Where Does the E&S Market Stand? Active for Sure, but Challenges Remain

Despite having an exceptional year, the excess and surplus market has had its fair share of hurdles to overcome.

By: Alex Wright | September 22, 2022

The excess and surplus (E&S) market has undergone stellar growth this year, with premiums and submissions both set to increase.

Premiums rose 32.4% to $31 billion in the first half of 2022, while year-on-year premiums increased at their highest rate since 2009, according to the U.S. Surplus Line Service and Stamping Offices.

Premium bearing transactions also hit a five-year high of almost 2.8 million for the first six months of the year, up 9.6% on the first half of 2021, Wholesale and Specialty Insurance Association records show.

The E&S market’s key strength is in providing affordable and innovative coverage to meet an insured’s specific needs, that often they can get or are harder to insure in the traditional insurance market. This has never been more prevalent than this over the last 12 months.

“The sky is the limit for the E&S market,” said Kyle Burnett, head of E&S property at Swiss Re. “There has always been a need for E&S broker and carriers, whether it was large or small, in supporting a submission or placement, but now more than ever the capacity and skill set is needed.”

But despite its undoubted success, the market has faced a host of challenges. Chief among them are the current inflationary environment, both economic and social; heightened competition from a huge influx of new entrants; and a shortage of talent.

Certain lines have also been hit with a spate of nuclear verdicts, particularly in sexual abuse and molestation, assault and battery, and wildfire cases, and losses, most notably in property catastrophe, where there have been capacity shortages in high-risk areas such as California, Florida, Louisiana and Texas. As a result, insurers have pushed for higher rates in these segments, tightened terms and conditions or exited the space altogether.

In California alone, the growing threat of wildfires and reduced admitted capacity has led to a significant increase in demand for E&S homeowners coverage. As a result, direct written premiums filings have almost tripled since 2018 to $235m, according to S&P Global Market Intelligence.

“While the surplus lines and specialty commercial markets have benefitted from a favorable pricing environment over the past few years, the reason for the push for pricing increases is that the performance on several lines of coverage has been trending unfavorably,” said David Blades, associate director at A.M. Best.

“These lines include catastrophe-exposed property, general liability for moderate-to-higher risk manufacturing and construction exposures along with tougher professional liability lines, and commercial automobile.

“This has been reflected in the underwriting performance of a number of surplus lines companies. The upward pressure on pricing appears to be decelerating with additional capacity entering the marketplace, so the individual carriers will have to balance where they feel they are presently in terms of rate adequacy on individual accounts with the desire to push forward for additional pricing increases, where they deem those increases are needed.”

Inflationary Challenges

Inflation has hit the E&S segment, like the traditional market, hard. It has resulted in rising claims costs, in part caused by the ongoing supply chain crisis, and volatile investment markets, as well as making it harder for underwriters to price the risk. Compounding this is the backlog of claims due to the closure of courts during the COVID-19 pandemic.

Kyle Burnett, head of E&S property, Swiss Re

Also, as a result of the increased competition from newly-capitalized and re-capitalized insurers, and managing general agents on the distribution side entering the market — reflected in the fact that 14 of the top 25 biggest players’ market share declined in 2021 according to S&P Global Market Intelligence — pricing increases have generally started to level off in the last couple of years. Notably, general and professional liability premiums have decelerated.

“Some carriers are still reluctant to put up full capacity or large chunks of layers, so there’s still a push to fill out these gaps in these programs for insureds,” said Dawn Brost, at Nationwide. “At the same time, the attractive rate environment has been broadened by the new capacity coming into the market.”

The need to attract and retain new talent continues to be a problem too, as more experienced insurance professionals have retired and the void hasn’t been filled. In greatest demand are underwriters to deal with the increasing volume of submissions.

“The greatest and most often heard challenge facing the E&S market remains finding and retaining specialist underwriters,” said Michael Garrison, The Hartford’s head of Navigators Wholesale. “We are all in the same race to find, hire and train underwriting resources across the breadth of property and casualty lines to support recent growth and prepare for the future.”

New Risks

Despite all these challenges, however, the E&S market has capitalized on the opportunities presented by the flight of insureds from the traditional space as primary layer rates have increased sharply.

In particular, it has tapped into the need for coverage for new risks such as cyber and cannabis, as well as more traditional ones like certain classes of public and private directors and officers, habitational real estate, New York City construction, transportation and healthcare.

“Freedom of rate and form allows E&S insurers to move faster to meet ever-changing conditions,” said Erich Bublitz, head of E&S at AmTrust Financial Services. “The market has come into its own over this inflationary period of uncertainty, where new business is being driven into the space as brokers, insureds and their risk managers have become more familiar with it.”

As well as increasing premiums, submissions have been on the rise too. And E&S insurers are well placed to take on that business.

“We are seeing an increase in submissions for specific classes of business, but renewals have remained steady with brokers focusing their efforts on new business opportunities that have become problematic from a pricing or terms and conditions standpoint,” said Laura Johnson, underwriting manager and E&S general liability team lead at AXA XL. “There is some uptick in risk managers looking at E&S.

“What was a standard retail play is shifting to E&S as an output due to the creativity of this segment. We expect to see this in the product area first as this is where E&S and risk management are closely aligned.”

Technology Solutions

Improved technology and data will enable insurers to take on more submissions and be more efficient in how they process them by improving underwriting decisions and expediting account handling. By automating the procedure to carry out more transactional tasks, it will free up underwriters to focus on the more complex and critical ones.

“The unique market we are in today has demonstrated the innovation there is in the wholesale and E&S marketplace,” said James Drinkwater, president of AmWINS.

One fact is for sure, however: the E&S market is more active than ever as the country emerges from the pandemic, with construction projects resuming, and hospitality, retail and travel reopens. Concurrently, insureds and their brokers are seeking more capacity to fill out their insurance programs.

In this vein, E&S will continue to play a key role moving forward. It will be vital in addressing a host of current and emerging risks, particularly as companies and their boards come under increasing pressure from their shareholders to conform with new environmental, social and governance requirements. &

Alex Wright is a UK-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

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