2022 E&S insurance update: Preparing to weather any storm
E&S professionals are in an ideal position to provide insurance coverage where it is most desperately needed.
After weathering the COVID-19 ‘storm’ since early 2020 (and keeping a wary eye on the persistent presence of highly virulent, vaccination-resistant variants), E&S insurance professionals are turning much of their attention to literal storms — natural catastrophe (“CAT”) risks that, while not new, are becoming more dangerous, damaging and deadly from one year to the next.
But with many insurance carriers exiting the market, exemplified by the exodus of carriers in Florida, E&S professionals are in an ideal position to provide coverage where it is most desperately needed.
“Unpredictable weather, much larger storms, bigger tornadoes, worsening fires and floods — all those factors are driving what’s going on in the E&S marketplace,” explained Joel Cavaness, a past board president of WSIA and co-founder and president of Risk Placement Services. “The southeast wind market is extremely hard. It’s as difficult a market as I’ve ever seen, given the legal environment and hurricane risks in Florida, for example. Louisiana has also been hit multiple times by hurricane losses. It’s difficult to place risks — more so for personal lines than for commercial lines. California wildfire is also very difficult to place. I don’t see that changing anytime soon, as we continue to have drought conditions and hotter weather. All these factors are concerning to underwriters.”
Over the course of the last three to four years, Cavaness pointed out, insurance companies have been realigning the risk profiles they have on their books. “In years past, carriers were deploying large limits, but now they have pulled back those limits to protect their balance sheets from any one catastrophic event. And whereas before you could put together a large tower of Casualty, for example, with just a few carriers, now it might take seven to nine carriers to put that same limit together. There is so much demand and much less supply.”
“The top emerging risks for the E&S market include climate change, cyber, inflation, political unrest, the next pandemic, and data analytics — with climate change definitely being number one,” reported Robert Sanders, founder and president of Preferred Specialty, who currently serves on the WSIA Board and chairs the Emerging Issues and Innovation Committee. “I have witnessed an acceleration of growth in the E&S market since 2020. After the start of COVID-19, we experienced premium growth of 21% in 2020, 22% in 2021, and now in 2022, we are up 27%. We are located in the Southeastern U.S., so coastal property is a large product line for us. We have seen increased rates each year since 2020 due to natural disasters.”
The 2022 Midyear Premium and Transaction Report of the U.S. Surplus Lines Service and Stamping Offices confirms an increasingly hard E&S market. Through the first six months of 2022, surplus lines premium continued its upward trend — exceeding $31 billion, while premium-bearing transactions numbered nearly 2.8 million. Furthermore, premium increased 32.4% and transactions 9.4% over numbers reported through the same period in 2021. In fact, year-to-year premium grew at the highest percentage rate since the stamping offices began reporting collective data in 2009. Most stamping offices predict that growth for the surplus lines market will continue for the remainder of 2022.
In their Q2/Q3 State of the Market report, Amwins pointed out that while they expected to see a slowdown of hard market conditions, “even with many carriers reporting improved loss ratios and record earnings, tightening capacity and rate increases are not quite behind us.” Amwins attributed this to such factors as carriers exiting classes of businesses and shifting away from volatility as they reduce the amount of limit deployed in “high-hazard cases, locations, and perils.” They also noted that the pace of interest-rate increases and the impact on inflation are wild cards whose full impact will not be fully known until later in 2022 and into 2023.
CATs grow claws
Burns & Wilcox President Danny Kaufman predicts that the hard market will continue at least another 18 months. “A lot of factors play into that—for example, social inflation due to the litigious environment we’re in and ‘nuclear verdicts;’ rates still not being where they need to be from an underwriting standpoint; and carriers pulling out of lines of business and geographies they haven’t reentered because they’re not seeing rate adequacy in those geographies or lines of business. We still haven’t really entered the core of storm season and don’t know what will happen from a loss standpoint due to such factors as hurricanes in the Gulf and wildfires in California.”
Kaufman explained that rising rates have driven a lot of growth in the insurance environment. “Rates have been going up double digits, and on the E&S side, there has been a huge influx of business from standard markets. The big challenge has been capacity, despite it being a growing marketplace and a hard market. There is still a lot of hesitation on the part of carriers, so capacity has been restrained, especially in CAT areas such as Florida.”
Kaufman forecasts that rates will steadily rise, driving further growth in the E&S market. “More capacity will be added to the market, slowly and cautiously, which will help growth. The cost of reinsurance will continue to go up, which will drive growth across the marketplace. However, we have to watch storm season very closely. A lot of what happens in the market this year will depend on what we see during storm season,” he acknowledges.
In its report, Amwins stated that natural catastrophe losses affecting the property market ranged from $100 billion to $145 billion in 2021, the second-costliest year for the insurance industry after 2017. They predicted that as most domestic CAT reinsurance treaties date in May and June, the impact of natural catastrophes would not be felt until the second quarter, after wind season blew in. The report confirmed that carriers were continuing to reduce portfolio risk by limiting their exposure to areas that are prone to experience wildfires and coastal flooding.
“Climate change is impacting us all with increased wildfires, flooding, and hurricanes. These events are not slowing down and will cause further strain on capacity,” said Cristi Carrington, chief distribution officer and principal at Brown & Riding, a national top 10 wholesale brokerage. Over this past year, Carrington and her colleagues have seen many MGAs shrink their footprint and appetite, especially in those treacherous CAT-prone regions.
“Opportunities are coming to the E&S sector due to the loss experience of preferred carriers in CAT-exposed areas, which has led to the further tightening of terms and rate increases,” Carrington pointed out. “According to our Property Practice Group leader Guy Rawlins, the property market remains challenging and tricky, especially on placements where carriers have shrunk or withdrawn their capacity.”
Valuation driving up prices
Valuation — a policy provision that specifies the amount of money an insured will be paid in the event of a covered loss — continues to be a hot topic with markets and brokers, and there is currently no easy answer, acknowledged Carrington. “It has been one of the biggest pricing drivers, as portfolios have been undervalued for many years,” she pointed out.
While market data continue to show that E&S is hardening, with average rate increases of 10% to 15% on accounts with good experience and soft occupancies, accounts with heavy CAT exposures, loss experience, and poor valuations are seeing increases up to 50%, Carrington noted.
She believes that bringing up the insurance to value, or ITV (how much of a structure’s rebuilding cost an insurer will pay for in a covered claim) to more current values is also “eroding the allotted aggregates of carriers and Lloyds, which creates the challenge of replacing capacity and providing options. Carrier underwriters are often stressed and overwhelmed by the number of submissions they see right now and the number of times they need to quote as their position changes,” Carrington said. “Brokers must work harder to get their submissions to the top of the pile and keep in mind their hit ratios so that they can continue to secure competitive terms.”
“One prevalent topic in E&S at the moment is the replacement costs of buildings. The costs to rebuild a property have significantly increased,” Cavaness pointed out. “Over the course of the past several years, there has been a lack of consistently updating the value of the replacement costs of buildings. The values have stayed at the same limits, while the actual costs to replace buildings have gone up significantly. Lumber alone has gone up almost 100 percent.”
Given the rampant property destruction wreaked by climate-related catastrophes such as fires and floods, it is crucial for the values on the books to match the in-real-life costs in order to calculate proper coverage and avoid huge losses.
“When you look across the market on the E&S side, we have much more flexibility to react more quickly to change, such as weather changes, social inflation, supply issues, all the factors that go into insurance,” Cavaness said. “On the admitted side, they are required to file forms and rates. They are less able to be flexible and respond to changing market conditions. Many larger insurance companies have expanded into the E&S market to give them that flexibility, which makes the industry bigger and bigger. The preferred risks will continue to maintain their home in the admitted market, but risks that need creativity and flexibility will continue to stay in or enter the E&S market.”
The need for discipline
The E&S industry is experiencing a perfect storm of many factors: Premiums have been increasing due to many years of unprofitable results and capacity is getting more restrictive, causing that tightening of the overall market, Sanders said. “We have new challenges on the horizon with high inflation and a possible economic downturn,” he added.
Sanders predicted that the E&S market will continue to hold the line on premiums, and there will be increasing rates in unprofitable or catastrophic exposed lines of business. “We continue to see growth on both the property and casualty side, as we are having a record-setting year. The greatest challenge for our industry is to stay disciplined on achieving the rates that result in continued profitability. We do not want to revert back to another soft market of undercutting rates that lead to unprofitable results,” he stressed.
“Staying disciplined means keeping the rates where they should be and not undercutting the market. At the end of the day, we need to make sure we are charging the correct premium to cover future losses,” Sanders said.
Kaufman agrees. “The market gets driven down when we all try to undercut one another,” he said. “That’s not healthy for the marketplace. Rates go up for a reason. We need the market to be healthy. Stick with it and maintain the appropriate rates.”
Building expertise is essential
How can insurance professionals best compete in the 2022–2023 E&S market?
“Two words: specialization and organization,” Carrington said. “Having strong market relationships in all market cycles is imperative and has proven true with this hardening market. If brokers do not have a strong connection with carrier underwriters, it will likely be challenging and time-consuming to get deals done.”
She stressed that more E&S solutions are needed for exposure to CATs — risks such as hurricanes and wildfires. “Brokers must have shared and layering placing expertise to be successful with their clients. Cultivating an area of specialization and a strong knowledge base will be critical for placement execution.”
To that end, training is essential. “Staffing continues to be difficult for everyone in the industry right now, and having the ability to develop and train internally will be a major focus for most wholesalers and MGAs,” Carrington said. “The E&S market will remain challenging in terms of available capacity and variable increasing prices. Insureds and agents will gravitate to specialists who understand their risks and have expertise with the markets that write them.”
It’s critical to continue to find ways to show value to your clients, Kaufman stressed. “As wholesalers, we produce value for retailers. In this market more than ever, we need to show great value to them, in terms of expertise and efficiency. They need our counsel more than ever before. It’s a difficult market where there are price increases every year, and they need the counsel of their agents for effective risk management.”
Kaufman’s best advice is: “Know what you’re taking about, know the policies and marketplace, and really study up. It’s important to become a true expert in terms of the industry and the market.”
“From my personal experience, we have done well competing in this market by just being there and responding quickly to the needs of our retail agency partners,” Sanders pointed out. “We are in a market cycle where the retail agent relies heavily on our expertise in finding innovative coverage solutions for their insureds.”
Sanders suggested that in the last quarter of 2022, when it’s highly likely extreme storms and other climate catastrophes will strike, opportunities will abound for E&S professionals who provide outstanding service to really shine through the clouds.
Anna Marie Trusky is a freelance writer and editor based in Connecticut.
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