1 September 2010 Insurance

Surplus to requirements

If there’s one thing that constantly changes the parameters and pricing of the excess and surplus lines market, it is the risk appetite of standard lines US insurers.

At the end of 2010, US standard lines insurers have become more engaged in business that previously went straight to the excess and surplus lines (E&S) market, particularly non-admitted specialist companies.

“Standard lines companies are showing that excess and surplus lines are not the sole preserve of non-admitted insurers,” explains Steve Dresner, senior vice president of casualty treaty & programs at Endurance Reinsurance Corporation of America.

“As they rebuild their balance sheets and become more confident, they move across the divide into more excess and surplus lines business,” Dresner adds.

He adds that as new companies enter the excess and surplus lines (E&S) arena, larger accounts are under more pricing pressure than the smaller ones because new entrants will naturally target the larger accounts as a priority.

It is one of the reasons, along with the economic conditions, that excess and surplus premiums have declined for the third year in a row, dropping by 7.5 percent in 2009, according to SNL Financial’s analysis of the US E&S market. All of the top 10 E&S insurers saw a drop in premiums. AIG wrote 15.1 percent less but stayed at the top with nearly 25 percent of market share.

By contrast, Ironshore was one of the big winners, raising its premium by 623 percent in 2009 compared to 2008 and moving the company to 20th from 65th position. Mitchell E. Blaser, chief operating officer and chief financial officer of Ironshore, attributes the increase to the launch of several new businesses during 2009, and the shift of clients and brokers away from concentration of risk to a syndication of risk.

“This has inured to the benefit of Ironshore. The largest specialty insurance markets in the Other Liability Claims Made space have all lost share over the last two years. The biggest beneficiary has been Lloyd’s, which experienced significant growth in 2009 as the rest of the industry was stagnant and shrinking. Ironshore, with fresh, clean capital, gained some share from this shift as well,” Blaser says.

But the outlook for the next 12 months is not as straightforward as a clearcut gain by standard lines insurers. Indeed, the plight of foreign-registered or non-admitted insurers has been assisted, perhaps inadvertently, by the passing of the Dodd-Frank financial reforms. One part of the act is designed to eliminate inefficient regulation of both surplus lines and reinsurance business.

Meanwhile, a separate regulatory change sees individual states such as New York increasing their acceptance of foreign E&S insurance capacity. Before a New York insurance risk can be placed with an unauthorised insurer, the risk must be offered to, and declined by, three authorised insurers.

However, a list of coverages, commonly referred to collectively as the ‘Export List’, may be placed by excess line brokers with unauthorised insurers without first having to obtain the requisite number of declinations from authorised insurers.

Despite these changes, regulation is far from the minds of E&S insurance and reinsurance buyers. “Buyers are looking at rate level and economic conditions...regulation is yet to come up in conversations with clients,” says Dresner, who adds that the changing dynamics of E&S business have increased the need for diligence in selecting an insurance partner.

“You have to look at it over a five to 10-year period to ensure your selected insurance company’s underwriting processes, claims-handling capabilities and pricing techniques are all of a high standard.”

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