NAPSLO 2017

Surplus Lines Growth Slows

Attendees at the NAPSLO convention in San Diego need to find ways to compete, yet avoid falling victim to price wars.
By: | August 29, 2017 • 5 min read

The excess and surplus (E&S) lines market is between a rock and a hard place.

Depressed interest rates and a soft market driven by fierce competition, lack of a big catastrophic event and unprecedented levels of available capital have combined to squeeze margins further and have forced some players to pull back or exit the sector altogether.

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Total surplus lines direct written premiums increased by the smallest amount in five years, up 2.5 percent in 2015, ending two straight years of underwriting gains, according to analysts. However, the market as a whole has more than doubled over the last 20 years from 3.4 percent of total property/casualty (P&C) direct written premiums in 1995 to seven percent in 2015.

As a percentage of commercial lines direct written premiums, surplus lines insurers also increased their share from 6.3 percent to 14.2 percent over the same period.

“With the demonstrated capability to effectively assess new exposures and the flexibility to tailor terms and limits to meet coverage standards, we believe that the surplus lines market will continue to assert its value in the property/casualty insurance marketplace,” an analyst said.

And with a planned merger between the National Association of Professional Surplus Lines Offices (NAPSLO) and the American Association of Managing General Agents (AAMGA), due to come into force before this month’s annual NAPSLO convention in San Diego, there has arguably never been a more opportune yet challenging time to be in the E&S market.

“An abundance of capital, low interest rates and a super competitive marketplace have all conspired to create a challenging set of headwinds,” said Jeremy Johnson, president, U.S. Commercial, AIG.

“Although we believe that the $40 billion E&S market will likely outperform the standard market in 2017, it’s certainly a market beset with a host of familiar challenges.”

Key Challenges

Property was worst hit, with rates falling between 10 and 12 percent, said David Bresnahan, executive vice president, Berkshire Hathaway Specialty Insurance.

David Bresnahan, executive vice president, Berkshire Hathaway Specialty Insurance

“Property remains the softest category by far with the most competition and as a result it has suffered continued rate reductions for several years now,” he said. “In financial lines, primary and lead lines are stable, but excess executive lines are under very heavy competition, while med mal and casualty are the most stable.”

Jim Auden, managing director of Fitch Ratings, said that pricing and competition, particularly from the wider P&C market, were the two biggest challenges facing the E&S industry.

“Profitable avenues of business growth are getting harder to find in E&S,” he said.

“In this part of the market underwriting cycle, admitted carriers’ efforts to maintain premium volume lead them to creep further into what was previously considered E&S space, further pressuring the E&S market.”

Consolidation

E&S market leader Lexington pulled back last year as its direct written premiums fell to $3.76 billion from $4.66 billion in 2015, resulting in its market share shrinking to 12.6 percent from 15.6 percent over the same period.

It is expected to continue to reduce its net written premiums because of unsatisfactory rates.

There has also been an increase in M&A activity led by Japanese insurer Sompo Holdings’ $6.3 billion takeover of Endurance Specialty Holdings.

Allied World Assurance Co. Holdings AG also announced its pending sale to an investor group led by Fairfax Financial Holdings for $4.9 billion, and Liberty Mutual agreed to a $3 billion deal to buy Ironshore from Fosun International Holdings.

“In financial lines, primary and lead lines are stable, but excess executive lines are under very heavy competition, while med mal and casualty are the most stable.” — David Bresnahan, executive vice president, Berkshire Hathaway Specialty Insurance

“I think more capital is and will continue to find its way into E&S, especially in the short tail lines and property,” said AIG’s Johnson.

Despite all of the challenges faced by the E&S market, there are still pockets of opportunity.

Among the biggest growth areas are private flood, drones, the service economy and robotics. But the biggest opportunity is cyber, said Terry Leone, manager, insurance research at S&P Global Market Intelligence.

“Standalone insurance almost doubled in 2016 from $488 million to $911million,” he said. “The more cyber attacks there are, the more demand there will be for protection.”

James Drinkwater, president, AmWINS

James Drinkwater, president of AmWINS brokerage and one of NAPSLO’s wholesale broker directors, added: “People are now starting to buy whereas last year they were just getting quotes.”

Innovation brings opportunity, but Bresnahan said that companies need to concentrate on getting the basics right.

“Carriers need to spend more time on the basics like getting policies issued quickly, paying claims without reservation and generally being a little bit more responsive,” he said.

“That has certainly been the feedback from customers who would prefer the industry gets the basics of service and claims right first.”

NAPSLO/AAMGA Merger

One of the key developments in the E&S market this year was the proposed merger between NAPSLO and AAMGA to form the Wholesale and Specialty Insurance Association (WSIA).

It was a no-brainer, said AAMGA president Corinne Jones, given that 76 percent of AAMGA members also have a NAPSLO membership and 48 percent of NAPSLO members are affiliated with AAMGA.

“The potential synergies of merging the AAMGA and NAPSLO, together serving the entirety of the wholesale, specialty and surplus lines insurance marketplace, became a common sense opportunity the organizations had to explore,” she said.

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“WSIA will be highly effective in promoting the value of wholesale distribution with a stronger, unified voice on behalf of its members.”

Jones said that WSIA will provide a simplified menu of programs and services, a stronger, unified voice in its legislative and regulatory advocacy and improved synergy in committee and volunteer work.

Among the biggest regulatory hurdles yet to be overcome by the new organization is the Flood Insurance Market Parity and Modernization Act of 2017, which is awaiting approval.

Brady Kelley, executive director at NAPSLO, said that NAPSLO continued to focus on lobbying Congress about the Act, enabling the E&S market to continue providing coverage for unique and complex flood risks not available through the National Flood Insurance Program or on the standard market.

Another issue, he said, is lobbying Congress to reform provisions from the Dodd Frank Act in order to maintain the Nonadmitted and Reinsurance Reform Act in its current form.

“We have encouraged members to support H.R. 871, which eliminates unnecessary FATCA (Foreign Account Tax Compliance Act) reporting for the property and casualty industry, and we are asking senators for help in quickly confirming any nominees to the board of the National Association of Registered Agents and Brokers and to allow it to begin the implementation process,” he said. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]