Top 5 Challenges and Opportunities for E&S

Attendees of the 2016 NAPSLO Annual Convention shared their thoughts on what lies ahead for the excess and surplus insurance industry.
By: | October 5, 2016 • 5 min read

Thousands of attendees converged on Atlanta, Ga., from Sept. 25 to 28 for NAPSLO’s Annual Convention. From the many conversations among brokers, carriers and underwriters, a few common challenges and opportunities facing the excess and surplus market emerged.

1. Soft Market Conditions

Overwhelmingly, convention attendees cited the continuing soft market as their primary challenge.


Excess capital and low investment income are making organic growth difficult, and most see no end in sight to that dynamic. The boost in M&A activity driven by these conditions is also emboldening primary insurers to take on new risks with expanded resources that typically are better suited to the E&S market.

“More standard carriers are entering into the Allied Health marketplace and driving prices down, which makes me less confident that the hard market will come again any time soon,” said Jennifer Schoenthal, a health care underwriter with Beazley.

“E&S shines where the standard market won’t go. There will always be opportunities for E&S as technology advances.” — Hank Watkins, president, Lloyd’s North America.

“E&S brokers used to be the brokers of last resort because there was no participation from standard insurers, but small agent consolidation makes standard insurers more inclined to place coverage themselves in new areas and forego E&S,” said Jon Starck, divisional vice president of marketing for the executive liability division of Great American Insurance Group.

“They are expanding their appetites.”

Some, however, took a more positive view, noting that some segments are performing better than others, forming “hard pockets” within the overall soft market.

“I think, though, there is a blurring between the soft and hard market. Non-admitted forms and products have improved, and there is a demand for specialized expertise,” Starck said.

2. New Risks Present New Opportunities

Despite movement from the primary market into E&S territory, opportunities remain in emerging risks like cyber, drones and driverless cars.

“E&S shines where the standard market won’t go. There will always be opportunities for E&S as technology advances,” said Hank Watkins, president of Lloyd’s North America.

One risk the primary market is hesitant to tackle is flood exposure. After the Senate vote earlier this year to allow the private market to provide flood insurance, many underwriters have approached with caution, but E&S insurers are already writing primary coverage.

“I don’t think there is enough investment in new technologies, but it’s tough to find the extra pennies in a challenging business environment when you’re trying to manage headcount and expenses.” — Ron Beauregard, head of U.S. E&S property, Beazley

“The NFIP is $25 billion in debt,” Watkins said. “There is a place for E&S to step in.”

Schoenthal of Beazley also noted that the specialty underwriter is adding value by participating in several health care-related risks that prove too tricky for the primary market, including telemedicine, clinical trials, implantable devices, nutraceuticals, and military medicine.

3. Technology and Pace of Change

To achieve growth in a soft market – other than through merger or acquisition – carriers, underwriters and brokers have to innovate. But that’s easier said than done.

“It’s imperative that we figure out how to create new products,” said David Nelson, senior vice president, E&S and specialty contract underwriting, Nationwide Insurance.

While many companies have idea-gathering mechanisms, they tend to fall short on the technology needed to turn those ideas to reality.

Younger generations communicate and build relationships differently, and there is increasing customer demand for greater ease of doing business. But industry leaders question whether they can keep up with the pace of technological change occurring in other sectors.

“We are an industry not used to rapid change,” said Craig Kliethermes, president and COO, RLI Insurance Co.

“I don’t think there is enough investment in new technologies,” said Ron Beauregard, head of U.S. E&S property, Beazley, “but it’s tough to find the extra pennies in a challenging business environment when you’re trying to manage headcount and expenses.”

In addition to servicing younger customers, updating technology will also be critical to attracting younger workers to the industry, many attendees agreed.

4. Talent Pipelines

Perspectives on recruiting and retaining talent varied widely. Some felt the issue was critical. With baby boomers preparing to retire, some executives were concerned about how to best transfer their knowledge and skills to incoming talent who — because of changes in technology — do business very differently.

Others were more optimistic. The more upbeat companies were those that had developed formal partnerships and internship programs with universities, or had robust training programs that gave new recruits face time with their older, experienced counterparts.

“We are an industry not used to rapid change.” –Craig Kliethermes, president and COO, RLI Insurance Co.

“People can always be trained,” said Schoenthal.

“You have to be willing to look outside the mold and look at other skill sets to find the person best able to do the job.”

5. Other Trends to Watch

Looking forward, attendees noted some new risks that present underwriting challenges and that need close attention.

Cyber and the Internet of Things as they relate to property risk remains a difficult exposure to identify and quantify, but will evolve rapidly as more devices become “connected.”

The marijuana market, set to expand as more states legalize possession of the drug, could offer abundant opportunities for insurers, but that expansion for now is stalled by prohibitive federal law.


Watkins of Lloyd’s said that market pulled its products for marijuana purveyors last year due to incongruities between state and federal laws, and is watching developments closely to determine when, if ever, it would be wise to re-enter the market.

Kliethermes of RLI also highlighted the emerging trend of funded litigation — when a third party essentially “invests” in a lawsuit, hoping to make a profit from the settlement or eventual award. This outside funding makes plaintiffs’ attorneys less willing to settle, or more inclined to demand larger settlements.

Some of these third parties focus specifically on cases stemming from auto accidents, covering the defendant’s medical and living expenses in exchange for a piece of the final compensation.

Given the increasing severity of commercial auto claims, E&S insurers could have an opportunity to step in and provide coverage for this new risk.

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

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Marine

Crewless Ships Raise Questions

Is a remote operator legally a master? New technology confounds old terms.
By: | March 5, 2018 • 6 min read

For many developers, the accelerating development of remote-controlled and autonomous ships represents what could be the dawn of a new era. For underwriters and brokers, however, such vessels could represent the end of thousands of years of maritime law and risk management.

Rod Johnson, director of marine risk management, RSA Global Risk

While crewless vessels have yet to breach commercial service, there are active testing programs. Most brokers and underwriters expect small-scale commercial operations to be feasible in a few years, but that outlook only considers technical feasibility. How such operations will be insured remains unclear.

“I have been giving this a great deal of thought, this sits on my desk every day,” said Rod Johnson, director of marine risk management, RSA Global Risk, a major UK underwriter. Johnson sits on the loss-prevention committee of the International Union of Maritime Insurers.

“The agreed uncertainty that underpins marine insurance is falling away, but we are pretending that it isn’t. The contractual framework is being made less relevant all the time.”

Defining Autonomous Vessels

Two types of crewless vessels are being contemplated. First up is a drone with no one on board but actively controlled by a human at a remote command post on land or even on another vessel.

While some debate whether the controllers of drone aircrafts are pilots or operators, the very real question yet to be addressed is if a vessel controller is legally a “master” under maritime law.


The other type of crewless vessel would be completely autonomous, with the onboard systems making decisions about navigation, weather and operations.

Advocates tout the benefits of larger cargo capacity without crew spaces, including radically different hull designs without decks people can walk on. Doubters note a crew can fix things at sea while a ship cannot.

Rolls-Royce is one of the major proponents and designers. The company tested a remote-controlled tug in Copenhagen in June 2017.

“We think the initial early adopters will be vessels operating on fixed routes within coastal waters under the jurisdiction of flag states,” the company said.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.”

Once autonomous ships are a reality, “the entire current legal framework for maritime law and insurance is done,” said Johnson. “The master has not been replaced; he is just gone. Commodity ships (bulk carriers) would be most amenable to that technology. I’m not overly bothered by fully automated ships, but I am extremely bothered by heavily automated ones.”

He cited two risks specifically: hacking and fire.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.” — Rolls-Royce Holdings study

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty, asked an even more existential question: “From an insurance standpoint, are we even still talking about a vessel as it is under law? Starting with the legal framework, the duty of a flag state is ‘manning of ships.’ What about the duty to render assistance? There cannot be insurance coverage of an illegal contract.”

Several sources noted that the technological development of crewless ships, while impressive, seems to be a solution in search of a problem. There is no known need in the market; no shippers, operators, owners or mariners advocate that crewless ships will solve their problems.

Kinsey takes umbrage at the suggestion that promotional material on crewless vessels cherry picks his company’s data, which found 75 percent to 90 percent of marine losses are caused by human error.


“Removing the humans from the vessels does not eliminate the human error. It just moves the human error from the helm to the coder. The reports on development by the companies with a vested interest [in crewless vessels] tend to read a lot like advertisements. The pressure for this is not coming from the end users.”

To be sure, Kinsey is a proponent of automation and technology when applied prudently, believing automation can make strides in areas of the supply chains. Much of the talk about automation is trying to bury the serious shortage of qualified crews. It also overshadows the very real potential for blockchain technology to overhaul the backend of marine insurance.

As a marine surveyor, Kinsey said he can go down to the wharf, inspect cranes, vessels and securements, and supervise loading and unloading — but he can’t inspect computer code or cyber security.

New Times, New Risks

In all fairness, insurance language has changed since the 17th century, especially as technology races ahead in the 21st.

“If you read any hull form, it’s practically Shakespearean,” said Stephen J. Harris, senior vice president of marine protection UK, Marsh. “The language is no longer fit for purpose. Our concern specifically to this topic is that the antiquated language talks about crew being on board. If they are not on board, do they still legally count as crew?”

Harris further questioned, “Under hull insurance, and provided that the ship owner has acted diligently, cover is extended to negligence of the master or crew. Does that still apply if the captain is not on board but sitting at a desk in an office?”

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty

Several sources noted that a few international organizations, notably the Comite Maritime International and the International Maritime Organization, “have been very active in asking the legal profession around the world about their thoughts. The interpretations vary greatly. The legal complications of crewless vessels are actually more complicated than the technology.”

For example, if the operational, insurance and regulatory entities in two countries agree on the voyage of a crewless vessel across the ocean, a mishap or storm could drive the vessel into port or on shore of a third country that does not recognize those agreements.

“What worries insurers is legal uncertainty,” said Harris.

“If an operator did everything fine but a system went down, then most likely the designer would be responsible. But even if a designer explicitly accepted responsibility, what matters would be the flag state’s law in international waters and the local state’s law in territorial waters.


“We see the way ahead for this technology as local and short-sea operations. The law has to catch up with the technology, and it is showing no signs of doing so.”

Thomas M. Boudreau, head of specialty insurance, The Hartford, suggested that remote ferry operations could be the most appropriate use: “They travel fixed routes, all within one country’s waters.”

There could also be environmental and operational benefits from using battery power rather than conventional fuels.

“In terms of underwriting, the burden would shift to the manufacturer and designer of the operating systems,” Boudreau added.

It may just be, he suggested, that crewless ships are merely replacing old risks with new ones. Crews can deal with small repairs, fires or leaks at sea, but small conditions such as those can go unchecked and endanger the whole ship and cargo.

“The cyber risk is also concerning. The vessel may be safe from physical piracy, but what about hacking?” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]