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On the edge: excess and surplus lines writers specialize in writing business the standard market doesn't want. Premium growth is slowing in some states, but not in others, a sign the market is still uneven.

Personal lines business is growing swiftly for many excess and surplus lines writers in the wake of the quartet of major hurricanes that struck Florida Florida, state, United States
Florida (flôr`ĭdə, flŏr`–), state in the extreme SE United States. A long, low peninsula between the Atlantic Ocean (E) and the Gulf of Mexico (W), Florida is bordered by Georgia and
 last year.

"In the first quarter, we had in excess of double-digit dou·ble-dig·it
Being between 10 and 99 percent: double-digit inflation. 
 growth," said John Moran John Moran is an American composer, author and choreographer. He was born in Lincoln, Nebraska, in 1965.

John Moran has generally been considered the protege of composer Philip Glass.
, vice president, personal lines, for Lexington Insurance Co. "Florida has been particularly strong after the hurricane season Hurricane season refers to a period in a year when hurricanes usually form. For more information see: Tropical cyclone#Times of formation.

For a lists of past seasons, see:
  • The Atlantic hurricane season (see also )
 last year. California California (kăl'ĭfôr`nyə), most populous state in the United States, located in the Far West; bordered by Oregon (N), Nevada and, across the Colorado River, Arizona (E), Mexico (S), and the Pacific Ocean (W).  has been very strong, and so has the Northeast, including Massachusetts Massachusetts (măsəch`sĭts), most populous of the New England states of the NE United States.  and Cape Cod Cape Cod, narrow peninsula of glacial origin, 399 sq mi (1,033 sq km), SE Mass., extending 65 mi (105 km) E and N into the Atlantic Ocean. It is generally flat, with sand dunes, low hills, and numerous lakes. ."

The advantage of the surplus lines market is it's able to react to market conditions quickly, said Bill McCord of Burns & Wilcox, a managing general agent and surplus lines broker. While standard lines companies may stop writing new business to wait for state approval of rate hikes and new exclusions or policy wording changes, surplus lines can change their operations overnight.

"Somewhere in the country, every day, someone is changing surplus lines," said McCord.

Lexington, a unit of American Insurance Group and the largest excess and surplus writer in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , according to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 A.M. Best Co. reports, has been able to take advantage of that.

"We're able to come in on various types of business: cat-exposed business, loss-exposed business, anything that the admitted markets have chosen or decided not to write going forward," Moran Moran

equitable councillor to King Feredach. [Irish Hist.: Brewer Dictionary, 728]

See : Justice

Lexington and other surplus lines writers go where the standard market fears to tread tread

injury to the coronet of the horse's hoof by treading on it by the opposite hoof, or by another horse when they are being worked in a team. If the coronary matrix is injured there may be a subsequent crack or deformity.
, but they don't write every risk that comes along. "We carefully monitor our exposures," Moran said. Lexington, which entered the personal lines market in 1993 after Hurricane Andrew This article is about the 1992 hurricane; there was also a Tropical Storm Andrew during the 1986 Atlantic hurricane season.

Hurricane Andrew is the second-most-destructive hurricane in U.S. history, and the last of three Category 5 hurricanes that made U.S.
, also tries to maintain profitable business by charging higher rates than the admitted market, and writing policies with higher deductibles and by excluding certain exposures and risks.

For instance, a home in Kansas with a history of water claims may have difficulty getting coverage in the admitted market. However, Lexington will offer coverage with an exclusion for certain water losses.

About 90% of Lexington's personal lines business is homeowners insurance, but it also writes personal umbrella and personal article floaters Personal article floater

Insurance policy attachment designed to cover specified personal valuables.
 to cover such things as fine art, jewelry jewelry, personal adornments worn for ornament or utility, to show rank or wealth, or to follow superstitious custom or fashion.

The most universal forms of jewelry are the necklace, bracelet, ring, pin, and earring.
 and furs.

In areas such as Florida where there's a state-run insurance fund, Lexington competes by covering high-value homes and by offering better service, Moran said. For instance, Citizens Property Insurance Corp. caps its coverage at $1 million. "The segment we focus on is the mid-to-high value segment," Moran said.

The personal lines area of the surplus lines market shows no signs of slowing its growth, Moran said. "A lot of people said 2004 was an anomaly Abnormality or deviation. Pronounced "uh-nom-uh-lee," it is a favorite word among computer people when complex systems produce output that is inexplicable. See software conflict and anomaly detection. , with four hurricanes. But we are hearing more and more people saying this could become more routine than we like to think."

Taking in the View

First, the sheer number of insurable in·sure  
v. in·sured, in·sur·ing, in·sures
a. To provide or arrange insurance for: a company that insures homeowners and businesses.

 homes keeps rising: last year a record 6.7 million homes were sold. "This hasn't been a one-year shot," McCord said. "With interest rates being low for about five years, there's been a tremendous increase in housing stock. And some of that falls into the surplus lines world."

McCord said personal lines are growing faster than commercial lines for Burns & Wilcox, accounting for about 13% of premium, up from 3% 10 years ago. Personal policies represent about one in every four policies written by Burns & Wilcox, and personal lines premium grew by 11.5% in the first quarter, compared with 4% growth in commercial policies written.

Houses often end up in the surplus lines world if they are a standard home in a nonstandard non·stan·dard  
1. Varying from or not adhering to the standard: nonstandard lengths of board.

 location. While coastal counties in the United States make up just 17% of the nation's land, they are home to more than half of the nation's population, according to the Pew PEW. A seat in a church separated from all others, with a convenient space to stand therein.
     2. It is an incorporeal interest in the real property. And, although a man has the exclusive right to it, yet, it seems, he cannot maintain trespass against a person
 Oceans Commission.

Rooms with beach views are often in the paths of hurricanes on the East Coast, and can be in danger of mud slides and earthquakes on the West Coast. That flood of people moving to the coast shows no signs of stopping.

McCord said the North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures

Area, 52,586 sq mi (136,198 sq km). Pop.
 Rate Bureau recently approved a 15% rate hike for homeowners insurance for homes along the coast. Some of those homeowners will have to find coverage with a surplus lines carrier, as the standard market looks to limit their overall exposure in that area.

Extenuating Circumstances Facts surrounding the commission of a crime that work to mitigate or lessen it.

Extenuating circumstances render a crime less evil or reprehensible. They do not lower the degree of an offense, although they might reduce the punishment imposed.

Credit history also can shut homeowners out of the standard market. "People with bad credit scores get kicked out of the market and come to us," McCord said.

Surplus lines writers tend not to use credit-based insurance scoring, charging higher premiums to make up for the additional risk they carry. There's no state review of the rates or policies surplus lines carriers sell, so they are able to act quickly to adapt to the changing marketplace. "Nobody is going to question why you are changing X rate or X fee in most jurisdictions," McCord said.

Also, unlike the standard market, most surplus lines policies break the various costs of the policy to show what the premium is, the fee, and local tax. Most standard market policies have all of those costs wrapped into a single premium amount. And surplus lines writers and brokers get to keep their fee, even if the policy is canceled after it's issued.

The Bigger Picture

The personal lines segment, although growing, is a small portion of the excess and surplus lines business. And, given the kaleidoscopic ka·lei·do·scope  
1. A tube-shaped optical instrument that is rotated to produce a succession of symmetrical designs by means of mirrors reflecting the constantly changing patterns made by bits of colored glass at one end of the tube.
 nature of the risks it covers, far-ranging statements about surplus lines premium trends are elusive. Market conditions in one state bring one type of risk into surplus lines, while capacity remains in another state.

For instance, Texas surplus lines business was down 18% in the first quarter, according to Phil Ballinger, executive director of the Surplus Lines Stamping Office of Texas. "Filings are down 9% to 10%. It's pretty clear the admitted market is aggressively trying to take back the business that flowed to the surplus lines market in the hard market."

But, Nevada's surplus lines market posted strong premium growth of 56.1% in 2004 over 2003, an indication that market is still hard, at least in some lines.

And, in New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
, surplus lines premiums rose to $3.1 billion in 2004, up 23.4% from 2003, but less than a third of the 73.2% jump in 2003 from the previous year.

The Surplus Lines Association of California found 2004 premiums rose just 8.24% from the year before, compared to an increase in premiums of 43.1% in 2003 over 2002, and by 104.5% in 2002 over 2001.

The premiums are still increasing, but not at the rate they were in the hard market, said Ted Pierce Pierce may refer to: Places
  • Pierce, Colorado, a US town
  • Pierce, Idaho, a US city
  • Pierce, Nebraska, a US city
  • Pierce, Wisconsin, a US town
  • Mount Pierce (New Hampshire), USA, a peak in the White Mountains
  • Pierce County, several places
, executive director of the Surplus Lines Association of California. "The strange thing is that the volume of policies is on the rise. More policies are being written for smaller size accounts."

McCord of Burns & Wilcox also has seen the average premium dropping. "That's the market softening softening /sof·ten·ing/ (sof´en-ing) malacia.


a change of consistency, with loss of firmness or hardness.
," he said. "It has been the case in property lines, but it's now hitting casualty."

In California, the number of surplus lines policies processed in 2004 grew 18.7% from the previous year, according to the Surplus Lines Stamping Office of Texas, which tracks premiums and policies written from all 15 states that have a stamping office (see "What Is a Stamping Office?" pg. 67.)

Pierce said he didn't think the growth in policy count stemmed stemmed  
1. Having the stems removed.

2. Provided with a stem or a specific type of stem. Often used in combination: stemmed goblets; long-stemmed roses.
 from personal lines there, where homeowners multiperil business represented about 0.73% of the policies processed in California in 2004, the 17th most common coverage written by the state's surplus lines market. The top three coverages were general liability, with 34.7% of all policies; errors and omissions errors and omissions n. short-hand for malpractice insurance which gives physicians, attorneys, architects, accountants and other professionals coverage for claims by patients and clients for alleged professional errors and omissions which amount to negligence. , with 9.9%; and all-risk commercial property, with 7.7%.

For all 15 states with stamping offices, premium rose an average of 12.8% in 2004 over 2003, and the number of policies processed grew by 5.3%. But there were wide variations in results. Premium growth in the market ranged from a low of 4.1% in Colorado to a high of 56.1% in Nevada. Policies processed ranged from a drop of 12.6% for Mississippi Mississippi, state, United States
Mississippi (mĭs'əsĭp`ē), one of the Deep South states of the United States. It is bordered by Alabama (E), the Gulf of Mexico (S), Arkansas and Louisiana, with most of the border formed by
 to a 32.4% jump in Nevada.

"We're writing more policies than ever, but the premium isn't growing very fast because the average premium is dropping," McCord said. "We borrowed a lot of business from the standard market, starting in 2000, when losses drove the standard market to stop writing certain kinds of business in certain parts of the country. Now the market has returned to a traditional soft market, so business is returning to the standard market."
Surplus Lines Policies, Premium Rise

Premiums in the surplus lines market continued to rise in 2004,
although it's slowed from the 36.8% it grew in 2003 over 2002.

                        Premium ($ Millions)

State                 2004          2003     % Chg

Arizona             $509.2        $395.3      28.8
California         5,518.9       5,098.9       8.2
Colorado             489.2         470.0       4.1
Florida            2,980.3       2,821.6       5.6
Idaho                 66.2          57.4      15.3
Illinois           1,012.5         815.0      24.2
Mississippi          264.2         233.7      13.1
Montana               47.9          36.8      30.2
Nevada               343.7         220.2      56.1
New York           3,134.9       2,540.5      23.4
Oregon               257.1         238.1       8.0
Pennsylvania         754.6         707.3       6.7
Texas              3,321.1       2,945.5      12.8
Utah                 146.2         135.9       7.6
Washington           708.9         621.5      14.1
Total            $19,554.9     $17,337.7       2.8


State                 2004          2003     % Chg

Arizona             47,275        39,258      20.4
California         441,221       371,689      18.7
Colorado            49,119        43,792      12.2
Florida          1,182,984     1,214,025      -2.6
Idaho               13,847        12,231      13.2
Illinois           109,440        92,662      18.1
Mississippi         52,272        59,803     -12.6
Montana              8,686         8,419       3.2
Nevada              22,390        16,906      32.4
New York           187,593       158,770      18.2
Oregon              32,645        30,147       7.3
Pennsylvania       103,709       102,947       0.7
Texas              996,340       928,743       7.3
Utah                14,205        13,163       7.9
Washington         105,077       103,728       1.3
Total            3,366,803     3,196,553       5.3

Source: Surplus Lines Stamping Office of Texas

RELATED ARTICLE: What is a stamping office.

Stamping offices do not have anything to do with the U.S. Postal Service The U.S. Postal Service (USPS) processes and delivers mail to individuals and businesses within the United States. The service seeks to improve its performance through the development of efficient mail-handling systems and operates its own planning and engineering programs. , or angry people who walk loudly.

The first stamping office was launched in 1938 in California, the year after the state commissioner suggested surplus lines brokers form an association to self-regulate the industry.

The surplus lines industry in the United States had been active since the 1800s, when brokers, unable to find coverage for high limits or unusual risks through American insurers, began to place coverage with British insurers.

As the business grew, U.S. regulators became concerned that they did not have adequate oversight
For Oversight in Wikipedia, see Wikipedia:Oversight.

Oversight may refer to:
  • Government regulation — The role of an official authority in regulating a separate authority.
 over the surplus lines industry.

The stamping office's original duty was to stamp every surplus lines policy before it was allowed to go into effect, said Ted Pierce, executive director of the Surplus Lines Association of America.

"We'd look at it, see if the placement was legal, and then stamp it as approved," he said. "It was a way of regulating the brokers."

Unlike the standard admitted market, no regulator regulator,
n the mechanical part of a gas delivery system that controls gas pressure that allows a manageable flow of drug vapor to escape.


see reducing valve.
, nor the stamping office, had approval over the rates or forms used.

"That's the key to surplus lines," Pierce said. "The policy language is not regulated by the state and the price is not regulated by the state."

However, all excess and surplus writers must be licensed in at least one jurisdiction, and it's that state or country that regulates the companies' solvency The ability of an individual to pay his or her debts as they mature in the normal and ordinary course of business, or the financial condition of owning property of sufficient value to discharge all of one's debts.

solvency n.
, said Phil Ballinger, executive director of the Surplus Lines Stamping Office of Texas.

Today, the volume of policies is so great that the stamping office began to give approval after the policy goes into effect--although it no longer uses a physical stamp, Pierce said.

Today, 15 states have stamping offices to help regulate the surplus lines industry.

* The personal lines segment of the excess and surplus lines market is still showing strong growth in some areas, mostly due to more standard homes being built in riskier locations and homeowners with higher credit-rating risks.

* The E&S lines market is continuing to grow, but not at the breakneck break·neck  
1. Dangerously fast: a breakneck pace.

2. Likely to cause an accident: a breakneck curve.
 rate seen during the hard market.

* Wide variations in E&S growth across the country indicate the market is uneven.

E&S Definition Box:

Standard market--The insurance written by licensed, or admitted, carriers. Companies must have a license for each state they write in, and state regulators often oversee the premium rates that the company can charge as well as the policy forms used.

Surplus lines--Nonadmitted insurance companies that provide coverage that the standard market isn't willing to write. Typically, the premium rates and policies are not regulated by the states. While surplus lines writers don't need a license to do business in every state, they have to be an admitted carrier in at least one state.

Typical risks that surplus lines cover:

* distressed business (fire coverage for a business with high incidence of prior fire loss);

* complex (property and liability coverage for an offshore Oil platform)

* unique (insurance on a professional football quarterback's throwing arm)

* capacity (exposure needing very high limits)

Surplus Lines Policies, Premium Rise

Premiums in the surplus lines market continued to rise in 2004, although it's slowed from the 36.8% it grew in 2003 over 2002.
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Title Annotation:Property/Casualty: Excess and Surplus
Author:Green, Meg
Publication:Best's Review
Date:Jun 1, 2005
Previous Article:A statement in stripes: in London, the 'broker's suit' says confidence, but not to loudly.
Next Article:Leading developments.

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