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

The Profession

For This Pharmaceutical Risk Director, Managing Risk Means Being Part of the Mission to Save Lives

Meet Eric Dobkin, director, insurance and risk management, for Merck & Co. Inc.
By: | September 28, 2018 • 5 min read

R&I: What was your first job?
My first job out of undergrad was as an actuarial trainee at Chubb.I was a math major in school, and I think the options for a math major coming out are either a teacher or an actuary, right? Anyway, I was really happy when the opportunity at Chubb presented itself. Fantastic company. I learned a lot there.

R&I: How did you come to work in risk management?
After I went back to get my MBA, I decided I wanted to work in corporate finance. When I was interviewing, one of the opportunities was with Merck. I really liked their mission, and things worked out. Given my background, they thought a good starting job would be in Merck’s risk management group. I started there, rotated through other areas within Merck finance but ultimately came back to the Insurance & Risk Management group. I guess I’m just one of those people who enjoy this type of work.

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R&I: What is risk management doing right?
I think the community is doing a good job of promoting education, sharing ideas and advancing knowledge. Opportunities like this help make us all better business partners. We can take these ideas and translate them into actionable solutions to help our companies.

R&I: What could the risk management community be doing a better job of?
I think we have made good advancements in articulating the value proposition of investing in risk management, but much more can be done. Sometimes there is such a focus on delivering immediate value, such as cost savings, that risk management does not get appropriate attention (until something happens). We need to develop better tools that can reinforce that risk management is value-creating and good for operational efficiency, customers and shareholders.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
I’d actually say there hasn’t been as much change as I would have hoped. I think the industry speaks about innovation more often than it does it. To be fair, at Merck we do have key partners that are innovators, but some in the industry are less enthusiastic to consider new approaches. I think there is a real need to find new and relevant solutions for large, complex risks.

R&I: What emerging commercial risk most concerns you?
Cyber risk. While it’s not emerging anymore, it’s evolving, dynamic and deserves the attention it gets. Merck was an early adopter of risk transfer solutions for cyber risk, and we continue to see insurance as an important component of the overall cyber risk management framework. From my perspective, this risk, more than any other, demands continuous forward-thinking to ensure we evolve solutions.

R&I: What’s the biggest challenge you’ve faced in your career?
Sticking with the cyber theme, I’d say navigating through a cyber incident is right up there. In June 2017, Merck experienced a network cyber attack that led to a disruption of its worldwide operations, including manufacturing, research and sales. It was a very challenging environment. And managing the insurance claim that resulted has been extremely complex. But at the same time, I have learned a tremendous amount in terms of how to think about the risk, enterprise resiliency and how to manage through a cyber incident.

R&I: What advice might you give to students or other aspiring risk managers?
Have strong intellectual curiosity. Always be willing to listen and learn. Ask “why?” We deal with a lot of ambiguity in our business, and the more you seek to understand, the better you will be able to apply those learnings toward developing solutions that meet the evolving risk landscape and needs of the business.

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R&I: What role does technology play in your company’s approach to risk management?
We’re continuing to look for ways to apply technology. For example, being able to extract and leverage data that resides in our systems to evaluate risk, drive efficiencies and make things like property-value reporting easier. We’re also looking to utilize data visualization tools to help gain insights into our risks.

R&I: What are your goals for the next five to 10 years of your career?
I think, at this time, I would like to continue to learn and grow in the type of work I do and broaden my scope of responsibilities. There are many opportunities to deliver value. I want to continue to focus on becoming a stronger business partner and help enable growth.

R&I: What is your favorite book or movie?
I’d say right now Star Wars is top on my list. It has been magical re-watching and re-living the series I watched as a kid through the eyes of my children.

R&I: What is the riskiest activity you ever engaged in? When I was about 15, I went to a New York Rangers versus Philadelphia Flyers game at the Philadelphia Spectrum. I wore my Rangers jersey. I would not do that again.

Eric Dobkin, director, insurance & risk management, Merck & Co. Inc

R&I: What is it about this work you find most fulfilling or rewarding?
I am passionate about Merck’s mission of saving and improving lives. “Inventing for Life” is Merck’s tagline. It’s funny, but most people don’t associate “inventing” with medicine. But Merck has been inventing medicines and vaccines for many of the world’s most challenging diseases for a long time. It’s amazing to think the products we make can help people fight terrible diseases like cancer. Whatever little bit I can do to help advance that mission is very fulfilling and rewarding.

R&I: What do your friends and family think you do?
Ha! My kids think I make medicine. I guess they think that because I work for Merck. I suppose if even in a small way I can contribute to Merck’s mission of saving and improving lives, I am good with that. &




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