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2010 E&S in review: is it really an insurance cycle if nothing changes?


Less than a generation ago, the ups and downs of an insurance cycle were simply part of the roller coaster ride of doing business. The E&S industry took the changes for granted, or at the very least expected them to occur. Agents and brokers knew that a soft market of four to five years would be followed by a hard market for a short time, which in turn would be followed by a soft market. The down times were sometimes bumpy, but at least they were predictable. Today, the E&S market appears trapped in a different sort of cycle--a soft market followed by a softer market.

The trending for Florida's E&S premiums written has been a fairly consistent drop-off for the past several years. Reports from the Florida Surplus Lines Service Office (FSLSO) through September 2010 show both premiums and transactions down again from 2009. Agent data for taxable premiums through the third quarter of 2010 shows premium of $2.597 billion compared to $2.835 billion for the same period in 2009. That is a reduction of close to $240 million, or almost 10 percent. Policy count reflects a similar fall off: 493,624 in 2010 compared to 544,841 in 2009.

There is little to indicate a sudden upward swing in E&S market production or premium soon, at least for any of the major lines of business. The economy is still struggling and new business startups are rare. Many of the businesses that have managed to survive have cut payroll because of reduced revenue; smaller payrolls mean reduced insurance costs, and less revenue for the agent/broker.

Admitted and surplus lines carriers alike are loathe to be the first to make any major pricing increases for fear of losing market share. Further affecting rates is the fact that capital is still sufficient--and in some cases more than sufficient--for insurance companies to be competitive with pricing on some classes and aggressive on others.

Competition From All Sides

Despite less-than-desirable pricing, competition for business remains strong. E&S carriers continue to adjust their strategy to compete with admitted carriers and other E&S facilities. In Florida especially, the lack of catastrophe storm events has blurred the line on which property risks are standard and which ones are not. Additionally, some E&S agents note that standard carriers are not as quick as they were a few years ago to cancel or non-renew accounts because of claim activity. Still others can give examples of incursions into what normally has been considered E&S territory, such as private and charter schools, airport and marine contractors, public livery vehicles, and bars and taverns.

Most E&S underwriters do not think rates can get any lower, and the carriers that seem to agree have found other ways to compete. Some have updated their policy forms by including new coverage or by enhancing existing coverage. On the E&O side especially, technology and/ or EPL coverage enhancements are more prevalent than ever. Claims expense outside the limit is becoming easier to find or to negotiate into the policy. Some E&O carriers have refocused their underwriting approach to take advantage of opportunities in areas such as real estate-related exposures and the environmental insurance market.

Much of what drives the market's pricing structure, especially regarding binding authority business, is to a great degree based on what happens in the reinsurance market. There is not much hard data yet on how reinsurance renewals are faring and where rates are headed; as of this writing, next year's reinsurance treaty negotiations are still being conducted.

However, those willing to speculate on Jan. 1, 2011, renewal dates and later do not expect much movement in the rates, with the possible exception of property risks, especially coastal property and property with inferior construction and higher protection classes.

Almost everyone--agents, brokers and carriers--would like to see meaningful rate increases, but few believe it will happen. One significant voice willing to offer a different view is William R. Berkley, chairman and CEO of the W.R. Berkley Corp. Berkley was the featured speaker for the Derek Hughes Education Foundation series at the National Association of Surplus Lines Offices (NAPSLO) annual convention in Atlanta in October. A self-proclaimed optimist, Berkley said that the market is about to see some positive rate movement.

Berkley based his upbeat prediction on insurance companies' overall performance in the past several years. He noted that insurance company profitability peaked in 2006, and the market has been steadily losing ground since that time. He speculated that current E&S rates are off on average by about 30 percent, with that number much higher on some classes. Berkley said that the industry's combined loss ratio will be 110 or higher for 2010. Those facts alone caused him to speculate that the pricing cycle is poised to correct itself.

Opportunities Still Exist

Unlike pricing, merger and acquisition activity has been fairly robust. Companies in need of growth to meet performance and shareholder demands continue to look for and find acquisition candidates, both in insurance agencies and E&S facilities. Observers expect that to continue as a large pool of buyers seek out opportunities and agency and brokerage principals decide it is time to cash out. There may be increased activity in the final quarter of 2010 as financial advisors and business brokers remind clients of the anticipated changes to the capital gains tax in 2011.

Some carriers continue to make their own opportunities. Jimmy Clark, who heads up the Tampa office of Harden, said, "We have seen the E&S casualty marketplace getting aggressive, particularly on construction and product liability. They are putting up large chunks of excess casualty and even playing on the primary layers," he reported. "The E&S carriers are stepping up to the plate on new business, giving broader terms, the ability to select counsel, and lower pricing. This has been a win-win for our clients who are looking to transfer as much risk as possible off their balance sheets while managing the cost of the risk transfer."

Opportunities in the E&S market can still be found as carriers adjust their appetites and underwriting criteria to the new normal. Cycle or no cycle, competition remains keen, and we will see more of the same for the remainder of 2010 and into 2011.

Tim Hoelle, Contributing Editor

A Sign of the Times?

In 2009, the Office of Insurance Regulation (OIR) approved 12 surplus lines carriers. While some were extensions of markets already in Florida, others were new to the state. In 2010, the number of new entries thus far is zero.

Eligible Surplus Lines Carriers Approved by OIR in 2009

* Prime Insurance Co.

* International Insurance Company of Hanover

* Infrassure

* North Light Specialty Insurance Co.

* Cincinnati Specialty

* Tokio Marine Europe

* Ariel Re

* Torus Insurance UK

* First American Specialty Insurance Co.

* Naxos Insurance

* Berkley Regional Specialty Insurance Co.

* Valiant Specialty Insurance Co.

Florida and the E&S Market From Westrope's Perspective

Although headquartered in Kansas City, Mo., Westrope produces one-third of its business in the Southeast and a large piece of that in Florida. As with most wholesale operations in Florida, Westrope's Southeast Unit finds itself with a heavy property presence and a large percentage of business derived from catastrophe-exposed layered property programs up and down the Florida coastline.

Even with an economic downturn, the vast majority of business owners are not going to take the financial risk of doing without property insurance with windstorm coverage. So while it is still a soft market for property, there is still business to be had, and it is largely being written by the E&S marketplace.

For the last few years (and possibly leveling a bit in 2010), E&S casualty premiums have been trending significantly downward. According to Florida Surplus Lines Service Office (FSLSO) data, commercial general liability premium in Florida has declined 40 percent from year-end 2006 to year-end 2009. During this time, the casualty marketplace has effectively been hit with a triple whammy: 1) An economic downturn that has pushed companies to close their doors and significantly reduced sales/receipts for the survivors. The casualty construction marketplace was particularly devastated. 2) Soft market conditions, fueled by a huge amount of capital and capacity in the industry, pushing rates significantly down. 3) Major encroachment into traditional E&S classes/products by the admitted markets.

However, according to Senior Executive Vice President Mark R. English of Westrope's Jacksonville office, there are some niche market opportunities for E&S casualty brokers looking to maintain and grow their Florida business.

"Even with the economic downturn, we have been successful in placing apartment construction projects, stadium wraps, some select condominium work," English said.

"The entertainment niche--nightclubs/bars, restaurants, amusement parks, animal parks/zoos, arenas/ stadiums, family fun centers--also has remained active," English reported. "In particular, we have seen a large need for cover for some of the nightclubs in South Beach. Providing assault and battery as well as liquor cover can be challenging for some. However, Westrope has several strong markets that provide full limits for those covers."
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Author:Hoelle, Tim
Publication:Florida Underwriter
Article Type:Cover story
Geographic Code:1U5FL
Date:Nov 1, 2010
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