AM Best exec outlines 2021 surplus lines market trends
Surplus lines companies have benefitted from hardening market conditions, says David Blades with AM Best.
AM Best Rating Services recently released Best’s Market Segment Report titled “Expanding Opportunities Boost Surplus Lines Growth and Spur Improved Operating Profits,” the firm’s annual U.S. surplus lines segment review.
PropertyCasualty360 worked with David Blades, associate director at AM Best, to learn more about the key indicators in the report and what its findings mean for the property & casualty insurance sector.
PC360: Based on finding in the recent market segment report, what are the key reasons that the market capacity for surplus lines risks is so strong? What are driving factors behind this growth?
David Blades: Surplus lines companies have benefitted from hardening market conditions for a number of key lines of coverage, particularly those insurers willing and able to provide coverage for specialty commercial risks. Tighter pricing in certain lines of business provides opportunities for surplus lines carriers to once again demonstrate their creativity and flexibility, and develop valuable coverage solutions for existing clients. In addition, standard market insurers offering coverage for borderline surplus lines risks have either non-renewed those accounts, or sought to change pricing or coverage terms upon renewal, which pushed brokers to look for better deals. Surplus lines companies have capitalized on opportunities arising from these circumstances.
PC360: How has the COVID-19 pandemic impacted surplus lines and subsequent profits?
Blades: On the positive side, the COVID-19 pandemic has created opportunities for surplus lines insurers to offer coverage solutions to businesses whose exposures changed because of new ways they have to operate, which may remain in place going forward. Surplus lines premium volume continued to show signs of robust growth through (the first half of) 2021, outpacing the growth in transaction volume. This indicates pricing momentum remains prominent in the surplus lines market. It also partially reflects economy’s bounce back after the initial diminishing effects of COVID-19 in terms of exposure bases, such as sales revenue and payrolls, used to calculate commercial lines policy premiums.
Conversely, the pandemic has had a muted, negative impact on the surplus lines market given its ability to tailor coverage terms and conditions, particularly clearly defined exclusions, which insulates the segment somewhat from pandemic-related claims. The degree of this protection is under the same loss creep threats facing the rest of the industry, specifically COVID-19 related loss creep from demand surge issues pertaining to labor and material costs, and loss creep from estimates related to hurricane losses over the development cycle of claims settlement.
PC360: How has M&A activity impacted these markets?
Blades: Surplus lines and specialty insurers are M&A targets, especially when the market is hardening. They can provide growth opportunities, desirable market expertise, diversification and a generally favorable loss experience. Technology-driven service providers have also proven their strategic value. The M&A focus on the surplus lines and specialty commercial markets extends to insurance intermediaries. Fueling this M&A is the desire of acquiring companies to provide a wider array of products and services.
PC360: What are the biggest challenges facing this segment that professionals in the property & casualty insurance sector need to be aware of?
Blades: While growth has been robust, underwriting results have not been as strong in the past few years. Losses from natural and manmade catastrophes have impaired recent results for surplus lines writers. Social inflation is also driving loss severity for professional liability, general liability and umbrella/excess liability claims.
Potential headwinds for the surplus lines market include the impact of social inflation on casualty claim trends (including commercial auto coverage in particular) and the potential for available market capacity to disrupt the current, favorable market conditions by ratcheting up market competition.
PC360: What are the other biggest “take-aways” from the AM Best surplus lines market report?
Blades: AM Best believes that surplus lines, specialty insurers and wholesale brokers remain attractive M&A targets. Surplus line markets can provide pockets of potential growth: cannabis businesses; construction-related business, especially if infrastructure projects reach fruition; and cyber coverage solutions.
AM Best has assigned ratings to several new surplus lines writers with talented management teams that, at least in their early stages, appear to be successfully staying on course with their initial five-year operating plans. Over time, these companies could develop into more significant market players for different risks classes.
PC360: What does the near future hold for the surplus lines market as indicated by the report? What are some of the key factors that will be impacting this future outlook?
Blades: AM Best also believes there are some key potential tailwinds that could propel the surplus lines market forward, including:
- The continued recovery from COVID-19 with full businesses that were shut down or limited beginning to re-open or expand;
- Any increase in the frequency of severe, weather-related or natural catastrophes may further affect capacity and dampen competition from standard market carriers;
- The client appetite for D&O and cyber coverages should lead to greater opportunities for surplus lines insurers already providing this coverage.
Maura Keller is a Minnesota-based freelance journalist.
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