E&S Market Outlook Shifts as Rate Momentum Slows and Headwinds Emerge: AM Best

AM Best has downgraded its outlook for the U.S. excess and surplus lines segment to stable from positive, signaling a recalibration of market conditions as emerging headwinds offset the segment’s historical momentum, according to the rating agency’s latest market analysis.

The E&S market continues to absorb an expanding portfolio of business lines as admitted carriers tighten their underwriting standards, according to AM Best. Commercial auto, directors’ and officers’ liability, cyber liability, and cannabis-related risks are increasingly finding their way to surplus lines carriers.

Additionally, homeowners’ coverage has accelerated into the E&S segment, driven by heightened volatility in weather-related catastrophes and elevated repair and rebuilding costs, the report noted.

This influx reflects a fundamental shift in the insurance market. As traditional carriers become more restrictive, the E&S market functions as a critical outlet for accounts seeking customized coverage, AM Best said.

Surplus lines carriers have built specialized expertise in underwriting moderate to high-hazard risks while maintaining underwriting profitability—a capability admitted carriers struggle to match under tighter market conditions.

“Although favorable market conditions for E&S writers persist, early rate softening in select classes such as commercial property, slowing premium growth and more-selective capacity deployment are dynamics that now warrant a stable outlook,” said Edin Imsirovic, director of AM Best.

Strong Underwriting Performance Amid Selective Capacity Deployment

E&S carriers are generating more favorable underwriting results and stronger top-line growth compared to the broader property and casualty industry, bolstered by investment income gains and enhanced capital positions, the report said. The segment’s lower financial impairment rates compared to admitted insurers underscore the prowess of risk selection and pricing discipline inherent to surplus lines operations.

However, market selectivity is intensifying, AM Best noted. While new entrants—including de novo start-ups and new affiliates of established carriers—continue to enter the E&S market, capacity providers are raising performance thresholds at renewals and narrowing terms and conditions.

The evolving role of managing general agents and fronting carriers has prompted collateral requirements and data reporting expectations to tighten, particularly at Lloyd’s and in the U.K., adding operational complexity to market participants.

Measured Tailwinds Persist Amid Lingering Uncertainties

Rate momentum is slowing in select classes, and loss cost uncertainties stemming from social inflation and catastrophe volatility inject caution into market forecasting, the report said.

Early rate softening in commercial property, for example, signals potential headwinds for sustained premium growth. Yet the integration of complex technologies across industries ensures continued demand for tailored surplus lines solutions, and the E&S market’s role as a “safety valve” for declining admitted carrier capacity remains intact, AM Best said.

“AM Best believes that given the overall dynamics of the insurance industry the tailwind conditions for U.S. E&S lines carriers will remain in place, albeit in a more measured form,” the report’s authors said.

Obtain the report here. &