By Jared Shelly, senior editor/web editor of Risk & Insurance®
1. State of the E&S Market
Attendees at the National Association of Professional Surplus Lines Offices Ltd. annual conference seemed cautiously optimistic. The industry seems to be slowly emerging from the doldrums of the economic collapse, and rates are on an ever-so-slight upswing, attendees said.
That means wholesalers are getting more submissions, said Linc Trimble, senior vice president of U.S. casualty at Torus, at the October 8-11 in Atlanta.
"The mood here at NAPSLO among all the wholesalers is much lighter because the economy is doing a little bit better as opposed to much worse," he said.
The entire excess and surplus market is in the midst of a dramatic shift, said Michael J. Pilla, president and CEO of Technical Risk Underwriters. "There are more standard markets, more companies entering the business because it is less regulated and easier to get into."
The E&S market today is "challenging," due to the combination of low interest rates and a lack of growth in payroll and revenues, said Steven K. Dresner, executive vice president and head of brokerage operations for Endurance Specialty Underwriters.
"It puts a lot of pressure on underwriting margin and really the only way to improve underwriting margin is to push rates," he said. "I think that's why you've seen a bottoming out of rate decreases over the last 12 months. We've seen rate increases in every one of our lines of business, so that's very encouraging. The big question is: will that continue?"
It's no secret that wholesalers have been acquiring each other in the past few years. The reason is simple enough -- it's the only way to grow in the current environment, said Michael J. Stone, president and COO of RLI Insurance Co.
"We see companies consolidating because they can't get growth any other way," said Stone. His company acquired Contractors Bonding Insurance Company in 2011 in a $137 million deal, but probably won't be doing too much of the same in the future because the company prefers organic growth.
"We're not a serial acquirer," he said.
Divergence on Firming Prices
The big question at the conference was whether prices will begin to firm in the near future. Dresner said that in the next few years, we're likely to see "microcycles" in pricing -- with pockets of opportunity and pockets of dislocation -- but no overarching move to a hard or soft market. That's because companies are more educated about pricing trends, monitor pricing more accurately and have improved their actuarial analysis, he said.
With more and more acquisitions, the wholesale market has been whittling down to fewer companies -- but the companies that are left have plenty of capital and can withstand difficulties. Years ago, tough markets would put plenty of E&S companies out of business.
"The industry is much stronger than it used to be, the companies are much stronger and therefore you don't have the boom and bust, it's much more cyclical and much more stable," said Dresner.
Stone said that "the market is not hard by any stretch. It feels better. We're getting some rate but not a lot." If the economy can get moving again, we'll see a more robust insurance market, he said.
Pilla, from Technical Risk Underwriters, disagreed.
"People talk about prices firming. I don't see it. That goes away on January 1," said Pilla.
Bigger Ships = Bigger Risks
When it comes to marine risks, bigger doesn't always mean better. Companies are now introducing E-class vessels with more cargo capacity than ever before. The Maersk Line Triple E-Class Vessel, for example, is said to be the largest in the world. While that means more cargo can be shipped at one time -- using less fuel than making multiple trips -- it also means that insuring such vessels can be an expensive proposition.
"These vessels can contain $1 billion to $2 billion in cargo," said Don Harrell, senior vice president in the Marine division at Liberty International Underwriters.
They are so big, in fact, that they typically can't fit into a port. So they instead rely on smaller ships to take the cargo from the E-class vessel to the port.
There could be as many as 10 reinsurance companies involved in one vessel, so if one sinks, the impact on the reinsurance market could be felt for years.
4. Highway Infrastructure Likely
Pilla has a bold prediction about the upcoming presidential election: whoever wins will put money into a large-scale highway infrastructure program. While that certainly seem to contradict Mitt Romney's plan of reducing the debt through less spending, Pilla said that either Romney or President Obama will have no real choice in the matter given the conditions of roads and bridges. The country simply needs it.
"Something's got to give," said Pilla, whose company is a division of Ryan Specialty Group. "Whoever gets in will have to address that issue."
A Modern Take on Flood Insurance
Pilla also said that Technical Risk Underwriters is trying to become the leader in analytical tools for flood insurance by building up-to-date flood maps and models created with the help of engineers. The government -- through the National Flood Insurance Program -- has "old data" and the insurance industry typically takes the "same approach to the same problem," he said.
When asked about how his newly formed company is fairing, Pilla said he now has nine underwriters and will finish the year with $40 million in premium.
6. London Calling
Wholesalers have been making their move into London and will continue to do so in the near future, said Darren Doherty, managing director of Pioneer Underwriting, who is based in the English capital.
"It allows them to become the London broker," said Doherty.
In early 2012, AmWins Group Inc. bought THB Group Plc, a London-based insurance and reinsurance broker serving the U.K. market. Ryan Specialty Group, bought specialist Lloyd's Insurer Jubilee Group Holdings Limited in 2011 and Global Special Risks, a subsidiary of Willis specializing in solutions for energy, marine and specialty product offerings with the London and North American markets. This trend doesn't show any signs of stopping.
"This helps these companies capture another element of income," he said.
7. NYC Construction Rates Reach the Sky
With the economy getting a bit better, the construction industry is starting to see some signs of life.
"It's very pocket driven -- some parts of the country are better than others," said Pilla. Surplus lines insurers have still got to be careful, especially in New York.
"New York construction is absolutely going vertical in rate because results are awful," said Trimble. "Carriers have been really aggressive. I've been hearing about doubling and tripling prices."
But now companies are smarter than they used to be, said Trimble meaning that rather than carriers initiating a 10 percent increase across the board -- which will drive away profitable accounts -- they are now much more aggressive in attacking the tougher lines and leaving the other ones alone.
"They're picking their battles," said Trimble.
October 16, 2012
Copyright 2012© LRP Publications