This Market Has Wheels: Surplus Lines Premium Growth Should Roll on Well Through 2021

Growth in the surplus market will continue as companies facing new exposures look for coverage flexibility and rate relief.
By: | September 24, 2020

Expect the surplus lines market to grow even more in 2020 after impressive growth the past two years.

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That was the consensus of a panel of experts at a virtual roundtable discussion hosted on Sept. 11 by the Wholesale & Specialty Insurance Association.

As markets harden, admitted insurers are passing on riskier businesses — and those businesses are increasingly coming to surplus markets and those that can write more favorable rates and coverage terms.

A new AM Best report found that the surplus lines market grew 11.2% in 2019, the exact same growth rate as 2018. The report also found that rate increases for most commercial lines rose from the 2-3% range in early 2019 to 10-11% from the second quarter of 2019 through the end of the year.

“We are the relief valve for the insurance business. As carriers on the admitted side start to pull back, we tend to grow that much more,” said Joel Cavaness, president of Risk Placement Services, during the panel discussion.

Growth from 2019 and anticipated growth for 2020 will be starkly different, said Danielle Wade, president and CEO of Jackson Sumner Associates.

In 2019, a thriving economy led to new ventures and new exposures that came with them. Growth in 2020, she predicts, will come from businesses pivoting to accommodate COVID-19 restrictions — and adding different exposures to their risk portfolios in the process.

An easy example is a restaurant that pivoted to delivery and curbside cocktails.

“Those different exposures are going to kick them out of a standard lines box,” said Wade. “That’s what’s going to spur the growth that we’re going to see — not necessarily from the clients we already had but from new people moving into our segment of the industry.”

The panelists also said the surplus lines market is hardening. Cavaness estimated that the market had been soft for nearly 15 years but hardened due to a combination of litigation funding, inflation and property insurance being hammered by natural catastrophes.

“Everything came together in an unfortunate way, and there needed to be some change in terms and conditions,” said Cavaness. “Carriers are no longer willing or interested in putting out large limit capacities, whether that’s a casualty placement or property placement.”

Richard Schmitzer, president and CEO of James River Insurance Co., added another reason for rate increases: low interest rates and an uncertain investment market. If carriers can’t be hopeful for investment dollars, they’re more likely to raise premiums.

“Making an underwriting profit is so key to the success of any carrier … it’s put a lot more pressure on the underwriting income side,” said Schmitzer.

COVID Complexities

COVID-19 has changed day-to-day operations in the surplus insurance industry. With many working from home, surplus lines carriers are juggling an influx of submissions, training new underwriters and adjusting to a virtual work environment.

Joel Cavaness, president, Risk Placement Services

“The COVID situation makes it harder to hire people and onboard people,” said Schmitzer. “We’re trying to do this virtually with varying degrees of success.”

Wade, however, said offering work-from-home options enables her to recruit more talented job candidates who may not even live in her region.

“Flexibility allows us to go out and get talent wherever they are. That’s one of the biggest positives,” she said. “It’s not necessary that somebody sits in a physical location with somebody else. It’s necessary that they get their job done.”

Wade also said more consumers are requesting insurance to stay ahead of potential perils.

“We’re starting to get more requests for cyber and D&O,” she said. “We’ve written these insureds for years, and now all of a sudden, they are asking for these coverages.”

Responding to Catastrophes

From the Midwest derecho to Hurricane Laura to the oil spill in Mauritius, insurers are being battered by a steady stream of catastrophes. That could mean they get more conservative with future risks, leading business to flow to the surplus lines market.

“These are hundreds of millions of dollars [in impact] that just keep piling on and hitting the industry in the face so to speak …” said Schmitzer. “There has been so much activity in the first half of the year that they’ve begun to compound themselves — and we still have 70% of the hurricane season left to go.”

An added challenge is a shortage of building supplies.

People staying home during the pandemic are renovating. Others or moving to new homes and taking on rehab projects. It’s led to serious demand on building supplies and labor, hindering the ability to rebuild after natural catastrophes.

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In fact, Cavaness said he saw a report that lumber prices have increased 30% recently.

“It’s hard to rebuild a house without lumber,” he said. He also noted that “there will be a labor shortage around the ability for many of these homes to be rebuilt. In the United States, we already have a shortage of craftsmen to build things.”

Wade said it’s important for surplus lines brokers to be creative and figure out solutions for businesses that have few other options. That takes being educated about trends, knowing which carriers to approach, and operating with speed and agility.

“By the time they get to us,” she said, “they’ve already been turned down and told ‘no.’ ” &

Jared Shelly is a journalist based in Philadelphia. He can be reached at [email protected]

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