Fuel for Innovation

In an era of fierce competition, E&S players turn to customization and cutting-edge technology to differentiate themselves.
By: | August 31, 2016 • 7 min read

The pressure on excess and surplus (E&S) lines brokers’ and insurers’ top lines has never been greater, say industry experts.

Increasing competition, mergers and acquisitions activity, and available capital, not to mention declining rates, have all resulted in many companies being squeezed out of the market.


However, the E&S industry continues to outperform the overall property/casualty market, reporting profitable results for the second straight year in 2014, according to A.M. Best. The report on performance in 2015 is due in September.

Total surplus lines direct written premiums also increased by 6.7 percent during the same period in 2014, compared to 4.5 percent for the total P&C market, the ratings agency said.

“The market is a very competitive place right now.” — Wyeth Coburn, wholesale broker and producer, Risk Placement Services Inc.

Added to that, ahead of the National Association of Professional Surplus Lines Offices (NAPSLO) annual convention in Atlanta this month, companies have become increasingly focused on customizing and innovating their products and services in order to stay ahead of the competition.

As a result, many have invested heavily in cutting-edge technology as well as employing ever more sophisticated underwriting and risk mitigation strategies.

“The market is a very competitive place right now,” said Wyeth Coburn, a wholesale broker and producer at Risk Placement Services Inc.

“Most of the major brokers all have the same product so it’s really about differentiating yourself through innovation and the quality of service you can provide.”

Market Pressures

Scott Culler, regional president at Markel, said one of the biggest challenges facing E&S brokers and insurers is the continued increase in competition and capital availability, particularly in property.

“There are new players coming into the market all the time, which can be a big challenge for brokers when they have 50 companies knocking on their door all looking for business,” he said.

In terms of premiums, on average, property decreased by 10 percent and professional lines by at least 5 percent, while casualty and management liability were also under pressure, experts said.

Jeremy Johnson, president, U.S. commercial, AIG, went as far as to say that the property market had become competitive to the “point of irresponsibility” in terms of its pricing and terms.

“There’s no doubt that the market is a lot more competitive than it was a year ago,” he said.

A key driver for increased competition has been the acceleration in M&A activity over the last year.

Among the biggest deals was Hartford Financial Services Group’s $170 million takeover of Northern Homelands.

James Drinkwater, president of AmWINS brokerage and one of NAPSLO’s wholesale broker directors, said that companies increasingly face competition both from within the E&S industry and the wider P&C market.

“The biggest challenge for us is the traditional market’s creep into the E&S space,” he said.

David Bresnahan, executive vice president, Berkshire Hathaway Specialty Insurance

David Bresnahan, executive vice president, Berkshire Hathaway Specialty Insurance

“Competition is fierce, with new insurers and MGAs entering the space on an almost daily basis.”

David Bresnahan, executive vice president at Berkshire Hathaway Specialty Insurance, said the increased competition resulted in “too much supply chasing too little demand.”

“It’s a really difficult underwriting environment at the moment, but that could all change with one big event,” he said.

“Property is certainly the biggest outlier — it’s the area where the market is down much more than any other this year, fueled by an aggressive reinsurance industry flooding the market with capital.”

Robert Raber, a senior financial analyst at A.M. Best, however, said that despite added competition, he expects premiums to be slightly up this year because of insurers’ pricing power.

Underwriting and Risk Mitigation Strategies

Johnson said the biggest challenge to the industry was to make sure that it remained relevant to its customers in an ever-changing environment.


“At a time when our business models and those of our customers are changing, and technology and computer power is creating a paradigm shift, we need to be able to deliver to them — not only in terms of product, but also the expertise to help them reduce their total cost of risk,” he said.

“In order to do this, we need to differentiate ourselves not only in terms of pricing, but also our value proposition to the customer through the use of our underwriting and risk mitigation strategies.”

Drinkwater said that there was a loosening of underwriting guidelines, with insurers considering risks they hadn’t previously, as well as expanding their terms and conditions.

However, he added, this was tempered to some extent by companies cutting their distribution costs and outsourcing specialist underwriting.

Meanwhile, others have been more proactive in terms of risk mitigation.

Scott Lockman, director of commercial insurance at Clements Worldwide, said that being small enabled his company to come up with new strategies and to create new products more readily than its larger competitors.

“Most of the smaller companies in the E&S space, ourselves included, are very innovative on the pre-loss side and in the analysis of their exposures in order to find ways to mitigate against them,” he said.

Investment in Technology

Raber said that companies were continuing to invest in their technology platforms in order to bind policies more quickly and effectively, as well as to control costs.

“Increasingly companies are seeking to customize their product and provide the insured with the exact coverage that they need,” he said.

“That also helps them with their rate structure, and to correctly price for a particular product.”

Bryan Salvatore, president of Zurich North America Commercial’s specialty products business unit, said that data and analytics are increasingly being used to better understand risks and to focus on more profitable business.

Jeremy Johnson, president and CEO, Lexington Insurance Co.

Jeremy Johnson, president, U.S. Commercial, AIG

“That in turn improves not only the service for the customer, but also makes the risk selection and underwriting process more efficient,” he said.

Johnson said that AIG had invested heavily in technology to help its customers understand their key risk drivers and leverage data, including the use of unmanned aerial vehicles for building and pipeline inspections, and personal sensor devices for employees to improve workplace safety.

“The name of the game is to try to out-risk-select the competition at a time when more and more markets are moving towards big data and black box technologies,” Bresnahan said.

Regulatory Challenges

Aside from the daily financial challenges for E&S companies, there are still a host of regulatory hurdles that need to be overcome.

Brady Kelley, executive director at NAPSLO, testified before the House Financial Services Subcommittee on Housing and Insurance in January about the Flood Insurance Market Parity and Modernization Act.

The bill was subsequently passed by the committee in March and then the full House in April.

If passed by the Senate at the end of this year, Kelley said the bill would endorse private flood insurance issued by nonadmitted insurers.

“This bill, in effect, changes the current federal definition of private flood insurance to ensure that surplus lines insurers are eligible to offer private market solutions to consumers with flood risks that fall outside of the national flood insurance program or the traditional market,” he said.

New Areas of Opportunity

Despite its many challenges, the E&S market remains well placed to capitalize on new opportunities and risks that the traditional market doesn’t typically cover.

Drinkwater said that cyber liability remained the No. 1 emerging risk for the market.


“One of the biggest emerging risks is poorly handled cyber breaches, which ultimately cost companies a lot of money and CEOs their jobs,” he said.

Other areas, he said, included health care, logistics and private flood.

Lockman said that the biggest areas of opportunity were in higher risk categories such as kidnap and ransom, political violence and evacuation coverage.

“The increase in the number of humanitarian companies being deployed in high risk areas around the world has presented big opportunities for growth and we don’t see that slowing down at any point,” he said.

Culler added: “What’s exciting is that despite all the competition and challenges in the marketplace, the E&S industry continues to grow.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]
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Risk Insider: Daven Lowhurst

Will Your Excess Insurer Protect You When You Use Up Your Primary Insurance?

By: | August 29, 2016 • 2 min read
Daven Lowhurst is a partner in Jones Day's San Francisco office and a member of the firm's Insurance Recovery Practice. The views and opinions set forth herein are the personal views or opinions of the author; they do not necessarily reflect views or opinions of the law firm with which he is associated. He can be reached at [email protected]

A fundamental notion of liability insurance is that when your primary liability insurance is used up, your excess insurer will step in and protect you.  But some excess insurers are not so quick to agree.

Excess insurers have argued with increasing frequency, and some success, that they are not obligated to cover a particular claim (or sometimes future claims) because innocuous-looking language in their policies requires that the primary insurer, and no one else, pay 100 percent of the primary policy limit in order to trigger the excess policy.

This scenario illustrates the point:  Your company is sued.  You tender the claim to your primary insurer whose policy has a $1 million limit.  You settle the claim for $1 million, but due to coverage disputes with the primary insurer, you agree that the primary insurer will pay $900,000 and be released from further liability on the policy, and you will pay the $100,000 balance.

You may think this position is unfair, against public policy, and in bad faith.  But some courts, confronted with such restrictive attachment language, have ruled that excess policies do not attach until the full underlying limit is paid solely by the underlying insurer.

When the next lawsuit is filed against you, you turn to your excess policy, which states that it attaches only after the underlying limit is paid in full by the underlying insurer (here, the primary insurer).

The excess insurer denies coverage, asserting that its policy is not triggered because the primary policy’s $1 million limit has not been exhausted.  The excess insurer contends that the $1 million limit must be paid solely by the primary insurer, and since your $100,000 contribution does not count, the primary policy has not been exhausted.

Consequently, the excess policy is not triggered.  Further, since you released the primary policy for any future claims, the excess insurer may argue that its policy can never be triggered, since the primary policy will never pay the remaining $100,000.

You may think this position is unfair, against public policy, and in bad faith.  But some courts, confronted with such restrictive attachment language, have ruled that excess policies do not attach until the full underlying limit is paid solely by the underlying insurer.

This result can be problematic to policyholders not only on a given claim, but on future claims as well if the excess insurer, and potentially all higher excess insurers, balk because some portion of the primary limit was not paid by the primary insurer.

But policyholders can employ several strategies to minimize these risks:

  • Review the attachment language in your excess policies, now and at renewal. If needed, negotiate language clearly providing that payment of the underlying limit by any source counts towards exhaustion.
  • Structure settlements, even those not requiring contribution from your excess policies, with your excess policies in mind.
  • Engage the excess insurer in the settlement process, including, if appropriate, confirming that it will not seek to avoid coverage based on who pays the underlying policy limit.
  • If an exhaustion dispute arises with excess insurers, consider steering the dispute toward a forum with favorable law, or at least with no adverse law, on the exhaustion issue.
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Sponsored Content: XL Catlin

Think You Don’t Need Environmental Insurance?

The risk of environmental damage is there no matter what business you're in.
By: | September 14, 2016 • 5 min read

“I don’t work with hazardous materials.”

“My industry isn’t regulated by the EPA.”

“We have an environmental health and safety team, and a response plan in place.”

“We’ve never had an environmental loss.”

“I have coverage through my other general liability and property policies.”

These are the justifications clients most often give insurers for not procuring environmental insurance. For companies outside of sectors with obvious exposure — oil and gas, manufacturing, transportation — the risk of environmental damage may appear marginal and coverage unnecessary.

“Environmental insurance is not like every other insurance,” said Mary Ann Susavidge, Chief Underwriting Officer, Environmental, XL Catlin. “The exposure is unique for every operation and claims don’t happen often, so many businesses view coverage as a discretionary purchase. But the truth is that no one is immune to environmental liability risk.”

Every business needs to be aware of their environmental exposures. To do that, they need a partner with the experience to help them identify exposures and guide them through the remediation claims process after an incident. The environmental team at XL Catlin has been underwriting these risks for 30 years.

“Insureds might not experience this type of claim every day, but our environmental team does,” said Matt O’Malley, President, North America Environmental, XL Catlin. “We’ve seen what can happen if you’re not prepared.”

Susavidge and O’Malley debunked some of the common myths behind decisions to forego environmental coverage:

Myth: My business is not subject to environmental regulations.

Reality: Other regulators and business partners will require some degree of environmental protection.

Regulatory agencies like OSHA are more diligent than ever about indoor air quality and water systems testing after several outbreaks of Legionnaires disease.

“The regulators often set the trends in environmental claims,” Susavidge said. “In the real estate area it started with testing for radon, and now there’s more concern over mold and legionella.”

Multiple hotels have been forced to shut down after testing revealed legionella in their plumbing or cooling systems. In addition to remediation costs, business interruption losses can climb quickly.

For some industries, environmental insurance acts as a critical business enabler because investors require it. Many real estate developers, for example, are moving into urban areas where their clients want to live and work, but vacant lots are scarce. Those still available may be covering up an urban landfill or a brownfield.

“We’re able to provide expertise on those sites and the development risks so the contractor can get comfortable working on it. It’s about allowing our clients to stay relevant in their markets,” O’Malley said. “In this case, the developer is not an insured with a typical environmental exposure. But if there is a contaminant on the worksite, they could inadvertently disperse it. In a high-population urban area, the impact could be large.”

Banks also quite often require the coverage specifically because developers are turning to these locations with higher potential environmental risk.

“Though it’s not a legal requirement, insurance is a facilitator to the deal that developers really can’t operate without,” Susavidge said.

Myth: The small environmental exposure I have would be covered under other polices.

Reality: Environmental losses can result from exposure to off-site events and are excluded by many property and casualty policies.

Environmental risks on adjoining properties can lead to major third party losses. Vapor intrusion under the foundation of one property, for example, can unknowingly underlie the neighboring properties as well. The vapor intrusion can then seep into the surrounding properties, endangering employees and guests.

In other words, your neighbor’s environmental exposure may become your environmental exposure.

O’Malley described a claim in which a petroleum pipeline burst, affecting properties and natural resources 10 miles downstream even though the pipeline was shut off two minutes after the rupture. The energy company that owns the pipeline might have coverage, but what about the other impacted organizations? Many other property policies exclude environmental damage.

Sometimes the exposure is even more unexpected. In 2005, for example, a train carrying tons of chlorine gas crashed into a parked train set sitting in the yard of Avondale Mills — a South Carolina textile plant. The gas permanently damaged plant equipment and forced the operation to shut down.

“It’s not always obvious when you have an environmental exposure,” Susavidge said.

“When there is a big loss or a pattern of losses, the casualty market will typically move to exclude it,” said O’Malley. “And that’s where the environmental team looks for a solution. Environmental coverage has been developed to fill the gaps that other coverages won’t touch.”

Myth: We already have a thorough response plan if there is an incident.

Reality: Properly handling an environmental event requires experience and expertise.

In addition to coverage, risk managers need experience and expertise on their side when navigating environmental claims.

“For many of our clients, their first environmental claim is a very different experience because the claimant is not always a typical third party – it’s a government agency or some other organization that they lack experience with,” Susavidge said. “Our claims team is made up of attorneys that have specific domain experience litigating environmental claims issues.”

Beyond its legal staff, XL Catlin’s claims consulting team and risk engineers come with specialized expertise in environmental issues. 85 to 90 percent of the team members are former environmental engineers and scientists, civil engineers, chemists, and geologists.

“Handling environmental claims requires specialized expertise with contaminants and different types of pollution events,” O’Malley said. “That’s why our 30 years of experience makes a difference.”

Thirty years in the business also means 30 years of loss data.

“That informs us as a carrier how to provide the right types of services for the right clients,” Susavidge said. “It gives us insight into what our insureds are likely to experience and help us determine what support they need.”

Insureds also benefit from the relationships that XL Catlin has built in the industry over those 30 years. When the XL Catlin team is engaged following a covered pollution event, the XL Catlin claims team can deploy seasoned, experienced third party contractors that partner with the insured to address the spill and the potential reputational risk. And they receive guidance on communicating with regulatory bodies and following proper reporting procedures.

“The value of the policy goes beyond the words that are written,” O’Malley said. “It’s the service we provide to help clients get back on their feet, so they can focus on their business rather than the event itself.”

For more information on XL Catlin’s environmental coverage and services, visit

The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of September 2016.



This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.


XL Catlin. From insurance to reinsurance, a changing world needs new answers. We’re here to find them. With an incredible blend of people, products, services and technology, we have the power to find innovative, creative solutions to your risks — from the most familiar to the most complex.
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