NAPSLO Report

A Challenging Environment

E&S insurers and brokers are scrambling for market share, but remain confident of future growth.
By: | August 31, 2015 • 7 min read

The excess and surplus (E&S) lines market is at a critical point in its development, according to industry experts.

The industry has reversed a five-year decline in direct written premiums between 2007 and 2011, with premiums up 7.6 percent during 2014, according to the latest figures from SNL Financial.

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The sector has also more than doubled its share of direct written premiums for the property/casualty (P&C) market, from 3.3 percent in 1993 to 6.9 percent in 2013, as well as its share of total commercial lines premiums (13.7 percent), said A.M. Best.

However, with increasing competition from new entrants and more capital than ever flowing into the market, rates — particularly in P&C — are starting to slow. Subsequently, profit margins have been hit.

A.M. Best currently views the surplus lines market as “stable,” but warned that profit margins may shrink in the near term as average rate increases diminish on various lines of coverage.

“Accident year reserve development for surplus lines companies has been slightly more favorable than the overall P&C industry, but the gap has been shrinking as the markets wrestle with excess capacity, low interest rates and capital outlays to enhance operational efficiencies,” said the ratings agency in a recent report. Added to that, the industry faces a constant battle to attract and retain new talent and to keep up with emerging risks and regulations, or risk getting left behind.

All of these issues will be at the top of the agenda when the National Association of Professional Surplus Lines Offices (NAPSLO) meets at its annual convention in San Diego this month, where 4,000 E&S brokers and wholesalers are expected.

“For NAPSLO members and the market in general, it is an extremely challenging environment right now, particularly in property and casualty,” said Scott Culler, regional president at Markel.

“The biggest question on people’s minds is whether the amount of capacity currently available in the market is sustainable.

“Everybody is scrambling just to maintain market share and to stay one step ahead of the competition. So we are constantly having to come up with new and innovative ways to write business in order to remain viable.”

Increased Competition

The recent clamor for market share has seen several big players enter the space, most notably Berkshire Hathaway Specialty Insurance (BHSI), and Tokio Marine Holdings, following its acquisition of HCC Insurance Holdings for $7.5 billion.

Other companies such as XL and Catlin have also merged for greater scale and efficiency, and ultimately to increase market share.

BHSI’s Executive Vice President David Bresnahan said that the trend of consolidation would continue as long as there was excess capital available.

“We see evidence that customers are trying to get in front of those trends, and they are beginning to award larger participations to those carriers with a long-term focus and strong balance sheets who can control their own destiny,” he said.

An adverse effect of increased competition, added Culler, has been to squeeze prices further. For rates in a line such as property, he said, “it’s 10 percent off just to start the conversation.”

“Last year, I thought we were at a point where the prices couldn’t go much lower, but every deal is under pressure now — there’s no such thing as a normal renewal.”

09012015_05_NAPSLO_Witmer

Henry Witmer, assistant vice president, A.M. Best

Henry Witmer, assistant vice president at A.M. Best, said that competition from the primary market for risks typically covered by E&S has also accentuated market cycles. As a result, insurers need to be prepared to scale up or down their operations and to adjust their prices accordingly.

“As products offered by the E&S insurers gain recognition and are imitated by others, the true innovators within the market need to study, evaluate and develop replacement products in order to stay on the forefront of the market,” he said.

Despite these challenges, Culler said, insurers are increasingly finding ways to differentiate themselves in a competitive market, while brokers are developing specialist niches.

“As the economy starts to recover, more entrepreneurs are entering the market and new cutting-edge ideas and products are being developed all the time, as well as opportunities being created in lines that the traditional market doesn’t want to write,” he said.

James Drinkwater, president of AmWINS brokerage and one of NAPSLO’s wholesale broker directors, is also bullish about the prospects for companies willing to take on such risks.

“As products offered by the E&S insurers gain recognition and are imitated by others, the true innovators within the market need to study, evaluate and develop replacement products in order to stay on the forefront of the market.” — Henry Witmer, assistant vice president, A.M. Best

“Prices are, on average, declining steadily, due to the amount of capital coming into the market and at the same time the market has become very competitive,” he said.

“However, there are still some hard pockets if you are willing to look, such as the New York City construction and transportation sectors.”

Investment in Technology

Going forward, Drinkwater said, companies need to focus more on improving their technology, and the training and development of their staff.

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“Everybody will naturally be focused on the rate environment, but I think there are more important factors at play — for example, keeping an eye on what’s happening with regulation and improving the delivery of our product through greater investment in technology and personnel.”

The greater use of technology and analytics has enabled companies to price more accurately, identify new lines of business and, ultimately, to deliver better cost efficiencies to the customer.

It has also spawned a host of new industries such as unmanned aerial vehicles or drones.

“Everything is revolving around technology right now,” said Wyeth Coburn, associate broker at CRC Insurance Services.

“A lot of companies are sitting and waiting to see what happens, particularly with the drone industry, but as soon as the new regulations come in I would expect there to be a big take-up from carriers.”

Culler added that cyber liability has now overtaken energy as the No. 1 risk for the E&S industry following the rise in cyber attacks.

“I think we are just scratching the surface with cyber, trying to understand the exposures companies face because they change almost on a daily basis,” he said.

Drinkwater added: “The cyber marketplace is one that is evolving quickly and with the recent spate of high profile breaches, insureds are steadily realizing that this is an exposure that they must protect themselves against.”

Value Proposition

Amid all these new developments, Bryan Salvatore, president of Zurich North America Commercial’s specialty products business unit, warned that it is important for companies not to lose sight of their core value of customer service.

“I prefer to focus on how we can differentiate ourselves in terms of the value proposition that we offer,” he said.

“In that respect, the whole market needs to think about what it can bring to the table.”

That involves a heavier investment in technology to help both the company and the customer better understand their pricing and exposures, he said.

“At the end of the day, we have to remind ourselves that we’re providing an important end solution to the customer for complex and hard to place risks rather than thinking of ourselves simply as a commodity,” he said.

There are also a host of key regulatory hurdles that the market has to overcome in the short- and long-term if it is to maintain its recent growth.

“I think we are just scratching the surface with cyber, trying to understand the exposures companies face because they change almost on a daily basis.” — Scott Culler, regional president, Markel

Brady Kelley, executive director at NAPSLO, said that the main piece of legislation currently impacting the industry is the Terrorism Risk Insurance Program Reauthorization Act 2015 (TRIA), enacted at the start of this year.

TRIA, which was first enacted in 2002 to provide a federal backstop for terrorism claims, was reauthorized at the start of this year and remains in effect until 2020 to cover new policies that run beyond 2014.

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Kelley said that the most important part of the bill is the enactment of the National Association of Registered Agents and Brokers Reform Act 2015 (NARAB II), providing a one-stop licensing system for agents and brokers operating in multiple states.

“That will be a tremendous opportunity for us because it will put in place a national set of standards and a new national electronic system for the processing of insurance licenses, meaning that everything is much more consistent and efficient going forward,” said Kelley.

Fight for Talent

Kelley added that one of the biggest challenges remaining is bringing new talent 09012015_05_NAPSLO_sidebarinto the industry; with many CEOs and business owners selling up or not having a succession plan.

“Many of the veterans in our business are starting to retire now and need to put in place a succession plan for the next generation,” he said.

“That means equipping themselves with the best standards and professional talent available and to prepare them so that they are ready to take on those top leadership roles.”

Despite all the challenges it faces, the industry is well placed to capitalize on the new opportunities and risks, such as cyber liability, that the traditional market doesn’t typically extend to.

Markel’s Culler concluded: “I’m bullish about the E&S market — it’s true, there are a lot of new competitors out there, but there’s also a lot of room for growth.”

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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]