The pandemic and return to work continued to reshape business and risk in 2021 along with new economic turbulence, continuing supply chain challenges and a tightening labor force. While still grappling with persistent economic turbulence, including historic inflation, and lingering COVID-19 impacts, the industry also faced unpredictable weather events, bigger storms and destructive wildfires in 2022.

Soaring premiums

"Despite the inflationary challenges, the E&S market continues to be a great opportunity," says Markel Chief Wholesale Officer Wendy Houser. "In the near term, the market continues to rise, and we believe it will once again secure a record amount of E&S premium. In fact, for the market as a whole, there hasn't been a retraction in E&S premium growth since 2011. The market has grown every year."

Loss on the carrier side driven by natural catastrophes, COVID-related claims, social inflation and economic inflation have all driven the E&S marketplace to record premium levels recently. Nearly all of the top writers of U.S. excess and surplus insurance recorded higher premiums year over year in 2022, although many lost market share, according to S&P Global Market Intelligence. E&S premiums increased for the fourth straight year in 2022 to $75.51 billion from $62.90 billion in 2021, an increase of 20%, S&P says. Premiums have more than doubled since 2018, when they stood at $34.65 billion.

Similarly, the 2023 Midyear Report from the U.S. Surplus Lines Stamping Offices found surplus lines premium increased 15.9 percent over the same period in 2022, and premium-bearing transactions increased 2.6 percent over 2022 totals in the states with surplus lines stamping offices. These results follow last year's record-breaking premium of $31 billion and growth of 32.4%. Comparing 2022 and 2021 surplus lines market data, the report, which is showcased on page 24, identifies key lines of business including auto liability, auto physical damage, disability/A&H, inland marine, liability (non-professional), multi-peril, professional liability, property, and residential/homeowners/other personal property. Line of business data also provides a valuable indicator of the types of business driving the E&S market. Some states also are seeing increases in personal lines coverages but that is a small fraction of the market.

"Our insurance engine grew nicely in a number of product areas where we have a high degree of confidence around margins," Houser says. "We took advantage of an improved pricing environment in property, and we grew in areas such as inland marine, binding, personal lines, and select London market marine and energy classes."

Market shifts

"As we look ahead in the near term, we'll go from high growth to more of a stable ongoing growth," says CRC Group CEO and WSIA Board President Dave Obenauer. "The overall E&S market has become pretty large relative to the overall P&C commercial market. In the U.S., 20% of the market is E&S, so $1 million of every $5 million of commercial risks is now being placed in the E&S marketplace. This is a marked shift from two decades ago when E&S was seen as a niche market for risks that couldn't get coverage in the admitted market."

Obenauer also noted that while property lines, especially catastrophe-exposed property lines, continue to grow given increased natural disasters around the world, casualty lines have slowed somewhat while D&O, E&O and professional lines rates are flat to down. Cyber is coming down moderately as well after years of significant rate increases, he says.

"There's plenty of capacity," Obenauer says. "In some cases, it's for a higher price. In other cases, maybe for a little bit lower price if it's in D&O or cyberspace. But overall, it's generally available. In property CAT, it is very hard to get in. There's not enough of it, so prices are very high and some insurers are reducing how much they buy or picking higher deductibles to reduce their dollar cost on that policy. It's a bit of a mixed market from a rate perspective."

Markel has expressed disappointment with the pricing trend in the professional liability space, particularly in much of the large account D&O space, Houser says. "As a result, we are selectively allowing some business to lapse, and being very discerning around new accounts." She also noted some contraction during the first quarter of 2023 in excess casualty lines as the pace of new business slowed.

"We are pushing hard for rate, and are willing to let existing business lapse where we are unable to get adequate rate," she says.

New entrants

In its 2022 U.S. Casualty Market Outlook, Risk Placement Services reported that much of the E&S market experienced an influx of new insurance companies and managing general agents. Over the past 2 years, more than 20 new and well-capitalized insurers have entered the E&S casualty market, according to RPS.

"In my 30-plus year career, I've never seen so many new market entrants come in within a few months of each other," says Bill Wilkinson, president, National Casualty Brokerage, at RPS. "These organizations have aggressive growth goals and aren't hobbled by the cost of legacy issues."

New players have attracted experienced underwriters away from established players, disrupting many long-term broker-underwriter and broker-carrier relationships and creating a new market dynamic, the firm says. New market entrants are starting to take market share from incumbents, the report says.

S&P also observed this trend, noting 17 of the top 25 E&S carriers experienced year-over-year declines in market share in 2022.

Inflation's impact

What isn't slowing down in the E&S market is the impact of inflation — both economic and social.

"Economic inflation may be moderating; social inflation is not. In the U.S., the civil litigation environment is one of the factors influencing social inflation," Houser says. "It is getting worse. And as it gets worse, it is pressuring loss costs across the industry."

Nuclear verdicts are defined as jury awards of more than $10 million and are called such because of their destructive impact on insurers and consumers. In 2019, there was a 300% increase in nuclear verdicts, compared to the annual average from 2001 to 2010, according to the U.S. Chamber of Commerce Institute for Legal Reform (ILR). The median verdict grew from $19.3 million in 2010 to $24.6 million in 2019.

Today, jury awards and settlements are skyrocketing so much that some verdicts are now being called "thermonuclear," because they far exceed the $10 million threshold.

Consider the impact of the June 2021 collapse of the Champlain Towers South condominium building in Surfside, Fla. In 2022, a Miami-Dade circuit court judge announced a $997 million settlement had been reached in the case. The condo association had a $31.4 million property policy for the building and $18 million in liability coverage, RPS says. A number of parties were held liable to make up the shortfall, including $500 million from the building security firm's primary and excess general liability policies.

Compounding the explosive impact of nuclear verdicts is the growing litigation funding trend; such efforts raise investment dollars to pay law firms to pursue tort claims against businesses.

Litigation funding is increasing potential losses for carriers and will drive the need for rate increases in the future, Obenauer says.

"Based on economic inflation and social inflation, there has been uncertainty about rate adequacy, but what I can say, with absolute certainty, is that the industry needs to stay ahead of loss trends," Houser adds. "It's important to maintain appropriate rate increases, cover loss trends, and offset the potential impacts of inflation."

"Beyond rate, carriers also need to actively utilize other underwriting tools that can help," she continues. "That means terms, conditions, attachment points, and most importantly, risk selection. Insureds need to know that carriers will be financially strong enough to be there for them in the long term. Pushing hard for adequate rate is one of the most important things carriers can do to assure that."

Cyber moderates

Meanwhile, the impossibly hard cyber market for the past two years is showing signs of plateauing.

"Make no mistake, this plateau is still rock hard, but most 'shock' pricing adjustments have already happened and pricing across most industry classes seems to have stabilized," according to the AMWINS Q1 state of the specialty market report. "We suspect the rightsizing of network security controls mandated by carriers over the last 18 months is beginning to have a positive impact on loss ratios."

During the first quarter of 2023, cyber insurance rates increased 8.4% compared with 15% average increases seen in the final quarter of 2022, according to AM Best. As cyber insurance pushes toward a potential end to its hard market, surplus line insurers are emerging with a considerable portion of the marketplace, now accounting for more than 60% of direct cyber premiums written in the sector, according to AM Best. This compares with a relatively steady 25% market share from 2015-2020.

"Underwriters have used every item in the proverbial toolbox to manage exposures. In addition to the rate increases, underwriters have cut limits, increased insureds' own retention and improved risk selection," says Christopher Graham, senior industry analyst, industry research and analytics, AM Best. "With the cyber universe expanding and becoming more complex with artificial intelligence creating new exposures and ransomware attacks returning to prominence in 2023, the demand for cyber coverage will only increase."

Catastrophes continue

Catastrophic weather events continue to play a major role in hardening the insurance marketplace, according to AMWINS. A major hurricane has made U.S. landfall in five out of the past six years, wildfires have engulfed thousands of acres, and unprecedented winter storms and flooding have battered parts of the country. According to the Insurance Information Institute, Hurricane Ida in 2021 was the third costliest hurricane on record, with $39 billion in insured losses. Hurricane Ian in September 2022 is currently estimated to be a $40-60 billion insured loss event, putting it second on the list of costliest hurricanes behind Katrina. Globally, insured losses from natural catastrophes reached $130 billion in 2021 — 18% higher than 2020.

"Property capacity within catastrophic areas continues to be one of the most important topics in today's market," says Brenda (Ballard) Austenfeld, managing director of RT Specialty and CEO and president of RT Specialty's National Property Practice. "The definition of 'CAT' property has expanded beyond hurricane and earthquake with now additional concern by insurers and capital providers to wildfire, severe convective storms, flood and other risks areas. This provides insurers a unique opportunity to determine where best to deploy capacity and to view these challenges as opportunities. Capacity has reduced in many areas of property along with significant premium increases and restrictions in policy terms and conditions. Insurance to value continues to be a key topic of discussion throughout the insurance and reinsurance sector with strict requirements by many."

Looking ahead

"In general, we see the specialty and non-admitted marketplace as increasingly playing a major role as solution providers," Houser says. "Carriers in the E&S market are the industry's problem solvers. We deliver custom-made solutions that can't necessarily be developed in the admitted marketplace."

Houser highlights the value of specialization in the market, pointing to a recent McKinsey study that showed that from 2016 to 2021, the more specialized E&S market in the U.S. grew at more than three times the rate of the U.S. admitted market. "The most successful commercial carriers have defined a clear source of distinctiveness that allows them to compete beyond prices — and have doubled down their investment in these areas," the report says.

Austenfeld agrees that specialization is a key focus for the industry. Within the property segment, she noted many accounts are now underwritten based on zip code, for example.

"During challenging market cycles like the one we are experiencing today — and have been experiencing for some time now — the need for specific expertise becomes all the more apparent," she says. "Throughout all challenging areas to place coverage, the market continues to become more complex. Wholesale brokers and insurance companies are vital trading partners of the retail broker, reinsurance segment and risk management team as often the expanded team creates the best terms and most cost-effective solutions. Creative solutions are much more attainable with everyone working together."

See also:

• How specialty insurers can overcome current underwriting challenges
• 4 trends shaping the casualty market
• How to better prepare insureds for climate change losses