E&S market remains difficult for buyers

Rates are increasing for many excess and surplus lines insurance buyers as business continues to flow into the sector from standard insurance markets, and while the pace of increases is slowing in some lines it is likely the hard market will endure.

For buyers, the rate of increases for property catastrophe coverages is a challenge, and for surplus lines insurers the increasingly competitive directors and officers liability and cyber liability markets are a concern (see story here). 

Meanwhile, there has been a slowdown in companies entering the sector, and the long-term prospects for newcomers are unclear
(see story here).

The E&S sector is also subject to the same stresses hitting the admitted market, including high jury awards and inflation worries as well as concerns over how the current hurricane season develops. 

Generally, though, experts say the E&S sector is flourishing.

It is “as strong as it’s ever been and continuing to get stronger,” said Erich Bublitz, Kansas City, Kansas-based head of excess and surplus for AmTrust Financial Services Inc. 

As a general rule, the sector “continues to be disciplined,” even with the new entrants, Mr. Bublitz said.

“Overall, we’re still very much in a hard market,” said Steve Girard, Alpharetta, Georgia-
based regional president of Markel Group Inc.’s southeast region.

“Certainly, the pace of rate increases has slowed, but halfway through the year, we’re still seeing pretty good rate increases in most products” and sizeable increases in property, especially in Florida, he said.

<a rel=”gallery” class=”fancybox” href=”https://www.businessinsurance.com/assets/pdf/BI_0923-10A.png”><span class=”rsrch_img” style=”background:white !important; width: 480″>

<img src=”https://www.businessinsurance.com/assets/pdf/BI_0923-10A.png” width=”480″></span></a>

Rate increases overall are slowing but not declining, said Nick Davies, West Hartford, Connecticut-based CEO of managing general agency Aurenity LLC.

The sector is “business specific. It may even be customer specific,” said Sanjay Godhwani, Boston-based president of Berkshire Hathaway Specialty Insurance Co. North America. “This is a market with lots of different speeds.”

“We’re not necessarily seeing universal themes cutting through the entire E&S marketplace,” said Matt Dolan, president of North America Specialty at Liberty Mutual Insurance Co. and its Ironshore unit. 

The introduction of capital in some lines “is leading to rate pressure and softening,” including D&O and cyber, he said.

Meanwhile, “the health care space is reasonably disciplined,” while property is “at the other end” of the continuum, Mr. Dolan said.

“We’re seeing a lot of pressure because of property insurance,” said Kimberly Smid, New York-based chief underwriting officer, E&S, Americas, for Axa XL, a unit of Axa SA. “There’s a lot of requests for pricing relief.” 

Observers say the E&S sector’s outlook overall is for continued growth. 

“I think it’s going to stay very firm and continue to expand,” said Timothy W. Turner, president of Chicago-based Ryan Specialty LLC. 

Mr. Davies of Aurenity said a confluence of factors, including social inflation — or higher court awards and settlements — economic inflation, climate change and cyber risks are pushing business into the sector, “which is probably a long-term situation.” 

E&S lines “will continue to be robust. Certainly, our submissions tell us this is the case today,” said John Burkhart, president, specialty lines, at Houston-based Skyward Specialty Insurance Group Inc.

Standard & Poor’s Corp. reported that E&S premium increased for the fourth straight year in 2022, rising to $75.51 billion, up 20% from 2021 and more than double the 2018 total of $34.65 billion.

Premium for the sector may increase to more than $90 billion this year, said Alex Bargmann, co-founder and CEO of Pathpoint Inc., a San Francisco-based digital E&S brokerage that focuses on small accounts. 

There will be “strong double-digit growth” in the surplus lines market this year, although not as much as in 2021, with rates moderating a bit midyear, even if they are still increasing, said David Blades, associate director of the industry research team at Oldwick, New Jersey-based rating agency A.M. Best Co. Inc. 

Some experts, however, raise concerns about the E&S outlook.

“There continues to be a big, open question right now,” as to what happens with the 2023 wind season, said Dave Obenauer, CEO of wholesaler CRC Group in Mendham, New Jersey.

“We saw last year it only took one hurricane” to “really change the market,” he said. “This is an important wind season from that perspective.” Hurricane Ian in September 2022 caused an estimated insured loss of $63 billion.

Concerns also center around macroeconomic issues.

Mr. Obenauer said, “The question remains of how much more interest rates might need to increase to address inflation,” which affects insurers’ exposure bases.

“It’s been more than 30 years since inflation has been as high as it’s been now, in 2023,” said Bill McElroy, portfolio director of casualty at Aspen Insurance Group in New York.

“Even though economic inflation appears to be easing a little bit, it’s still not in the rear-view mirror,” and we are “staring straight ahead at social inflation,” Markel’s Mr. Girard said.

The combination of nuclear jury verdicts, litigation funding and increases in catastrophe losses is leading people to protect their balance sheets, said Joel Cavaness, president of Rolling Meadows, Illinois-based Risk Placement Services Inc., a unit of Arthur J. Gallagher & Co. 

“Cases are settled at very high numbers today because (defendants) are afraid to go to trial,” said Alan Jay Kaufman, chairman, president and CEO of the H.W. Kaufman Group.