Uncertain times: 2021 E&S insurance market update
Wholesale insurance is often at its best during erratic economic conditions.
The past two years have been among the most uncertain the world has faced in recent history. As a result, the market for wholesale insurance, also known as excess and surplus (E&S) insurance, has experienced strong growth and proven its resilience in the face of a global pandemic, outsized property catastrophe losses, increasing cyberattacks and “nuclear” jury verdicts.
According to AM Best’s most recent E&S industry report, the surplus lines market grew by 17.5% in direct premium written last year, to a record $66.1 billion. The segment experienced continued demand despite business closures and job loss during the pandemic. This market also benefited from an uptick in unique exposures with higher risk profiles due to the modernization of engineering, manufacturing and construction businesses along with advancements in warehousing and logistics, AM Best said.
In addition, while the segment incurred a small underwriting loss driven by wildfires and storms, operating profitability remained favorable thanks to investment gains, a factor that will remain important given prolonged low interest rates. This market’s ongoing financial strength is highlighted by low incidence of impairments and the fact that 96% of surplus lines insurers had AM Best long-term Issuer Credit Ratings of “A-” or higher compared with 78% for the overall property & casualty industry.
“Insurers with the acumen to understand and protect these evolving specialty businesses are even more focused on underwriting this business to add to their portfolios,” said AM Best. “As a result, market capacity for surplus lines risks has been high. Some opportunities have come from the growth in borderline surplus lines risk exposures from which standard market companies have backed away or offered significantly different renewal terms for price, coverage or both.”
In addition, the Wholesale and Specialty Insurance Association (WSIA) continues to monitor stamping office results from several of the largest states where non-admitted business is placed. According to WSIA’s midyear 2021 report of U.S. surplus lines service and stamping offices, surplus lines premium exceeded $24 billion and premium bearing transactions exceeded 2.6 million through the first six months of 2021. Premium increased 21.9% and transactions increased 7.2% over numbers reported through the same period in 2020, the association said. Each of the 15 stamping offices reported premium increases through midyear 2021, and all but one state reported increases in transactions, with construction and casualty lines driving these trends in many states.
“Over the past several years, capital has continued to migrate into the E&S channel as capital providers have seized important opportunities — many through wholesale only, delegated authority platforms,” said Brenda Austenfeld, managing director of RT Specialty and president of RT Specialty’s National Property Practice. Austenfeld also is treasurer of the WSIA board of directors. “The number of new MGUs, MGAs and binding authority facilities has continued to increase in a significant way. This segment was very small just 10 years ago and continues to rapidly expand successfully in all sectors of the E&S space,” she said.
The recent growth in the market builds on steady growth trends spanning the past two decades.
“There really have not been any years where we haven’t seen successful growth in our industry,” said Joel Cavaness, president of Risk Placement Services Inc., an MGA/underwriting manager and nationally focused wholesale insurance broker. “Insurance companies going back three years ago were freely putting out very large limits on accounts. But you started seeing natural catastrophes and nuclear verdicts on the casualty side, and insurance companies began to pull back in the limits they were able to provide, which lessened the exposure that they had on the balance sheet. The E&S market was called upon to really fill the gaps.”
The pandemic’s punch
In the midst of an already hardening market, the COVID-19 pandemic emerged, which has created additional challenges and opportunities in the E&S space. The pandemic has spawned supply chain issues, increased prices on goods, and a tightening labor market that could translate into higher premium needed to cover risks, said Gary Grose, president, Commercial Specialty at specialty insurance provider Argo Group.
“If there’s anything insurance doesn’t like, it’s an uncertain picture,” said Grose. “And we’re in the middle of a big uncertain picture.”
Business interruption insurance policies have come under industry and regulatory scrutiny as many businesses that expected coverage due to pandemic interruptions found that such losses were excluded. Some state legislatures have even considered laws that would compel insurers to retroactively cover pandemic-related business interruption, although no such measures have yet passed.
There are also questions about how to cover any future pandemic risks. It’s become a hot topic among carriers and regulators alike. The idea of public-private partnerships to provide adequate coverage, similar to how flood and terrorism are managed, have been discussed. Cyber coverage could enter that realm as well, said Grose.
Outlook and opportunities
Outside of pandemic impacts, the professional liability market continued to firm this year, and the market for property risks is still hardening due to an increase in weather-related and natural catastrophe losses over the past four years, according to AM Best. The number of weather and climate events in the U.S. has increased each year since 2015, causing more than $1 billion in losses, including Winter Storm Uri in February 2021, which caused power outages across Texas.
Heading into 2022, the insurance market faces several headwinds, including lingering impacts of COVID-19, continuing catastrophe losses, uncertainty about casualty claim costs as courts reopen after COVID-19 closures, and price adequacy concerns, said AM Best. A decline in capacity due to changes in company risk appetites coupled with hardening rates for many commercial lines creates an environment where creative market and product-oriented solutions are needed, the firm said.
“The freedoms that we have to craft coverages does give us, in turbulent times, the ability to react quickly to any particular situation,” said Cavaness, noting that standard insurers sometimes elect to exit particular lines when exposures climb too high. “The E&S market is able to step in and get the proper amount of premium for the exposure, and we can very quickly react to any particular type of market condition.”
Austenfeld said the E&S lines arena has been known for many years for the creative solutions it provides thanks to freedom of rate and form. “The world today continues to be riskier, which requires specialization, creativity and technological improvements within coverage areas such as pandemic, cyber, construction, wildfire, convective storm, flood, among others,” she said.
Construction lines will provide opportunity for the E&S space as an uptick in projects that were delayed due to COVID-19 shutdowns could help generate premium increases, said AM Best. The collapse of the Champlain Towers South high-rise building in Miami may result in greater scrutiny of inspections, repairs and re-certifications for liability coverage. That could result in retailers turning to wholesalers and surplus lines insurers, the firm said.
Cyber coverage is also a significant opportunity as the frequency and severity of ransomware attacks continues to increase. The situation became exponentially worse during the pandemic as hackers sought ways to exploit the growing remote work environment to attack businesses.
Grose said cyber cover was some-thing of an afterthought in the standard market in the past, with insurers offering it nearly for free with minor covers. Then, the world learned that nobody was immune to cyber events and the standard market pulled back. A lot of that business is now being re-underwritten, he said.
“The E&S business has done a great job of constructing coverages and deductibles and sub-limits to react to that pullback because it’s one of those new coverages, or lines of business, that didn’t have a lot of historical loss data to support actuarial projections for insurance companies,” said Cavaness. “If you don’t have that past history, it typically will fall into E&S, and the E&S carriers are typically willing to craft coverage forms around the actual exposure at hand.”
Talent troubles
Like many industries, the E&S ecosystem faces a talent shortage.
“It’s a fight for talent, not just in our business but across so many industries with record numbers of people who have quit and a large exodus into retirement,” said Grose. “Everyone’s chasing fewer people and that drives the price up of those people. For public companies, that means our expenses go higher and in turn, we have to control expenses another way.”
The aging population of the insurance industry has been a topic of discussion for many years, said Austenfeld.
“The E&S industry understands the need to develop top talent yet with so many new facilities moving into the non-admitted channel, the demand for quality underwriters throughout all areas is an important factor,” she said. “Many underwriters are moving around to various opportunities more than ever before as the price for top underwriting talent continues to rise. It is important for our industry to continue focused recruiting throughout.”
Technology shifts
Meanwhile, technology could be poised to change the way the E&S ecosystem operates. Grose said the ability to consolidate data from more sources so it can be analyzed more effectively and efficiently and allow companies to react more quickly is becoming increasingly important. In addition, from a transactional standpoint, anything a company can do to provide services to clients faster than the competition with the same or better coverage is an advantage, he said.
“One of the most exciting things in E&S right now is how fast attitudes about technology are starting to change,” said Alex Bargmann, CEO and co-founder of Pathpoint, a digital E&S brokerage. “Two years ago, folks told us there would never be enough E&S markets using software — particularly APIs — to distribute products. E&S risks were viewed as too complex and required a human touch. But that perception has changed. Today, not only is our digital E&S platform connecting agents to carriers with appetite, but we’re seeing a lot of demand to add new, high-volume products onto our system. We’re at a point where we’re able to add a great user experience to the risk placement process, even for complex risks.”
Bargmann said wholesale broker-ages still struggle to create a superior user experience for agents, and carriers are looking for better ways to distribute their products.
“Given the high-demand we are seeing from carriers looking to add new products to our market, we believe E&S carriers are slowly catching up to the admitted insurance in the desire to create a more transparent and efficient market where ease of use and speed matter,” said Bargmann.
The virtual work environment necessitated by pandemic shutdowns could have been one factor that has accelerated the acceptance of technology solutions. AM Best noted that intermediaries invested in specialized equipment for next-level remote work and enhanced their capabilities for real-time collaboration. Brokers with strong call center operations and robust technology platforms fared well. MGAs and MGUs developed advanced work distribution frameworks with flexible working schedules.
“With the current market conditions, E&S is more important than ever as retail agents are increasingly turning to the wholesale market for products,” said Bargmann. “So, the pressure is on for the E&S market to invest in the customer experience. Because more agents want to use this marketplace right now, the spotlight is on E&S and we have to deliver in a fast, transparent and cost effective way.”
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