‘Unprecedented Consolidation’ in Specialty Market Is Imminent According to Experts at WSIA Summit

Catastrophe losses dented some wholesale and specialty businesses in 2018, but the focus of WSIA’s Underwriting Summit was on how this steadily growing market can continue to thrive.
By: | February 25, 2019

An estimated 1,500 insurers and brokers attended the Wholesale and Specialty Insurance Association’s (WSIA) 2019 Underwriting Summit, which took place from February 24 through 27 at the Gaylord National Resort and Convention Center in National Harbor, Md.

With the exception of the keynote speech delivered by President George W. Bush, the summit program was almost entirely focused on networking; the onus is firmly on giving wholesale and specialty practitioners the chance to simply get together and talk.

“For the wholesale and specialty segment, our networking focus is paramount. Relationships are key to our members’ success,” WSIA executive director Brady Kelley said.

Joel Cavaness, president, Risk Placement Services; vice president , WSIA

There is plenty to celebrate in the sector, which has enjoyed a healthy period on the back of U.S. economic growth. The excess and surplus (E&S) segment grew 5.8 percent to post a record $44.9B in premiums in 2017, and Kelley expects 2018 to also set a new high. However, this growing segment of the insurance market is not without its challenges. Last year catastrophe losses hit sections of the market hard — particularly those exposed to California wildfires.

Across the pond, the Lloyd’s market has instigated a clean-out of unprofitable syndicates and MGAs, and while this presents some opportunities for U.S. insurers to fill the void, closures are likely stateside too, as capital providers get more selective with the risks they are willing to back.

WSIA vice president Joel Cavaness, president of Risk Placement Services, said he’s never seen such intense M&A activity in the wholesale and specialty space as in the last six months, predicting a year of “unprecedented consolidation” in 2019 among both carriers and distributors.

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Doug Turk, chief marketing officer of JLT Group, noted that aerospace had the largest number of market withdrawals and job losses in 2018 — particularly general aviation — and he predicts that the aerospace products segment “will be the next line to face scrutiny and correction in 2019.”

Extreme weather also put pressure on event cancellation/weather underwriters, he added, noting that recent losses are “changing the game” in the way carriers factor these exposures into their modelling.

“The opportunity for the specialty market is to follow the pain of the traditional market and provide options.” — Joel Cavaness, president, Risk Placement Services

According to Daniel Vetter, head of E&S at Swiss Re Corporate Solutions, rate and capacity dynamics in the U.S. property and casualty space are “in flux” across several risk classes. And while Swiss Re continues to see E&S as a key growth area, the reinsurer is exercising caution. “Robust portfolio steering, including a clear articulation of our underwriting appetite, will be a key focus area for us in 2019,” he said.

“This year, we want to further align and strengthen our value proposition for this distribution channel, while at the same time, address areas of the portfolio that are currently not performing according to our expectations, such as construction or habitational real estate in casualty,” Vetter explained.

Stepping Up to the Plate

But in a fast-evolving insurance landscape, there are usually more opportunities than challenges for the wholesale and specialty industry.

“The opportunity for the specialty market is to follow the pain of the traditional market and provide options,” said Cavaness, noting “a number of markets that sit on the fringes between standard and surplus lines business are looking for new homes.”

Daniel Vetter, head of E&S, Swiss Re Corporate Solutions

“Pricing pressure is very geography- and product-specific,” said Kelley, pointing to hardening in New York construction as a prime example.

Meanwhile, transportation carriers have reassessed their appetite in the wake of poor loss experience; property accounts, which have suffered attritional losses, are struggling to find willing capacity; certain segments of health care, such as assisted living, are hardening; and rising compensation verdicts driven by movements such as #Me Too are putting D&O underwriters under pressure, Cavaness explained.

“Part of the value of this market is our ability to cover difficult risks,” he said, arguing specialty insurers have both the flexibility to keep up with evolving forms and pricing in lines such as cyber and the creativity to develop initial coverage forms for emerging and intangible risks like reputation.

Turk believes the specialty market also has an opportunity to step in and provide solutions such as parametric cover to support distressed insurance lines, as well as analysis to help combat the converging threats of cyber, supply chain and business interruption.

And even in the aerospace sector, specialty insurers can lead the way in covering risks associated with drones and unmanned aerial vehicles, low orbit satellites and even commercial space flights, Turk added.

Value Proposition: Perception vs. Reality

In recent years, WSIA members have diversified how they distribute products, with fewer firms specializing exclusively in broking or delegated authority.

“Many now have mixed brokerage operations, MGA operations, program administration and highly specialized units covering various categories of specialty products,” Kelley explained.

But despite continued growth in the wholesale and specialty market, a key objective at the Summit was to further promote the value proposition of the wholesale system, which some perceive as expensive.

WSIA commissioned an independent study into distribution costs in 2016, which found that wholesale distribution — contrary to common perception — actually saves insurers, on average, 1 percent compared to the retail market. While wholesalers’ commission is typically higher than retailers, this is offset by significantly better non-commission cost ratios in the wholesale market, the study found.

“Wholesalers bring expertise, flexibility and an innovative approach, and now we know they bring cost-effectiveness too, so we need to promote that message,” said Kelley.

One way wholesalers and specialty insurers can add value is by offering data, benchmarking and modelling services, said Cavaness.

“Robust portfolio steering, including a clear articulation of our underwriting appetite, will be a key focus area for us in 2019.” — Daniel Vetter, head of E&S at Swiss Re Corporate Solutions

“We have enormous amounts of data we should share with customers to help them make better buying decisions, and with markets to encourage more responsive coverage decisions,” he said.

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According to Kelley, the ability to leverage advancing technology has risen in prominence on the agenda for wholesalers and specialty insurers, and WSIA is hosting a dedicated conference on automation in March.

While insurtech partnerships and innovation have so far centered primarily around automating low-value, high-frequency placement and claims, wholesalers and specialty insurers are aware that over time, even buyers of more complex coverages will increasingly expect touch-of-a-button service where possible.

Investing in new technology is a big undertaking for smaller insurers, as is luring specialist data scientists away from the appealing remuneration and working environment of the tech space.

Nevertheless, warned Cavaness: “Those who don’t invest in data will be left behind.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

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