You Can Go Home Again

Surplus lines markets rally as standard carriers lose high-risk appetite.
By: | April 7, 2014 • 7 min read

It’s hardly a hard-market environment, and yet, U.S. excess and surplus lines carriers are expecting to compound last year’s healthy premium growth with continued expansion in 2014.

With the exception of cyber insurance — which is still competitively priced — commercial insurance rates have been firming across a number of property/casualty segments, E&S specialists said, and many tough classes are returning to the space.


Placements gracing E&S carriers’ books of business of late include construction and long-haul trucking liability programs, property-catastrophe coverage in areas impacted by Superstorm Sandy and the tornadoes in Oklahoma last May, as well cyber liability insurance, where penetration rates are rising following the massive Target breach.

“My take on this personally is that companies now have to rely on the underwriting, given they can’t make it on the investment income.”

— Richard Bouhan, consultant to the National Association of Professional Surplus Line Offices

Part of the impetus, E&S experts said, may be a prolonged low-interest-rate environment, which has injected more discipline into traditional insurance pricing trends.

“My take on this personally is that companies now have to rely on the underwriting, given they can’t make it on the investment income,” said Richard Bouhan, consultant to the National Association of Professional Surplus Line Offices (NAPLSO), in Kansas City, Mo.

“That’s true of the surplus lines writers as well as the standard companies,” he said, but it means that more high-risk business is gradually migrating from traditional markets into the surplus lines space, said Bouhan, who spent close to 24 years as NAPLSO’s executive director, from 1987 through 2011.

Tom McLaughlin, casualty division leader with Lexington Insurance in Boston, agreed that increased underwriting discipline has sent risks returning to E&S markets of late, leading to “low to high single-digit rate increases” across much of Lexington ’s casualty book over the past year or so.

Also driving the trend, he said, is the fact that the economy has been moving in a much more positive direction over this period of time, leading to gains across Lexington’s broad spectrum of casualty risks, including transportation and construction.

Widespread Growth

A January 2014 report from The Surplus Lines Stamping Office of Texas said that the E&S business made some very solid gains last year, in fact. The report pointed to double-digit growth for E&S carriers in several states through the end of 2013. It found that 14 states with stamping offices saw growth in surplus lines premium during 2013, compared to 2012.

Total surplus lines premium reported to the stamping offices was nearly $22.5 billion, representing more than 3.1 million transactions and demonstrating premium growth of 15.5 percent last year.

The report stated that New York’s 2012 premium number was impacted by premiums the state processed for other prior policy years, which skewed the 2012 to 2013 comparison, but even with New York excluded, 13 states saw a 12.2 percent increase in 2013 premium, compared to 2012.


The data included E&S premium volume for California, Florida and Texas — each of which produced more than $4 billion in surplus lines premium volume in 2013 — as well as smaller premium-generating territories like Illinois, Arizona, Idaho, Nevada, Minnesota, Oregon, Pennsylvania, Utah and Washington.

Historical Comparisons

This is small when compared to premium increases in the U.S. surplus lines industry a decade ago. A.M. Best reported an 81.7 percent increase in domestic U.S. surplus lines carriers’ direct written premiums between 2001 and 2002, for instance, followed by a 31.1 percent increase between 2002 and 2003.

Still, the 2013 figures pointed to some positive trends for specialty carriers.

“We’ve been riding some rate lift for the past 24 to 26 months,” said NAPSLO President Kevin Westrope, president of RT Specialty Kansas City, managing director for RT Specialty, and managing director of parent company, RSG, of Chicago.

For instance, RT’s third-party casualty business including auto liability and workers’ compensation has grown roughly 20 percent per year for each of the past three years, some of it under the banner of Kansas City wholesaler Westrope, which merged with RT Specialty in December 2013.

“We’re writing in the $40 million range on our auto business [on an annual basis], including liability and physical damage,” Westrope said, noting that “long haul trucking is always a difficult risk from a liability standpoint.”

Westrope has also seen growth in the multi-family apartment building space, where it writes property and liability coverage for building owners who have seen an “explosion” of new interest in apartment living following the mortgage crisis of 2008. Westrope is also writing a good deal of builders’ risk programs since the construction industry has rebounded over the last couple of years.

David Grafstein, a casualty specialist with wholesaler Partners Specialty Group in Stamford, Conn., agreed.

“As respects E&S opportunities, again I think it will be similar to 2013 with the market being hard for New York construction, firming for pockets of habitational real estate [including] apartments in urban areas and higher-hazard manufacturing risks.”

Grafstein also expects to see a fair amount of private equity-driven merger and acquisition activity as well as consolidation, particularly in the health care industry.

This tends to create E&S opportunities due to the specialty coverages often sought by acquiring firms — including potential long-tail malpractice exposures and discontinued products coverage.

Other risks that have moved to the E&S space over the past 12 to 18 months include:

• Property-Catastrophe Exposures.

“After Sandy, we saw a lot of business moving to the surplus lines market,” said Westrope.

But the trend may be short lived.

During a webinar in late January, Dean Klisura, Marsh’s U.S. risk practices and specialties leader, said that Jan. 1, 2014 reinsurance treaty renewals saw average rates “fall significantly across nearly all regions and business segments” due to low loss experience and the influx of billions of dollars in new capital.

Westrope agreed that “catastrophe-driven property coverage is becoming more competitive again, with primary and reinsurance rates coming down due to the overabundance of capital in that area.”

“I think we’ll see property rates softening” in standard markets throughout 2014, he said, “sans major events like the ground shaking on the West Coast.”

• Cyber Liability Insurance.

Cyber insurance pricing remains competitive as new players continue to enter the marketplace.

Markel’s minimum premium is $1,500 for $1 million in insurance limits for its data breach claims-made policy, for instance.

Still, cyber remains the most promising growth line that exists today, according to Markel’s Jake Kouns, Richmond, Va.-based director of cyber security and technology risks underwriting.

More than any other form of insurance, “cyber seems to be filling the need for an up-and-coming growth product,” said Kouns, noting that Markel was up 65 percent in premium for the line in 2013, compounding 75 percent growth in gross written premiums for cyber a year earlier.


Several dozen non-admitted markets continue to dominate this space today, Kouns told Risk & Insurance®.

E&S markets providing standalone coverage include Markel, RSUI Group, Allied World Assurance Co. (AWAC), AIG and its surplus lines company Lexington Insurance, as well as Lloyd’s syndicates including Hiscox, Beazley and CFC Underwriting.

Many carriers’ “bread and butter” business is on the decline right now, as many areas that were once profitable are now more commoditized, Kouns said.

Coverage Questions Remain

With cyber insurance, however, “everywhere you look there’s some new issue. That’s an emerging risk,” said Kouns.

For example, what exactly is covered by a data breach program? This is one area still fraught with uncertainty, he said. “Breach mitigation breaks down further than most people think,” he said, noting that notification and credit monitoring is only the tip of the iceberg.

Buyers are also in need of forensics, he said. Not all cyber policies will cover the costs of “bringing in the experts to see what really happened,” after a breach has occurred. Markel is among those providing full limits for data-breach forensics, said Kouns, while other carriers may impose a policy sublimit for that.

Besides that, “in terms of [cyber] market penetration, there’s still a long way to go,” he said.

Also, the Target debacle continues to draw attention and awe.

If Target ultimately “blows through $100 million in insurance and we have a limit loss” with several insurers who participated on that tower impacted, “there’s going to be a reaction,” said Kouns.

“Some underwriters could decide that prices need to increase, [that writing] a class of business such as retailers is now prohibited, or even that now’s time to exit the business,” he said.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached 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.


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.


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?


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.


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.


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]