2019's Excess & Surplus market is a different animal
The E&S market has a well-earned reputation for creativity and flexibility.
Rescue workers routinely enter places others are running away from. The E&S market is a bit like that. Non-admitted carriers seek out the most challenging risks — the ones other markets are simply not equipped to handle, whether from an appetite, financial strength or underwriting experience standpoint.
The market is often misunderstood. It’s often assumed (even by those in the industry) that risks covered by the E&S market are distressed ones with the potential for high severity and/or high frequency that are virtually impossible to place in the admitted market.
Sometimes that’s true; distressed risks have found their home in the E&S space over the years. But the market we’re seeing in 2019 is a different animal.
Rather than the primary driver being a collection of the more traditional one-off troublesome risks, classes with consistently high risks (like frame habitational and food delivery) or clients with straight-up bad claim histories, 2019 is different. We’re seeing an overall need for capacity in the market as a key driver.
Back to the future
Industry veterans and students of insurance know what happened back in 1986. That’s What Friends are For was at the top of the pop music charts, but commercial clients were struggling to find friends in the P&C market. There was simply no capacity.
While we’re clearly in a different economic environment now, the reduced capacity, particularly in the commercial property space, is sending insureds looking for creative alternatives in their risk management portfolio.
The E&S market has a well-earned reputation for creativity, not to mention flexibility. With capacity growing tight, those traits are in now very high demand. And it’s precisely those traits that send E&S underwriters into markets that others just don’t want to enter. So here we are.
For the last year or so, the market has been gaining strength with premiums growing roughly 11% in 2018. That was on top of a 5.8% bump in 2017. And the market seems to be on target to maintain this growth through 2020. But as we know in this market, anything can happen.
There’s something in the air — literally
Increased national catastrophe activity is helping push this shift in the property market. Unstable weather in the form of severe storms, tornadoes, hurricanes and wildfires are adding to usual lack of predictability in cat risks. And as climate change continues to exert unusual influences on weather patterns, the likelihood of weather-driven cat events remains high.
We’re seeing a lot of public entities looking to the E&S market for capacity. While they’ve been fairly stable with good loss history, cat losses have put pressure on this class. Even school districts, for example, which usually have relatively tame loss histories and strong risk management practices, can find themselves pushed out of the admitted market after even a single major storm with tornadoes, high wind and hail. Compounded by the threat of increased frequency of such unstable weather patterns, risks once deemed fairly safe are find themselves in the unenviable risk company of pizza delivery drivers.
The California problem
The most severe wildfire damage in the Golden State has happened since 2000, bringing billions in losses. According to the National Oceanographic and Atmospheric Administration (NOAA), the 2017 wildfires alone resulted in nearly $19 billion in losses.
With climate change threatening to increase the risk of wildfire In California through drier conditions, higher temperatures and increases in available fuel due to destruction by pests like the mountain pine beetle, personal lines carriers are non-renewing entire ZIP codes. Desperate for solutions, the state of California is looking to the United Nations for help in solving this growing insurance crisis.
Then with two major quakes in southern California in just a matter of days, the added risk of earthquake damage from “the big one” brings another set of variables that must be accounted for when assessing risk appetites and portfolio diversification.
Another significant cat event, like the recent storms and wildfires, could dramatically change the landscape. In more ways than one.
Consider casualty risks
Casualty exposures related to wildfires continue to be a challenge. As many admitted markets have pulled back on capacity — many unwilling to offer lead umbrella, the E&S market is coming to the table, bringing not only capacity but creativity in structuring coverage to meet businesses’ liability needs. For instance, many admitted carriers are unable to offer much needed $25 million in capacity on a lead umbrella. Instead, multiple E&S carriers are collectively meeting market needs offering $5 million and are willing to take the lead.
Excess liability overall is a growth hot spot. Many admitted carriers have cut back on their excess liability capacity while Lloyd’s rolled out its Decile 10 strategy, announcing that they were ready to take action on under-performing syndicates.
This re-positioning of incumbent carriers books’ has brought a lot of opportunities to the E&S market. In fact, we’ve seen double-digit new business growth in the first half of 2019 as businesses look for providers with a broad appetite, adequate capacity and the willingness to look at new ways to do business.
Emerging risks
New and emerging risks have typically allowed the E&S market to shine. They still do.
For one, E&S providers are seeing significant opportunity in the shared economy, also referred to as the gig economy, peer-to-peer economy and among other monikers. According to data from Statista, adults involved in the sharing economy will reach 86.5 million participants by 2021, nearly double what it was in 2016.
The sharing economy is filled with innovative business models that have little history to help assess potential risks and losses. Startups or web-based businesses continued to turn to E&S underwriters who have an appetite and creative streak to design effective insurance solutions for new ways of doing business.
Phones are ringing
It’s a profitable space right now, with a variety of E&S players being able to meet the market’s capacity needs and diversification demands.
As a result of this market shift, E&S carriers, like one of the AXA XL insurance companies, report hearing from wholesalers they’ve literally not done business with in a decade. The need for capacity and portfolio diversification is changing the way wholesalers must think about covering their clients’ risks. Long-term deals are coming to an end. They were locked up in a previously favorable market. Now, risk portfolios need to be more diversified — both for the insured and insurer.
No one carrier can offer the capacity that so many businesses need. That’s where the E&S market has really been stepping up to the plate and will continue to do so.
Matt O’Malley leads AXA XL’s environmental and E&S casualty insurance businesses. He can be reached at matt.omalley@axaxl.com. Kyle Burnett leads AXA XL’s E&S property insurance business. Kyle can be reached at kyle.burnett@axaxl.com.
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