INSURANCE: How are US surplus lines insurers coping with market upheaval?
Resilient. That is the word used by many to describe the state of the excess and surplus (E&S) lines insurance market in the United States. Through systemic challenges like the COVID-19 pandemic and resulting economic depression, the rise of social inflation, and the ever-increasing frequency and severity of natural catastrophe events, the E&S market has been unwavering on its record growth trajectory.
In 2020, surplus lines direct written premium (DWP) hit a new high of $66.1 billion, a 17.4% increase from the $56.3 billion recorded in 2019 – which was actually the first year the industry had ever exceeded the $50 billion DWP mark.
“When you look at the growth from 2019 to 2020, we really saw the surplus lines market be able to come through the economic [uncertainty] or the market upheaval that coincided with the onset of COVID-19,” said David Blades, senior financial analyst at AM Best Company. “We saw the surplus lines companies be able to come to the market with solutions for companies and for areas/sectors of the market, where things were changing because of COVID-19, where the way companies had to operate was changing, and obviously, when economics and company revenues and payrolls were down.
“To see that the surplus lines market grew in the way that it did, and it continues to grow in in 2021, I think that’s a very key takeaway for the overall health of the marketplace.”
Domestic professional surplus lines insurers – US companies that write more than 50% of their business on a non-admitted or surplus lines basis – have experienced the highest levels of growth since 2018, according to Blades. They’ve been growing at a faster rate than other segments of the E&S market, including Lloyd’s syndicates and non-Lloyd’s-regulated alien insurers. In fact, AM Best’s 2021 Special Report, US Surplus Lines – Segment Review reports that domestic surplus lines insurers grew by 20.2% in 2020, which is the largest percentage of growth since 2003.
Over the two and a half decades that AM Best has produced the state of the surplus lines market report, the ratings agency has considered the surplus lines market to contain 85% commercial business. Therefore, AM Best compares surplus lines growth to the overall growth of the commercial lines market for the total property and casualty (P&C) industry. In 2020, surplus lines as a percentage of total commercial lines DWP grew from 7.1% to 18.4%.
Blades commented: “Over the last couple of years, growth in surplus lines is actually outpacing the growth in the overall total commercial market. There’s a lot of momentum – a lot of it driven by price – which has really been helping propel the performance of surplus lines companies.”
The commercial insurance marketplace has become increasingly tight in recent years. With underwriting profits impacted by deteriorating loss ratios across many key lines (such as marine, commercial auto, cyber, and management liability to name a few) and investment yields stinted by a sustained low interest rate environment, insurers have taken corrective actions to shore up their portfolios, manage their capacity, and return to profitability. As such, many primary insurers are stepping away from certain risk classes and borderline surplus lines business, which is creating opportunities for E&S players, according to Blades.
“We really saw the surplus lines market and surplus lines companies step into those opportunities and bring solutions to the marketplace,” he said. “And that’s why you see the domestic professional surplus lines insurers [have grown at a pace that has] really outstripped the other components in the marketplace.”
Not only has the surplus lines industry outpaced the total P&C market in terms of growth percentage, but it is also recording better results from an operating performance perspective. Looking at pre-tax returns on revenue for surplus lines composite compared to the total P&C industry, Blades described how from 2010 to 2020, the surplus lines market has “fairly consistently” generated better returns over the long-haul.
But certain areas of the market have been more challenged than others, as Blades pointed out. “The last three or four years (2017, 2018 and 2020, in particular) have been significantly impacted by catastrophes, be they hurricanes, convective storms, meaning tornadoes, hailstorms, and also wildfires,” he said. “And we’ve seen the impact of the catastrophe losses on some of the property results and in the commercial multi-peril line of business for the surplus lines market. Catastrophe losses on those particular lines have caused the returns to be a little bit lower than those of the total P&C market.
“But in general, we’ve seen over time … that the surplus lines market has produced results that have been superior to those of the total P&C industry.”
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