#12 Excess & Surplus Lines Market in the US – Why and what for?

First of all: What are Excess & Surplus lines?

In the domestic US market, there are uniquely highly exposed risks that are difficult to underwrite.?This often concerns industries such as construction, manufacturing, services, and other sectors that are not a fit for the standard lines market. This is where E&S insurance comes in.

The Excess and Surplus (E&S) lines market has been around for well over 100 years:? The first E&S license was issued in 1890 (in New York of all places as my fellow NYC construction underwriters can attest to) which makes the concept of E&S a dated one. This license was requested and issued for one reason:?The need for a non-admitted (or E&S) market that could address the individual needs of complex insureds without the confining structure of the admitted (or standard lines) market. This concept is not only still around to this day, but gaining in popularity as recent history suggests.

Following on the heels of the 9/11 tragedy, the P&C market faced an immediate hardening across most verticals, which caused considerable chaos in the commercial lines market. Where chaos rules, opportunity reigns, which is where the E&S market comes into focus. Vast amounts of capital flowed into the E&S space which emboldened legacy markets such as WR Berkley, Berkshire, Lexington, and others while creating new capacity in the form of carriers like Endurance (now Sompo), AWAC, Axis, and others. These markets form the backbone of a now robust E&S market.

The E&S market in numbers

Growth within the non-admitted space has ranged between 6% to 8% annually, as standard line carriers began to shed premiums in 2019 to minimise exposure to a multitude of threats: economic upheaval, inflation, geopolitical uncertainty, environmental change, and capital constraints. The standard market decision to pull back admitted capacity led to ideal growth conditions in the non-admitted space, where brokers look to place difficult and distressed accounts with underwriters who better understand these exposures and are willing to take on and assume complex risk issues confronting their insured clients.

E&S Statistics:

• Combined ratios across all E&S verticals is 98.2%.
• Annual year-over-year growth in the E&S lines range from 6% to 8% year over year from 2018.
• Casualty premiums in the E&S Space make up, on average, 61% of total E&S GWP.
• Automobile liability premiums grew the fastest in the last 5 years at 25.6% compounded growth during that period. Auto Liability is considered the most challenging of the E&S verticals.
• The five largest E&S States (adjusted for the share of total State premium) are CA, LA, TX, FL, and HI. These 5 States are considered amongst the more challenging of all 50 States to write liability lines in.

Headwinds in the E&S market

As with any market in any industry, there is no such thing as static conditions. The hard market, which began in earnest in 2020, changed the E&S casualty landscape, if not temporarily. What had been a steadily softening market cycle throughout nearly all casualty LOBs from 2012 on, turned hard in 2020. Carriers, both standard and E&S, started to feel the impact of the same phenomena earlier mentioned, along with a few more nasty consequences of a justice system gone awry: Social inflation, nuclear/thermonuclear verdicts, third-party litigation funding, and expansion of overly plaintiff-friendly court districts known as “judicial hellholes.”?

These headwinds, along with adverse developments on the reinsurance side, necessitated a major pullback of capacity and upward pressure on attachments. The heat was on, and all but the most na?ve of carriers found religion and got serious about their targeted class underwriting approach and the limited deployment & attachment profiles that went along with it. The hard market was back, at least for a couple of years. Then came the new money pouring into the E&S market, just like post 9/11 – only much more aggressive this time around.

“The newfound E&S investor interest in the hard market manifested itself in the form of the sudden emergence of new capacity. New E&S carriers and MGU’s/MGA’s started popping up (at last count over thirty new entities) in the E&S space. To further exacerbate the problem, many standard line carriers have stepped back into the E&S space and once again began blurring the line between what is considered admitted and non-admitted territory.”

The subsequent additional capacity introduced into the E&S space created competitive pressures which, in many cases, have led to rate decreases, underwriting discipline breakdown, and poor class, attachment/limit deployment decisions. This is happening not only with some of the legacy carriers (as they fight to retain hard-earned renewal business) but mostly with the new capacity players, many of whom engage in the practice of cash flow underwriting, more commonly known as naive capacity.

The good news is…

While this has been a problem with some areas of the E&S market, there is still good news to be had with this situation.

1. The disciplined “old-school” wholesale broker plant has managed this new capacity influx very well. Having been through this cycle before, the seasoned brokers recognise the intangible, yet material value associated with staying the course with established, long-term carrier relationships. They understand the other side of doing business with unproven capacity can ultimately lead to disaster for their retail and insured relationships. Carrier or MGU capacity that is likely not going to be around in 4 or 5 years (or beyond) when the underwriter relationship and claims services are often at their most critical. These brokers are where HDI sees the most value-added, and thus, where we seek to partner.
2. Despite ample capacity in the E&S space, there are some spaces where rate and limit/attachment deployment are holding up, and in some cases, 10% plus rate increases are still the norm. These are the spaces where HDI operates exclusively. It is all about aggregate rate integrity in our defined market.

What’s HDI’s role in the E&S market

HDI more than 120 years of history as one of the World’s preeminent heavy industrial insurers. We are no stranger to underwriting and assuming the most challenging of risks. We welcome the opportunity to design programmes that fit the needs of the Insured, the expectations of the broker, and the demands of our shareholders. HDI will never be the cheapest nor the most expensive market option, but we will never cut and run at the first hint of problems with an HDI-insured programme. As our storied history suggests, we are in for the long haul.

Where we choose to participate is in the domestic E&S market – both in the commercial construction (primary and excess) and excess liability space.

HDI has worked closely with our reinsurance partners and broker plant to find the space that is most underserved in the E&S casualty space. This has resulted in a targeted approach to low-limit, low-capacity, true E&S business in the construction and non-construction space. In short, HDI predominately (but not exclusively) is interested in accounts where we are either in the working layer (primary) or in an extension of the working layer (lead excess). We focus on commercial grade (as opposed to residential) construction casualty (both projects and practice) policies. Additionally, on the non-construction excess front, we also focus on working layer capacity deployment. This area is where HDI has proven our mettle repeatedly in an ever-evolving and devolving market space.

Both our construction and non-construction appetites allow our partner brokers to build capacity towers above us to fit the specifications necessary for the Insureds to do what they do best:? Build, manufacture, sell, and service their customers without fear of insufficient coverage or being abandoned by their carrier when the going gets rough.