It’s a great time to work in surplus lines, say specialists working in today’s busier than ever market.
The excess and surplus lines (E&S) sector is experiencing record growth — again.
In the first six months of 2022, premiums topped $31 billion, and premium bearing transactions pushed 2.8 million. According to the 2022 Midyear Report of the U.S. Surplus Lines Service and Stamping Offices released in July, premiums in the E&S sector rose 32.4% and transactions were up 9.4% over numbers reported through the same period in 2021.
Year-to-year premium grew at the highest percentage rate since the stamping offices began reporting collective data in 2009. Most experts predict continued growth for the market for the rest of 2022 and well into 2023.
There is an abundance of accounts to work on in the surplus lines market today, says Jeffrey McNatt, co-president of AmWins’ brokerage division. “The E&S space has had a tremendous year. Just when you think we may have tapped out, you turn around and we continue to grow. The opportunities are crazy.”
It has been the longest hard-market cycle in McNatt’s career. “It’s pushing four years now in so many silos of our business from professional to casualty to property and there’s harder markets inside all of those.” Despite some softening of prices in the casualty space, many sectors continue to see hard market pricing.
Aside from the longer duration of this hard-market cycle, something else is different — causation, according to Sam Baig, co-president of AmWin’s Brokerage division.
“It’s an unusual market cycle because all lines of business are affected and there’s no single event that drove the change,” he said. Past hard-market cycles were driven by significant single-loss events, such as 9/11 and Hurricane Katrina. This hard market seems to be lingering thanks to a combination of factors that continue to put pressure on underwriting results, he said. They include social inflation and funded litigation efforts, overall higher costs of claims, economic inflationary trends, and lower investment earning potential for insurance companies.
As courts have begun to clear their dockets from delays from pandemic closures, insurers are seeing claims that were held in reserves for $100,000 now jump to $1 million or more, he said, adding, “A lot of accounts that we have in casualty, the results are much worse than we probably thought they were.”
For casualty business in particular, Baig added, the longer it takes to settle a claim, “the more you hear about these [larger] verdicts.”
Timothy Turner, director and president of Ryan Specialty, and chairman and CEO of RT Specialty, says that while rate is always important, it’s secondary to how much business is coming into the surplus lines channel today. “It’s more about the movement of business and the flow into the channel than it is rate,” he said.
He agrees that this hard-market cycle has some distinct differences from the past three hard markets. “They were very different in terms of the volume that came into the channel and the amount of capacity we actually had to solve problems and meet those challenges,” he said. “The market is just a lot bigger today than it was in ’02 and certainly significantly bigger than it was in ’85 or ’86.”
Drop in the Bucket
The rising rate environment is often a time when new capacity enters the market, but those new additions aren’t always permanent players, says Michael Garrison, The Hartford’s head of Navigators Wholesale.
Historically, hard-market cycles see the more new entrants launch into the E&S space than at other times, but their expectations sometimes outweigh execution, he told Insurance Journal. “Successful startups must navigate all market cycles, and sustainability comes with the ability to effectively underwrite in the most competitive markets,” Garrison said.
The challenge with some new players is not their capital. Rather, the challenge is their ability to provide support to the sectors’ wholesale partners, Baig said. “They’re popping up with capital, but they have enormous staffing issues and so you end up with a facility with a lot of capacity, but that’s got two underwriters to service the whole country,” he said. That’s problematic, he says.
Even so, the new capacity entering E&S has helped in areas such as the excess casualty and excess D&O space, he added. But overall that help is limited. “It’s an interesting time, because while there is more capacity coming into the market, it’s a drop in the bucket.”
One legacy carrier that has expanded into the E&S world is Westfield, a 174-year-old super regional property/casualty insurer who joined the specialty market just a year ago.
Jack Kuhn, president, Westfield Specialty, said the company is entering surplus lines slowly and focusing on just five business units: E&S property; E&S excess casualty; financial institutions; professional liability (including cyber); as well as commercial management liability.
Kuhn says while Westfield is new to E&S, its long history in the P/C market keeps the carrier focused on what’s important to grow and be successful in such busy times. “I think some people try to wrap us into being a startup, but we’re not really a startup,” Kuhn said. “We’re just a new division of an existing company that’s been around since 1848.”
Kuhn understands profitability is key to being successful, and that key depends greatly on relationships. “Our value proposition is pretty simple: it’s focused on bringing in top level talent,” he said. That means bringing in talent and working with wholesale partners who are experts in this space. “The lines that we have entered into, we’ve been bringing in people that have industry recognition and deep relationships with a number of brokers.” So far that strategy is working, Kuhn says. “When I look at our business units, they’re all performing very well.” Kuhn noted that Westfield Specialty will likely end its first 12 months in the E&S sector with more than $250 million in premium.
There’s no better time to be in E&S right now but the slow road is the right one to take, agreed Danny Kaufman, president of Burns & Wilcox Kaufman. Most new E&S entrants aren’t diving into the property market, he says, and there’s a good reason for that.
“We’re still not even seeing markets willing to write in certain geographies for certain lines of business, which tells us we’re still in the thick of this hard market,” Kaufman told Insurance Journal. He predicts the cycle lasting for at least another 18 months or so given today’s market conditions.
“The industry has been in one of the longest ‘firming’ markets in history,” says Navigator’s Garrison. “Buyers and producers are experiencing fatigue, and we do see a deceleration to the size of rate increases.” Even so there are rising costs that are likely to remain permanently, he added.
“As a large construction industry writer, however, we remain concerned with the increasing costs of materials and labor — the latter of which is more likely to be permanent — and the effect on loss scenarios which often take years to manifest and ultimately resolve,” he said. “The fundamental nature of the jury pool is also changing over time in terms of their general acceptance of large awards and willingness to punish companies for their mistakes.”
The Future: Tech and People
Success in today’s busy surplus lines market depends on speed and response time. “Speed is such a big factor in our business, if everything else is equal,” said Ryan Specialty’s Turner. “Retailers need help quickly and efficiently, and that help has to be reliable time after time.”
It’s a repeat sales business and a relationship business that’s built on mistake-free execution and high level of performance, according to Turner. At the end of the day, it’s a talent business. “Training, developing, mentoring people at every stage of the business, every stage of their careers is a commitment that you make and if you want to be the best wholesaler and underwriting manager, you have to have a serious commitment to recruiting, training and developing talent,” he said.
While talent and relationships are keys to success so too is technology, according to Kaufman. “I think the top challenge for anyone in insurance — carrier, wholesaler, retailer — is technology,” he said. “I’ve always thought that since I entered our space a long time ago that insurance was so far behind when it came technology, especially the E&S space.”
Kaufman, who took over as president of B&W in late 2021, has been leading the way for the firm’s technology overhaul. “Since April 2020, while in the midst of the pandemic, when everyone else was cutting staff, cutting costs … we actually signed our first agreement with Salesforce to undergo $100 million overhaul of our technology,” Kaufman said. “Our first rollout finally of this new system is next month.”
Their goal is simple: To have the best technology in the industry. “Our size and independence mean that we’re nimble enough to make this kind of investment,” he said.
Burns & Wilcox has remained a privately owned and family run business since the organization was founded in 1969 by Herbert W. Kaufman, Danny Kaufman’s grandfather. “If we were larger and publicly traded or private equity backed, we probably wouldn’t be able to make this kind of investment and roll it out as quickly,” he said. “It’s game changing for us; we’re consolidating over 15 systems to one.”
The future story of the surplus lines sector will be one of great efficiency and service for its partners, according to these specialists.
“The surplus lines market is made up of business that has struggled to find a home elsewhere,” said Garrison. “Being successful in the space is contingent on two areas — one, having an appetite to underwrite business in the segment, and two, having the experience and expertise to provide the best probability of a profitable underwriting outcome.”