E&S Market Growth: More Choices for Challenging Risks

By: Lucy Pilko | November 18, 2024

Lucy Pilko leads AXA XL’s insurance business throughout the US, Canada, and Bermuda. She joined AXA XL in October 2023 from Boston Consulting Group (BCG). She was a Managing Director & Senior Partner in the New York office and led BCG’s North American Insurance Practice. Lucy brings over 20 years of consulting experience with particular focus on growth strategy, operating model and transformation for Insurance carriers and brokerage. She has worked closely with leaders from nearly all of the region’s major carriers and broking houses, helping them solve problems and uncover opportunities. Prior to BCG, Lucy was employed at Marsh McLennan and Bain Capital. Lucy has a BS in Industrial Engineering from Stanford University, and an MBA with High Distinction from the Harvard Business School, where she was recognized as a Baker Scholar.

Having been in double-digit growth mode in recent years, the Excess and Surplus (E&S) insurance market is getting its fair share of attention, and for good reason. More businesses are turning to the surplus market for customized coverage to meet unique insurance needs or to address more complex, hard-to-place business risks.

The E&S market is renowned for its flexibility in responding to economic cycles, market changes, and industry shifts. When the standard market tightens or becomes overly cautious, the E&S market typically expands to meet demand. Another factor contributing to the growth of the E&S insurance market is the expansion of industries and businesses that require specialized coverage.

As traditional insurers try to limit their exposure to catastrophic events and other high-risk exposures, the E&S market provides essential coverage options. Consider states like Florida and California which have seen insurers exit the local homeowner’s insurance markets because of Nat Cat losses. Commercial insurers also have to look closely at risks they assume in natural catastrophe-prone areas. When standard lines insurers pull out of states or risk, it often creates a gap in the insurance market. This is where the E&S market plays a crucial role. It’s a role however that participants have to be well prepared to fill.

Following growth opportunities

The enthusiasm for the market’s continued growth was evident at the most recent WSIA Marketplace conference in San Diego, where industry leaders, including wholesale brokers and surplus lines insurers, came together to discuss the evolving needs of clients facing non-traditional risks. This year’s conference had record-breaking attendance. While there, I had the opportunity to see firsthand the continued fervor for a growing E&S market.

Some speculate that more stabilized rates will prompt some businesses back to standard markets, but it’s unlikely to derail E&S’ growth trajectory or the important role it plays in today’s insurance market.

According to industry estimates, some 82 carriers are either new or are re-entering the E&S market since 2022. These market entrants wrote close to $9 billion or 10% of the $86 billion market in 2023 says S&P Global Market Intelligence’s 2024 US Excess & Surplus Insurance Market Report. New MGAs, who also cater to specialized risks, are also emerging. According to A.M. Best, 198 new MGA companies started writing business in 2022 or later. They now underwrite some 14 percent of MGA market premiums in 2023.

Finding the right options

New E&S entrants have brought more capacity, competition, and innovation to the market. That’s good news for businesses who turning to surplus lines for coverage. There are more options for coverage but choosing the right market requires some careful consideration.

Here are some factors to consider:

Financial strength: Financial strength of an insurance carrier assures they are likely to fulfill its obligations, even in challenging economic or market conditions. In the surplus lines market, where coverage for emerging, non-standard, or hard-to-place risks is provided, the financial strength of the insurer is a key factor in ensuring that claims can be met and that the insurer can maintain its stability and performance over time.
Longevity: Carries enter and exit markets all the time, for many reasons. But businesses want a partner that will be there for the long haul, one that’s committed to the market. Longevity is also testament that an insurer has developed the expertise and specialized knowledge in underwriting non-standard risks. Over time, they can build robust underwriting practices and gain insights into niche markets, enabling them to effectively assess and price unconventional risks.
Underwriting expertise and discipline: A big driver of surplus lines’ growth is the increasing complexity and uniqueness of risks facing businesses today. The market’s deep expertise in covering emerging, non-standard, or hard-to-place risks allows businesses to find solutions where traditional markets fall short. Expertise also requires discipline. In a very competitive market, it can be easy to let underwriting discipline slide. Proper underwriting discipline ensures accurate assessment and pricing of unconventional risks. It also helps insurers maintain profitability, financial stability, and sustain their long-term commitment to the market.
Claims-handling expertise: Especially where hard-to-place risks are concerned, expert claims management can set an insurer apart. When a claim arises, it can be complex and require specialized expertise to assess and settle. Where risks are often more diverse and less predictable, a strong claims handling process helps insurers manage their own risk exposure and maintain financial stability – again so they are in the market for the long haul.
Responsiveness: Businesses turn to the E&S market to replace expiring coverage after failing to find a solution elsewhere. Time is of the essence. A strong insurer should offer timely support and answers to wholesale brokers and clients, understanding the urgency often required, where complex risks often demand swift and efficient responses.
Product diversity: The diverse risks present in the wholesale insurance market demand a wide array of products, including property, casualty, professional liability, and specialty lines. Insurers with expertise and capacity across these areas are highly valuable to the wholesale market.
Solutions and services beyond the policy: The cost of risk is rising. Growing frequency and severity of natural disasters, rising litigation and regulatory expenses, among other issues, contribute to higher insurance premiums and risk management costs for businesses. E&S insurers that offer access to risk management products and services help clients manage the total cost of risk as well as insurance costs are especially valuable to keeping complex risks in check.

The ability of an insurer to offer both admitted and non-admitted coverage can also be a significant advantage, as it provides greater flexibility and a wider range of options to clients. This dual capacity allows insurers to meet a broader spectrum of insurance needs.

A valuable option, not a last resort

In the past, the surplus lines market may have been perceived as a last resort for hard-to-place risks. That is no longer the case. Today, the E&S market is considered a viable and appealing option for businesses seeking underwriting flexibility that standard markets may not offer, particularly for new and emerging risks.

Businesses exploring this market have a range of options and must choose the best E&S partner to meet their needs. It’s important for them to understand that they are not just buying insurance; they are implementing customized risk management strategies to navigate today’s complex risk environment. &

Vermont’s Future Is Golden

Challenging market conditions are driving insureds to captives. Vermont offers a reliable domicile.

Hard markets in commercial insurance lines have been a problem for years now. Many lines don’t show signs of softening, though some, like cyber, have ebbed over the past few years.

High claims volumes and costs have caused carriers to tighten terms and conditions, introduce new exclusions and increase premiums. A variety of different risks are included in this market tightening, and it’s affecting both public and private companies.

As Sandy Bigglestone, deputy commissioner for the State of Vermont’s captive insurance division, explained, schools, churches and other nonprofits are contending carriers are “excluding sexual abuse and molestation from coverage for a lot of these types of entities. These organizations understand the risk and the public needs to have confidence the organizations are addressing the risks, so they must have the coverage.”

Though many commercial lines are affected, property has perhaps been hit the hardest. Increased claims, inaccurate property valuations and other challenges have caused insurers to tighten their books in recent years. 2024’s spate of hurricanes will likely make matters worse.

“There continues to be challenges in the commercial market,” Bigglestone said. “Some companies are coming to us with risks that they say they’ve been self-insuring on their balance sheet, and why not transfer that to a captive to receive greater benefits?”

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.