On that last point, Mark Smith, chief underwriting officer for Chevy Chase, Maryland-based underwriting manager Victor O. Schinnerer & Co. Inc., says, “If you look at where we were in the mid-1990s — you had the standard market, you had the E&S market, and you had the Lloyd's market, which is obviously part of the E&S market. They were really distinct.

“But now, through mergers & acquisitions activity, most of the really big companies have an E&S arm, and they also have their own syndicate in Lloyd's,” he notes. “So at this point, the E&S market is kind of blurred from the standard market.”

As a result, Smith notes that clients may be more at ease today buying coverage through the nonadmitted market from brand names they recognize, especially in lines such as Cyber Liability, catastrophe-exposed Property or Professional lines.

“I almost don't define the E&S market and traditional market as two different marketplaces,” says Mike Andler, head of U.S. Property Risk for Lockton. He adds that if you consider the historical risks in the E&S space, “I would say there's a lot more blending now. Carriers in the E&S space and the traditional — let's call it 'admitted' — market, they're playing together on a lot of risks.”

Related: John Nelson on how Brexit will impact Lloyd's of London [video]

David M. Gross, managing director/casualty broker at Burns & Wilcox Brokerage, also says the products in the non-admitted market are better now, rivaling standard market products, and policy wording is more in line with wording in standard market ISO policies.

Last year, experts who spoke to National Underwriter Property & Casualty about the E&S marketplace emphasized the need for specialization to survive and thrive in today's landscape. This year, professionals point to that demand for specialization and expertise as a major reason why the E&S marketplace continues to grow.

For Power, a significant driver of this demand comes from the rapid speed of change in the economy overall. “The world around us is changing at a pretty unprecedented pace,” he says. “As new business models and new technologies evolve, new associated liabilities emerge in tandem.”

He points to the rapid growth in emerging industries like robotics, genomics, micro materials and others, and he says the E&S industry, with its freedom of rate and form, is uniquely positioned to meet new marketplace demands. “There was a time when the E&S industry was viewed solely as a market of last resort — a safety valve for the greater P&C industry,” says Power. It still serves in that capacity, he adds, but it is also a place “where creativity and innovation take place at a much more advanced level than in the admitted markets.”

Related: Leading writers in 11 key P&C markets

Excess capital drives the need for specialization in the E&S market (Photo: Shutterstock).

Impacts on distribution

The demand for specialization drives a thriving wholesale distribution system as well. “There's a lot more product that goes through wholesale-only channels now today than there ever was,” Turner observes.

Turner and James Drinkwater, president of the brokerage division at Charlotte, North Carolina-based AmWINS Group, both point out this is in stark contrast to the soft market of the 1990s, and Drinkwater says wholesale brokers today have done “a phenomenal job” providing in-demand expertise to retail clients.

For carriers distributing through wholesalers, says Turner, “It's to their advantage. It's less expensive for them. They know what the advantage is now.” He adds, “New capital is very much gravitating toward E&S distribution because it's cheaper to do so.”

Building out the necessary expertise in-house can be expensive, Turner explains, especially given the limited amount of available specialty talent. “But there's a huge demand for it because it's less expensive to distribute and broker through those channels in specialty. So it's a great time to be a technical specialist in the E&S marketplace — as a retailer, as a wholesaler, as a [managing general underwriter], as an underwriter.”

A final reason cited for the healthy size of the E&S marketplace in this competitive environment is an apparent change in the appetite of standard carriers. “I think [standard carriers have] reached a point in this market where they're being much more cautious,” says Smith.

“Our discussions with them on new-program development and current programs have been more cautious than they have been in the past,” he continues. “We're still talking about growth and expansion, but you can see an increase in their attention to discipline and rate maybe more this year than in the last couple of years.”

Pricing and rate environment

According to Drinkwater, standard carriers are very aggressive on the property side (which has seen relatively benign loss activity in recent years) and in Product Liability and some casualty business.

As Gross describes it, standard carriers are competing for business but not as much in pure E&S lines. “Over the last 20 to 25 years, the E&S marketplace has increased dramatically,” he says. “I think standards have figured out what they can write and what they can write well, and then you have the E&S players that do well” in their lanes.

Both Gross and Turner note that standard carriers have been burned in previous soft markets when venturing into longer-tail E&S lines, which may be influencing their decision-making this time around.

Derek Broaddus, senior vice president of the excess casualty division at Switzerland-based Allied World, agrees that competition from standard carriers has not been as pronounced compared to previous cycles — noting there are plenty of E&S carriers competing against each other.

Related: Cyber insurance's increased profile leads to more offerings and more buyers

While pricing is soft in spots, Broaddus says there's another element at play that does not get talked about as much: “There's duress under this market,” he says, adding that some renewals (and even non-renewals) look like what would be seen in an increased rate environment.

“This isn't a cycle that would be a prototypical soft-market cycle. It's not across-the-board downward pricing,” says Broaddus. “The traditional idea that we're in a 'soft' market, which is the entrance of standards, the reduction of pricing, with an abundance of capital — is not what's happening right now.”

Power points to another reason why pricing no longer seems to move in one uniform direction: “The size of the industry has grown to a point of complexity,” he says, “and that drives some of the thinking.”

He also points to underwriters' ability to drill down into specific lines of business, stating that data and advanced modeling “play key roles and allow us to get to a point where we understand micro-changes within books of business and react to them in real time.”

Related: NAPSLO Q&A: Executive Director Brady Kelley

While competitive, the E&S market is only expanding.

Broaddus says the difficult part when it comes to defining this market is that both realities — the soft pricing on some risks and the harder pricing on others — can be the case on the same day for the same broker.

The harder pricing is perhaps more consistent in certain lines — such as trucking, New York City contracting, some tougher habitational risks and some auto fleet business, Broaddus says. But in other cases pricing may vary by region or risk by risk. And the patterns are not always predictable. Sometimes, Broaddus notes, harder pricing is seen in expected classes, but other times there are deals that brokers feel are adequately structured, but still become surprises.

Future of E&S

While still competitive in many respects, experts are mostly optimistic about the opportunities in the E&S market. “I'm very bullish on the market,” says Drinkwater. “We've seen positive results each and every month of this year, and there's plenty of opportunity and growth in many lines.” He believes the E&S space will likely continue to evolve and attract increased capacity and better talent.

Most experts cite Cyber Liability as a key area of growth, even as the market becomes crowded with both E&S and standard players. Turner notes that Cyber is still an E&S play for the more challenging risks, and when it comes to handcrafting solutions to emerging risks. The standard market, by contrast, is writing some of the more basic Cyber coverages.

Andler likes the opportunities in Property, even with a number of players and the continued presence of alternative capital there. He says pricing is competitive and it is “definitely a buyer's market,” but adds that combined ratios are still healthy and any type of significant catastrophe loss activity will put pressure on rates.

Gross says traditional E&S lines, such as construction (particularly in the South and in New York City), restaurants, taverns, nightclubs, habitational risks, etc. — are all growing.

“Many say the market is as competitive as they've ever seen it,” observes Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices. Nonetheless, he adds, the market is not shrinking. “Despite what I hear about rate declines, I hear a lot of optimism about opportunities that exist for our market,” such as the continued economic recovery and emerging risks in need of solutions that the E&S marketplace is ideally suited to provide.

Adds Power, “I think the E&S industry is hands down the most exciting sector within the P&C business.”

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