In a hardening insurance market, companies look to excess and surplus (E&S) lines insurers to find coverage that is both affordable and meets requirements. So it’s no wonder that, as admitted commercial P&C insurers have responded to the COVID-19 pandemic and other factors by raising rates, constricting terms and limits, or dropping some lines of coverage altogether, 2021 has been a period of expanding opportunity for many E&S providers.
As we look toward 2022, the cyclical nature of the insurance market begs the question, “Is increased demand for non-admitted commercial products a trend that is likely to continue into the new year and beyond?”
The Factors Fueling E&S Opportunities
For insurers, MGAs, program managers, and others in the E&S and specialty markets ecosystem, the current environment is quite rare. As reported in the Carrier Management article One of Best E&S Markets in 50 Years, Industry Veteran Says, William R. Berkley — chair of W.R. Berkley Corporation — commented on current market conditions in a September 2021 speech at the Keefe, Bruyette & Woods Virtual Insurance Conference, saying “there have only been ‘two, or possibly three opportunities that have looked like this’ that he has witnessed during the course of his career — opportunities where ‘demand for [insurance] products outstripped the supply of reasoned and intelligent suppliers.’”
The PropertyCasualty360 article Uncertain times: 2021 E&S insurance market update summarizes the factors fueling these opportunities. “The past two years have been among the most uncertain the world has faced in recent history,” writes Kristen Beckman. “As a result, the market for wholesale insurance ... has experienced strong growth and proven its resilience in the face of a global pandemic, outsized property catastrophe losses, increasing cyberattacks and ‘nuclear’ jury verdicts.”
Citing a Fitch Ratings review published in August, the Insurance Journal article Surplus Lines Report: Mostly Good News explains what is likely to come next for the E&S market. “The Fitch report anticipates that all E&S lines, minus commercial auto, will enjoy a double-digit growth streak in direct written premiums going forward as rates and exposure showed strong growth in the first half of 2021,” writes Lori Widmer. “Fitch sees rate increases and tighter underwriting resulting in better underwriting results at break-even or better.”
Areas of Challenge and Opportunity for E&S Insurers
Even though the overall E&S market outlook is positive as the coming year approaches, there are some lines of business and specific areas for which the outlook for E&S insurers is not as glowing. According to those with whom Widmer spoke for the article, these come as a result of recent nuclear verdicts and the cost of claims related to liability lines for specific industries such as security and heavy auto fleet.
“Underwriters are also taking a hard look at catastrophic exposures,” writes Widmer, who spoke to Joel Cavaness, president of Chicago-based Risk Placement Services. “‘Wildfire coverage is extraordinarily difficult to get today,’ said Cavaness. ‘It’s very difficult to find insurers who are interested or willing at any price to look at California wildfire. And obviously, after the last two years, Louisiana will be even more difficult to write hurricane coverage with three hurricanes causing damage.”
On the other hand, AM Best details a number of potential areas of opportunity for E&S insurers, three of which include:
- Cannabis – As an expanding market that heavily-regulated insurers are hesitant to enter given cannabis’s classification as a Schedule I drug under US federal law. AM Best states that “developing coverage solutions for the businesses involved in growing, producing, and selling cannabis requires the type of creativity that has long been the hallmark of the surplus lines companies.”
- Construction – The potential for premium increases in construction lines on the part of admitted insurers, spurred by continued resumption of projects delayed by the pandemic, may provide another area of opportunity for E&S insurers. And following the collapse of the Champlain Towers South in Miami, the likelihood that admitted insurers will require more information related to inspections, repairs, and re-certifications has the potential to result in a turn to surplus lines insurers for general liability and property coverage of residential high-rise risks, says AM Best.
- Cyber – The increased frequency and severity of malware and ransomware attacks provide yet another area of opportunity. “Surplus lines insurers constitute an alternative marketplace for unique and evolving cyber exposures, with new policies serving as a testing ground for product innovation,” states AM Best. “ As more surplus lines companies develop cyber solutions, products for which the interpretation of contract language proves favorable in the courts can become more common.”
Into the coming year, AM Best notes that insurance market conditions are likely to remain tight. This will be driven by the ongoing impacts of COVID-19 and economic uncertainties. According to the firm’s report, “a decline in capacity owing to changes in company risk appetites, along with hardening rates for many commercial lines of coverage, creates an environment with an acute need for creative market and product-oriented solutions — the hallmarks of the surplus lines carriers.”
Using Technology in the Pursuit of E&S Opportunities
The presence of what AM Best, Fitch, and others describe as “tailwinds” for many E&S lines as 2021 winds down and we head into 2022 is welcome news. As E&S insurers respond to changes in the market, it is critical that they take steps to ensure they are able to react quickly. This can be a challenge for some E&S insurers when it comes to technology — specifically, those who are reliant on outdated legacy systems that require time-consuming changes to code, restrict the ability of insurers to integrate with data from multiple sources for analysis, and make it difficult, if not impossible to, provide user-friendly experience to intermediaries in the E&S ecosystem.
The ability to automate processes is another technology-specific challenge facing E&S insurers, particularly for those who face staffing shortages as a result of "The Great Resignation." As mentioned in the Risk & Insurance article ‘It’s What We Do’: E&S Steps Up to Address Hardening Markets and COVID Hinderances, “One of the biggest issues has been implementing automation and underwriters harnessing technology to improve their efficiency, particularly in an industry steeped in tradition and historically slow to adopt new processes,” writes Alex Wright.
The importance of automation for E&S insurers is echoed by Martina Seferovic, the managing director of OIP Robotics. “By implementing technology that automates data entry driven tasks, along with delegating some of the common manual tasks, innovation and creativity is sustainable,” said Seferovic in an interview with Insurance Business at the 2020 Insuretech Connect conference.