The rise and rise of E&S—where would Florida be without it?

Changes in the admitted markets and Lloyd’s specifically have led to the rapid growth of the excess and surplus lines markets in the US—a phenomenon that is showing no sign of slowing, Jason Liu of Zywave tells Intelligent Insurer.

A dearth of property-catastrophe capacity in recent years combined with changes and higher costs at Lloyd’s are just some of the factors driving the rapid growth of the excess and surplus (E&S) lines and/or specialty insurance market from 2018 to 2022. E&S capacity has become central to some key markets such as Florida—and the sector is still growing fast.

That is the view of Jason Liu, chief executive of insurtech Zywave, who argues that changes in the admitted markets and Lloyd’s specifically have driven this rapid growth—but there are other factors specific to certain lines of business or states.

The E&S market in the US recorded double-digit growth year on year for four consecutive years between 2018 and 2022, with S&P Global Ratings reporting that the market grew by 20 percent in 2022 to $75 billion in premiums. In 2023, AM Best changed its outlook for E&S from stable to positive, noting that there was increased business as a result of declining capacity in commercial lines and some personal lines.

“Property-catastrophe is an extremely volatile peril, and this affects capacity. Capacity to support natural catastrophe is accessed through rigorous underwriting rules to ensure there is enough capacity. Capacity is shrinking at Lloyd’s, driven by costly expense ratios, which is moving demand towards the US E&S and specialty markets,” Liu says.

“A further factor driving capacity to the E&S markets is that costs are rising due to weather events, social inflation and supply chain issues, which impact the price of car repairs.

“Finally, due to issues such as high hurricane risk, mudslides, wildfires and anxiety about the legal environment, some carriers have withdrawn from states such as Florida, Louisiana, and California. All of this contributes to a further reduction in capacity.”

Many of these factors driving growth held true in 2023. Data from the Wholesale & Specialty Insurance Association, based on figures from 15 surplus lines offices (a different criterion from S&P’s), show premiums reaching nearly $73 billion in 2023—a 14.6 percent increase over the record-breaking figures of 2022, when premiums grew in excess of 24 percent, to $63 billion.

The total number of transactions increased by 5.2 percent to $5.8 million last year. Commercial liability rose by 10 percent to $26.8 billion and commercial property increased by 32 percent to $24.2 billion.

States lean on E&S

Liu says some states are leaning on the E&S markets more than others as specific challenges have prompted many traditional carriers to walk away. In California, for example, where many admitted carriers have stopped writing homeowners’ business, personal property transactions increased the most (23.3 percent) and premiums grew by more than 20 percent to almost $746 million (although personal property accounts represent only 4.5 percent of the California E&S market).

Another good example is the Florida market. Figures from the Florida Surplus Lines Service Office show that total Florida E&S premium has grown significantly every year between 2018 and 2023. In 2018 it stood at $5.8 billion, rising to $12.1 billion in 2022. For 2023, it was projected to grow, year-on-year by 32.5 percent to $16 billion.

“There are a number of reasons for this dramatic growth in premium, including increased demand for hard-to-place risks,” Liu says. “Due to factors such as rising hurricane activity and concerns over property values, many standard insurers are becoming more selective in the risks they cover, especially in coastal areas. This drives individuals and businesses towards the E&S market for coverage.”

He adds that commercial property insurance, a significant segment of the E&S market, has also seen a notable increase in premiums due to factors such as rising construction costs and concerns over natural disasters.

Meanwhile, the standard market in Florida has seen reduced capacity, meaning fewer insurers are offering coverage and those that do have stricter underwriting guidelines. “This leaves a gap that the E&S market fills,” he says.

Another significant factor in Florida is that the Citizens Property Insurance Corporation, a state-backed insurer of last resort, has experienced financial struggles and implemented assessments on other insurance markets, including E&S, further pushing some towards the surplus lines market for coverage. 

“These factors have collectively led to a significant increase in the Florida E&S market, making it the second largest in the US,” Liu explains.

Rapid growth, however, also causes some challenges for carriers, specifically in terms of managing the high number of submissions. Liu says the challenge they face is how to evaluate the vast volumes of business coming through the door and then to decide what to write. “Carriers are losing out on a lot of good business because they don’t have the time to discern the good submissions from the bad.”

He says that much of the communication still relies on email and the same data is entered and re-entered multiple times before a quote is produced. Only then does the underwriter get the chance to evaluate the submission.

He suggests that carriers should explore the use of quoting and pricing platforms that can allow them to respond to risks more efficiently. Smart technology, such as application programming interfaces, generative artificial intelligence (AI), automation and rapid data processing, can all improve the accuracy and efficiency of their decision-making.

“These same enhanced workflows can be used for renewals to update pricing and underwriting requirements,” he adds.

Liu is an advocate of the use of such systems, especially open architecture software. He believes that many insurtechs historically have failed because they focus on the technology instead of the needs of the client, saying: “We have seen far too many technology solutions in search of a problem. Rather than trying to disrupt the market, we need an evolution to integrate many of the technologies that already exist.”

He continues: “There is tremendous potential in technologies such as AI and machine learning, and what the market really needs is collaboration to create a platform that safely and seamlessly transfers data from carriers’ and brokers’ existing tech stacks. 

“This would involve open architecture and the creation of integrated modular solutions that can be plugged in where and when they are required by clients. If we achieved this, it would deliver genuinely transformative benefits: a digital distribution system that drastically simplifies processes and saves carriers and brokers time and money.”

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