Surplus lines drained, but not dry

01-11-2010

An A.M. Best special report outlines effects of the soft market and economic conditions impacting the surplus lines market.

Breaking a two-decade run of fairly consistent gains, the surplus lines industry’s direct premiums written (DPW) declined for a third consecutive year in 2009. At 4.1%, the decline was still better than the previous year’s 6.2% reversal, but higher than the overall property/casualty (P/C) industry’s 3.3% DPW fall off. Standard market carriers that compete on risks traditionally insured in the surplus lines market are still major sources of pricing pressure and profit margin compression.

Recessionary economic conditions, volatile financial markets and competition from Bermuda-based carriers are added challenges for this market, according to the A.M. Best Co. special report.

Still, surplus lines specialists, particularly the market leaders, generated considerable operating profits and returns on both revenue and surplus. The partial rebound in the underwriting performance can be credited to the margins built up before the market softened. In 2009, favorable prior-year loss reserve development also helped offset aided underwriting performance.

Surplus line specialists in 2009 released a significant percentage of prior year loss reserves relative to net premiums earned, as did the P/C industry, which led to a sizable benefit on their yearend combined ratio. Nine of the top 10 U.S. surplus lines groups by DPW remained the same as in 2008, and the rankings from one to eight did not change. Berkshire Hathaway Insurance was the only group to drop out of the top 10, landing in the number 13 position.

Three groups experienced DPW growth: QBE Americas Group, Munich-American Holding Corporation and Endurance Specialty Group. QBE Americas Group is one of several groups that have made acquisitions to increase market share.For the sixth year in a row, the surplus lines industry recorded no financial impairments.

A.M. Best, surplus lines, recession, report, DPW, QBE Americas Group, Munich-American Holding Corporation, Endurance Specialty Group

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