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