Surplus lines insurers experienced impressive growth in 2018

The odds are in surplus lines’ favor — a healthy U.S. economy, emerging risks surrounding new technologies, and operational investments fueled the sector’s growth last year, which grew 11.2%, says AM Best’s new report, “Surplus Lines Insurers Achieve Impressive Growth, Improve Operating Profitability.”

State of the market

Despite premium growth, surplus lines insurers experienced their fourth consecutive year of underwriting loss due to weather-related losses and market competition.

M&A activity continues to shape the market, particularly affecting the wholesale channel as larger wholesalers expand their profiles by acquiring smaller brokers and intermediaries. While insurance companies have slowed their acquisition activity in recent years, AM Best predicts the market may see fewer consolidations of large global insurers and more strategic acquisitions of niche, specialty insurers. This activity could result in a new landscape for the surplus market with fewer companies that have greater capabilities.

Surplus insurers are also more likely to entertain challenging risks, which AM Best sees continuing as technology adds complexity to manufacturing and other types of risks.

Although A.M. Best reported the impairment of a small surplus lines insurers in July 2018, it is the first such impairment in the sector in more than 14 years. “The dearth of segment impairments in recent history highlights the remarkable resilience of surplus lines and specialty market companies through different market cycles and during a period of numerous P/C market-impacting events,” says the report.

Market outlook

Although last year was one of considerable loss for the insurance industry, with numerous wildfires and Hurricanes Florence and Michael, surplus lines saw increased premium activity as more admitted carriers exited certain markets. As a result, the 11.2% year-over-year direct premium written growth in 2018 was the largest the surplus lines has experiences since 2012 (11.8%).

All-in-all, AM Best maintains its stable outlook on the surplus lines market. As established players in the sector continue to manage their risk-adjusted capitalization, as well as implement clearly defined risk tolerance and appetite levels that take into account underwriting and other risks to their balance sheets, they will be able to maintain and expand their capacity for risks declined by the admitted market. These factors help position surplus lines carriers to withstand market hardships, such as weather-related catastrophes.

“The most successful surplus lines carriers have historically demonstrated an underwriting proficiency that captures the nuances of the market,” explains the report. “These carriers do not stray from their deep-rooted philosophies. Their success in underwriting is complemented by the diversity of product offerings as well as significant geographic diversification.”

Additionally, surplus insurers maintain strong risk-adjusted capitalization, which support underwriting, and diversified investment portfolios on balance sheets that provide net investment returns that exceed those of the P&C industry. ”The strength of their balance sheets allows these carriers to weather competitive market conditions,” the report continues.

Top insurers and groups

The lion’s share (75-80%) of surplus lines premium is written by the top 25 groups in the sector, AM Bests notes. Excluding Lloyd’s of London, which represents a market of 88 syndicates, the top 25 groups in AM Best’s report accounted for approximately 56% of total surplus lines market premium in 2018.

To read the full report, visit AM Best’s website.

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