Storms and social inflation: Wholesale insurance in 2024
Excess, surplus and specialty insurance lines have grown as admitted carriers pulled back amid hard-market conditions.
The wholesale, excess and surplus (E&S) insurance landscape evolved over the last decade from a period of steady growth and stage-one tech adoption to a dynamic, expansive market focused on emerging risks and advanced digital integration.
Related: 2024 Wholesale & Specialty Insurance News Hub
This growth was driven by changing regulatory demands, the impact of global events, and the increasing complexity of risks faced by businesses and individuals.
Given that risks ebb and flow between the standard market and the E&S market, one important metric that helps explain how wholesale insurance evolved over time is the percentage of E&S premium compared to total property & casualty direct written premium, says Dominic Lee, ACAS, a senior actuary and risk solutions advisor with SAS.
In 2023, the U.S. E&S market constituted 9.2% of the total direct written premium in the United States, nearly double the market share of 5.2% recorded in 2018. E&S direct premium written totaled $86.47 billion during the most recent year compared to $75.51 billion in 2022, according to the S&P Global Market Intelligence 2024 US Excess & Surplus Insurance Market Report.
Aggregate premiums in property lines grew by at least 20% for the fifth straight year, S&P says. Commercial property lines and homeowners insurance direct premium surged to $27.44 billion last year, an increase of roughly 41% year-over-year driven by rising reinsurance costs and a declining appetite among admitted carriers to write business in catastrophe-prone states.
Aggregated premiums in several liability lines moderated somewhat, growing only 4.2% in 2023, the first time in five years total liability lines did not grow by double digits, according to S&P. The combined liability lines reported $45.4 billion in direct premium. In recent years, E&S casualty direct written premium has been driven by social inflation, nuclear verdicts, third-party litigation funding and pro-plaintiff court districts, which has led to reduced capacity in the standard market, Lee says.
“We’re in a continuing hard market for the industry as a whole that we have been in for the past four or five years,” says Richard Kerr, CEO of Novatae Risk Group. “As the market gets harder, the admitted marketplace starts pulling back, and when that happens, the E&S space grows because there’s a lot more freedom to adjust your policy forms and charge differing types of premiums without the regulations the admitted carriers have.”
Shake, rattle and roll
On the property side, the usual suspects are driving the hard market: hurricanes in Florida and wildfires in California, not to mention floods, wind events, winter storms, convective storms and tornadoes throughout the country. Although 2024 has been a somewhat calmer year, Kerr notes that natural disasters can bubble up at any minute.
Inflation and supply chain challenges don’t help matters. These threats to business are driving up construction and replacement costs for all kinds of structures including homes, apartment buildings and offices.
Three states have seen their share of the E&S premiums against the total property market grow by more than 8 percentage points since 2018, according to S&P. South Carolina is up 9 percentage points to 19.4% of the market. California rose 8.8 percentage points and now stands at 14.2% in the state, while Louisiana grew 8.3 percentage points, making E&S premiums 22.7% of the total property market in 2023. Louisiana has the largest share of E&S premiums to the state’s total in the nation, closely followed by Florida.
“Unfortunately, I think, the West Coast states are going to continue to burn, and standard carriers are going to be very wary about jumping in, especially in California,” says Mark Kauffman, southwest executive vice president at wholesaler XPT Specialty and past president of the California Insurance Wholesalers Association. “That’s where we come in, and we serve a great purpose. When clients and consumers can’t get coverage from the standard carriers, we come in and hopefully fill the need.”
Several other factors outside of storms can increase loss severity in the property category including high-value properties, such as those with unique architecture and fine art collections; distressed properties; vacant properties subject to vandalism and theft; emerging manufacturing operations such as those in the cannabis industry; and performances and events, says Lee. Emerging risks in this space include green energy installations like wind and solar farms with unique construction and operational risks; supply chain and logistics risks including business interruption; and theft of digital assets related to blockchain and distributed ledger technology.
Casualty market moderates
On the casualty side, risks covered in the E&S marketplace traditionally include professional liability such as errors & omissions and medical malpractice; product liability; environmental liability encompassing pollution and contamination; transportation; and construction defects covering materials and workmanship. Emerging risks include cybersecurity, autonomous vehicles, space exploration and telehealth, Lee says.
Not only does the E&S market cover cybersecurity threats, insurers and other insurance players need to protect themselves against breaches.
“The E&S marketplace was directly affected by a carrier that was hit with a cyberattack over a month ago and hasn’t been able to operate since,” Kauffman says. “According to the Identity Theft Resource Center, over 1 billion people have been impacted by data breaches in the first half of 2024 — a more than 10% increase compared to the same period last year.”
Further, social inflation continues to affect the casualty marketplace due to increases in claim costs, including higher jury awards, says Kauffman.
“The cost of adjusting a claim is going through the roof,” he says, noting attorney fees are higher and jury awards have skyrocketed. “Carriers are paying 30%, 40%, sometimes 50% more in claims handling on a day-to-day basis. Carriers sometimes just want to settle because they don’t want to go to court and risk huge awards.”
Pricing and capacity
Just a few years ago, additional capacity in the E&S market was creating competition and in some cases rate decreases, but that dynamic has course-corrected. In November 2023, AM Best changed its E&S outlook from “stable” to “positive,” considering its strong underwriting results and continued high demand.
“In addition to rate increases, underwriting actions such as terms and conditions enforcement and non-renewals are important to preserve the integrity of any book of business and ensure that risks are within appetite since qualitative factors can impact profitability as well,” Lee says. “Reinsurance pricing impacts profitability since it will potentially increase or decrease the available attachment point and limits that are acceptable to E&S insurers. For example, if reinsurance pricing is too high, an E&S insurer may have to increase their attachment points and/or reduce limits thereby potentially receiving less protection in an adverse scenario.”
Lee adds that the E&S market appears to have healthy capacity at the moment.
In some areas, however, coverage availability is challenging, especially in catastrophe-prone markets like California and Florida.
“Many of the major admitted insurers have just pulled out completely,” says Kerr. They are saying, ‘We can’t win in this state. We’re done.’”
Kerr says insureds are accepting higher deductibles in capacity-constrained markets, and the industry is finding creative ways to provide coverage, such as higher deductibles and parametric insurance, which pays out based on the magnitude of the event.
Best practices
There are plenty of ways the E&S insurance ecosystem can succeed, including targeting small businesses, developing strong partnerships, and providing high-touch customer service.
“E&S is becoming such a critical part of the commercial lines story,” says Nicole Farley, vice president of carrier operations for Bold Penguin, a digital solutions provider focused on small and medium-sized businesses. Often smaller businesses worry about the perception of the E&S market because of the term “non-admitted,” which makes it seem unregulated.
In fact, E&S products “can really help these small businesses,” says Farley, noting that agents are critical to helping such enterprises understand and secure the coverage they need for their unique offerings.
Good customer service is always a best practice, and that is no different in the wholesale insurance market.
“Insurance professionals should know that they have an important presence in the overall insurance marketplace and their expertise is needed now, more than ever, to help insurance retailers make sure their clients and consumers are properly insured,” says Kaufmann. He pointed to how simple things — like picking up the phone, answering emails in a timely manner, and getting quotes out quickly — can make the difference when it comes to winning business or not.
Kerr emphasized the importance of retail agents partnering with a wholesale broker and approaching the market with a team strategy approach.
“Do not send three brokers into the market at the same time,” says Kerr. “They’re going to run into each other and you’ll end up wasting their time. In a soft market, retailers could just pit everybody against each other, but nowadays, you need that partnership with a wholesaler.”
Kristen Beckman is seasoned business journalist based in Colorado.
See also: