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16 July 2013 Insurance

Rehabilitation

The excess and surplus lines market is in a recovery mode. While rates are increasing, they are not exactly “hardening” just yet, the market has pulled back from very soft rates in 2009-10. But new and potential capacity entering the market also makes its full recovery far from certain.

That is how Michael Sillat, chief executive of WKFC Underwriting Managers and CivicRisk, both owned by the Ryan Specialty Group, summarises his take on the market he specialises in. WKFC operates principally in excess and surplus property lines but with a healthy book of general and professional liability business as well as other specialty lines, while CivicRisk underwrites excess casualty lines for mainly large public bodies.

“By around 2009, rates had become very soft,” he says. “They hit a real low point in 2010. Since 2011, there have been steady increases and I predict these should continue but it will be gradual and will vary by line. General liability is looking strong at the moment, for example, meaning its rehabilitation should be a lot quicker.”

Putting the current situation into context, he says the market as a whole gradually started softening from around 2004 following a hard market triggered by the 9/11 terrorist attacks and subsequent losses.

The current improvement in the market means there are some opportunities for carriers able and willing to take them. One of the fallouts from Hurricane Sandy, for example, has been the requirement for increased scrutiny when providing flood coverage in the excess and surplus lines market.

Sillat does not believe the sector is heading into a true hard market head first—not enough capacity is leaving the market to cause that. Instead, he describes the “slow and steady” dynamic as the “new normal”.

“While upward pressure continues on rates we are also driving changes in terms and conditions,” he says.

The sector is in a delicate balance at the moment. He also believes the dynamic could ultimately force smaller managing general agents that lack diversification out of the market. “That is my prediction.”

There is also fluctuation in the carriers participating in the market. “Some have withdrawn completely; others have purposely pushed rates up so far they know they are unlikely to see any business, but then there are those that remain bullish at all cost,” he says.

“But there have also been interesting developments such as brand new capital coming out of Asia into the market and other new carriers coming in,” he says. “Despite this, there are probably half the carriers competing for business now compared with 2010.”

He notes that the excess and surplus lines market has also faced external challenges. The economic downturn has made life tough for carriers because it has led to an increase in claims on some lines of business. Meanwhile, events such as Hurricane Sandy have forced the sector to ask some tough questions because of the highly unusual nature and geographical path of that storm. “These are not unique events but they are pretty unusual,” he says.

The other trend is a propensity of package products in recent years with different risks being bundled into a policy. “We are seeing property being bundled with general liability products, for example,” he says. “But usually, the upshot is a discount in some form. Competition is still very aggressive in that area.”

Despite the challenges, he is cautiously optimistic. “I would characterise the market as going through a slow and steady rehabilitation,” he says.

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