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A June webinar provided an excellent opportunity for a panel of excess and surplus insurance lines experts to weigh in on market cycles, workers' comp and professional lines to name a few. Hosted by A.M. Best and the National Association of Professional Surplus Lines Offices, participants included Lee McDonald and Duncan McColl of A.M. Best, Richard Kerr of MarketScout, Kevin Westrope of Westrope, Marla Donovan of Burns & Wilcox and Paul Springman of Markel Corp. The panel was moderated by McDonald. The original transcript was edited by Dan Reynolds, senior editor, Risk & Insurance®.

MCDONALD: OK. So, now I'd like to start picking the brains of our panelists. We're going to be doing that in conjunction with a survey that NAPSLO performed. Marla, what are we seeing there?

MCDONALD: Paul, what are you seeing, particularly in terms of catastrophe and high-end exposed property? Where's that going?

SPRINGMAN: It's a real mixed bag right now. We have started to see some pricing increases on the catastrophe-exposed business on wind and probably to a lesser extent on quake-related business. Probably not to the extent that we believe where the marketplace should be relative to the loss experience in the last five to seven years, but it's encouraging at least that they're starting to go up.

On the noncatastrophe-exposed business, in Middle America it is still very, very price competitive right now, with ample capacity, lots of players and lots of choices for buyers. But as we get a little further along in the economy, I anticipate that we're going to see an uptick in claims frequency that will lead to claims severity. And sooner or later, underwriters are going to have to recognize that in terms of increased pricing.

MCDONALD: Kevin. Where in property--vacant property, multifamily property, things like that--where's that headed at this point?

WESTROPE: Particularly in the multifamily business, we are beginning to see a fairly significant uptick in rate restriction and capacity. That is a class of business that generates a lot of premium volume, but consistently also generates a pretty significant loss pick as well. So, we're seeing fewer carriers willing to jump in on a primary basis in that line of business and we write a very significant book of that.

Not only do you have just the day-to-day exposure of normal fire losses, but you also generally will have some significant catastrophe exposure as well. Those two things combined make that tend to be a difficult class of business from time to time and we're beginning to see a fairly significant uptick there.

MCDONALD: Is it that the pricing is hardening? Is it hard to place?

WESTROPE: The pricing is definitely hardening and there are fewer players chasing the primary layers in that business, which tends to be where the bulk of the premium is.

MCDONALD: OK. Just moving along to a line that I know is very important to your business, Richard, which is workers' comp and I know Marla has some interesting views on that as well. Has that been changing at all?

KERR: We expected workers' compensation to start changing by this time, but it's not. I mean it's still a very, very competitive market and it's even gotten to the extent where you would expect some risks such as asbestosis or chemical blending to have a very limited number of potential markets.

However, a lot of the class codes that used to be restricted are being broadened and carriers are still clamoring for premium and broadening their scope. So, we see insurance companies doing class codes today that they wouldn't have been doing several years ago. Now, admittedly, some of the big, strong players in the workers' comp. arena of two or three years ago are pulling back and changing their price strategy and that will ultimately have an impact.

Perhaps, their view is--we'll come in and write billions of dollars whenever the pricing is right and when it's wrong, we're going to pull back. So, as a broker I don't like it, but as a shareholder I would commend them for that strategy.

MCDONALD: OK. And Marla, you see workers' comp as tomorrow's story. How so?

DONOVAN: We're in a time of unprecedented economic disruption. What tends to happen with workers' compensation is that it almost becomes the unemployment insurer of last resort. As workers are laid off, they will file claims for back strains and things that are very difficult to prove. The workers' compensation mechanism ends up being a support system.

The mirror dynamics are that people are going to be out of work for longer and have more difficulty finding work. So, they'll be looking for solutions and one of them is the workers' compensation system.

I think that's a differentiator, too, between the surplus lines market and the standard market when we talk about the difference in results. In surplus lines we don't do workers' compensation. It tends to be the single largest product line for many carriers and as those results start to come in, there may be some reserving issues and a need to acknowledge the negative economic impact of workers' compensation in the standard markets.

MCDONALD: So you see that shooting way up?

DONOVAN: I see it shooting up. I absolutely do. And I think it's something that has not necessarily been factored into the current results.

MCDONALD: One thing. You don't believe 105 is where it's probably at in actuality for combined ratio either, do you?

DONOVAN: I do not. Unfortunately, so much happened so quickly last year and nobody can afford to acknowledge everything at once. It's very difficult.

So, acknowledging what was going on in the capital markets, acknowledging what went on with cats is one thing, but workers' comp results are a little more insidious. We saw the wild swings back in the '90s; from one extreme to another. I think that's the next big story--is workers' comp is going to start to catch up?

MCDONALD: And the tail is going to come back on this year and there might be some adjusting there.

DONOVAN: I believe this to be true. And I believe it's a broader group, as well, because the problems are more serious in the employment area than they have been in the last 30 or so years.

MCDONALD: Let's talk about professional liability. I know Markel is very deeply involved in that market and particularly in the medical malpractice part. Why don't we start with med mal, Paul? What are you telling people is the story these days?

SPRINGMAN: Well, here again, it's similar to a lot of the other specialty classes. It's a real mixed bag. There seems to be a lot of competitors that have wandered into the specialty arena in the hard to place--we refer to them as "physicians with special needs."

MCDONALD: We refer to them as "other people's doctors."

SPRINGMAN: The first thing I want to do when I see a new physician is make sure that we don't insure them, but that's another story. There seems to be a lot more competition for no apparent reason other than some cash flow underwriting and we've seen some of the medical mutual companies become a little bit more aggressive.

We've seen some of the standard stock companies start to wander their way back into what they perceive to be as standard medical covers on some relatively hard-to-place-type physician exposures.

On the other hand, on our allied medical or specified medical--some people refer to it as miscellaneous medical--we see that as a tremendous area of opportunity.

Things like day spas, and one of the things we get lots of calls on today and tattoo removals and things like that; but clinical trials and new and emerging medical technologies are a great place for wholesalers and surplus lines underwriters when they have the opportunity to partner.

October 1, 2009

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