Tough Risks Get Tougher

Talk to us about the current state of the excess and surplus lines market.

The market is firming and the percentage of non-admitted business in our channel has increased significantly in the last six months. Over the last 10 years, non-admitted business nationally has been at about 10 % of the market, and it’s been pretty flat until really this year. We expect it to be up around 13% and headed to 14-15% by year-end. Many factors played into this but the most obvious one is the 17-year prolonged soft market which created a lot of unprofitable business for standard markets.

Are there any specific lines that are clearly more unprofitable than others or is it a mix?

A big one is anything to do with transportation—any kind of accounts that have big fleets. Long haul trucking, an obvious one, for example. Loss cost adjustment factors and social inflation have changed, and claims on transportation accounts that have big fleets are a lot more expensive to handle. Auto is a secret killer in its latency. From the time the incident is reported, the claim manifests itself and by the time it’s adjusted and adjudicated, these claims end up being a lot larger and more significant than first anticipated. The whole industry has been caught off guard by the significance of these commercial auto claims.

I also think it’s important to touch on habitational, public D&O, certain healthcare lines, construction—these round out the lines that are driving more volume into the non-admitted channel.

Have you seen any changes in personal lines?

Personal lines coverage historically has never been a significant part of the non-admitted marketplace. But due to Mother Nature, wildfires, coastal challenges with hurricanes and earthquakes, and the development of so much residential construction in those areas, the claims have been significant. Standard markets are non-renewing an all-time high number of accounts and they have nowhere to turn so they pour into the E&S market. We’ve seen personal lines expand significantly in the last 24 months and most national wholesalers have had to develop personal lines practice groups with unique solutions for them coast to coast, so that’s a change.

Let's talk about the increased demand for solutions to new and emerging risks.

Cyber continues to challenge the non-admitted sector for creativity and for product development. There is a growing number of small buyers with unique needs and a medium-to-low exposure base so there’s a lot of demand for handcrafting solutions.

As you move upstream, into larger companies with thousands of employees who handle sensitive customer data, it becomes more challenging to put together a significant limit for risk transfer. You read about these seven- and eight-figure cyber breach claims that are impacting the industry every day, now. So it is new, it is a creative part of the business and part of these losses are unknown. It’s written on a claims made basis, as opposed to an occurrence basis, for that reason, and our industry will continue to be challenged on innovation here.

How will true specialists continue to differentiate themselves from the new entrants into the E&S market?

It’s a constant challenge for talent, and specialists are the most sought after broker group and underwriting group in the country. There’s a demand for more specialized underwriting and wholesale broking, and MGUs, for that matter, and it starts, like a lot of trends, in the top 100. Retail brokers have really become much more sophisticated and deliberate about how they buy from our channel. So we’ve been in almost a decade-long audition, if you will, in all the specialty practice group segments of business that are the top silos in wholesale non-admitted.

Where is the E&S market headed?

Twenty years ago the largest wholesaler in the U.S. was $1 billion in premium. Nine years ago, the largest wholesalers in the U.S. was $3.5 billion in premium. Today, you have three wholesalers over $10 billion well on their way to $15 billion apiece. So you can see the impact of all these changes. There’s a lot of opportunity left in the non-admitted and small business space. I believe you’ll see a few $20 billion wholesalers within the next three to five years.