledgeable about risks they've written. He also notes that everyone's renewal is someone else's new business, resulting in “this sort of feeding frenzy for business we haven't seen in a while.”

Opportunities in E&S
Despite the challenges in the marketplace, E&S professionals are mostly optimistic. Playing in the E&S space comes with some advantages: freedom of rate and form, and constantly emerging new risks that the standard market cannot write.

“There's always something, or multiple things, coming around the corner that the standard market doesn't understand,” says Watkins. Cyber coverage, he says, is a no-brainer for the E&S industry, and he also mentions the slowly growing trend of private-flood coverage as a potential opportunity. On the horizon, the E&S industry will be key in providing coverage for autonomous vehicles and drones.

On Cyber, E&S professionals recognize the opportunity, but acknowledge the challenges to keeping up with such a quickly evolving risk. “I think there's opportunity there,” says Culler, “but the business is changing so rapidly, technology is changing so rapidly, the needs in the marketplace are changing so rapidly. But it's an E&S play, and we've probably just scratched the surface as far as exposures and opportunities.”

Watkins notes that take-up has not been robust, and Greenebaum adds that buyers may see the coverage as too expensive relative to their budgets, and they may (mistakenly) believe a cyber breach will not happen to them.

Drinkwater says he's seeing Cyber interest beginning to increase. “People are asking about it more now,” he says. “More and more are buying coverage.” He attributes this to the stories of high-profile breaches in the news.

“We are being asked by our retail customers to become specialists. The role of the generalist is not nearly as important as it may have been 10 or 20 years ago. [Our customers] want specialized expertise on specialized products.”

- Bob Greenebaum, Executive Vice President, Casualty Practice Group Leader at Swett & Crawford, NAPSLO Director

Leonard says middle-market breaches are happening too, and that is opening eyes among buyers. Relatively small companies are being targeted in attacks that impact them dramatically. “It's not just the huge companies that are exposed to this kind of attack anymore,” he adds.

Staying relevant by specializing
As the E&S marketplace deals with its current challenges and a rapidly evolving world, Bob Rheel, president of Aspen U.S. Insurance, believes carriers and brokers will need to specialize further and deliver more expertise and knowledge to their customers. “I think the demand being placed on the traditional E&S market is to become more of a specialty market, and deliver expertise and solutions to an increasingly complex world,” he says.

Greenebaum agrees. “Adapt or die,” he says. “We are being asked by our retail customers to become specialists. The role of the generalist is not nearly as important as it may have been 10 or 20 years ago. [Our customers] want specialized expertise on specialized products.”

Drinkwater sees the same trends emerging: “If you're a retail broker, you want to do business with someone who has specialty capabilities and specialty knowledge in that particular industry as opposed to a generalist.”

And as producers specialize, carriers will have to as well. Says Rheel, “If you're not a specialty player or expert, it'll be harder to line up with these specialty retailers and wholesalers.”

Ultimately, it comes down to providing value in a where buyers and retailers have more information and capabilities than ever before. “Companies need to understand this and deliver strong value to the marketplace, and sell that value and achieve a fair return for the value they bring,” says Rheel. “Companies that focus on specialty areas and delivering expertise will win. Those who focus on expense side and deliver a montage approach will lose.”