Dick Quehl, president of CNA E&S
By Phil Zinkewicz
As traditional boundary lines between various insurance and reinsurance sectors continue to melt away, with insurers and reinsurers becoming almost one in their activities and with brokers and agents moving into the underwriting end, the excess and surplus lines industry is looking more befuddled than ever before. In the not-too-distant past, risks that were labeled "exotic," meaning that the traditional market didn't know what to do with them, found a home in the excess and surplus lines industry. Lloyd's of London--the underwriting facility that was willing to take on Jimmy Durante's nose and Betty Grable's legs--was the usual "home" for these risks that baffled the underwriting brainpower of more traditional insurers. Other excess and surplus lines insurers were there to take on Lloyd's overflow.
Dick Quehl, president of CNA E&S
But today, everything's up for grabs. In the current "prolonged" soft market--some say "permanent" soft market--there are very few exposures that cannot be written by the traditional insurance marketplace. "The challenge we face today is how to define the excess and surplus lines market," says Dick Quehl, president of CNA E&S, a subsidiary of the CNA Cos. "The market changes every day as the regular market continues to draw exposures that they wouldn't look at before. We define excess and surplus lines by the method of distribution. For us, E&S is anything that comes to us through wholesalers or managing general agents."
However, beyond definition, E&S underwriters today have to determine the best way to deal with a shifting marketplace where premium dollars are here today and gone tomorrow. There was a time when professional liability exposures--directors' and officers', lawyers' malpractice, accountants' liability, etc.--were all written by excess and surplus lines carriers because regular insurers shunned these risks. Today, as companies boast of their "niche" marketing capabilities, traditional insurers are sharpening their razors on a daily basis to cut the throats of their competitors and steal the business away.
Moreover, it's not only in professional lines that this situation exists. Special events coverages, as well as unusual types of business exposures, have moved into the regular market. "To survive and grow in today's market, we believe that we must be on the cutting edge of developing new products," says Quehl. "It sounds cliché to say that we have to recognize and understand what our customers need and want, but it's absolutely true. We believe the challenge is to recognize the changes that are taking place in our daily environment and develop the products that meet new exposures."
Quehl points out that many of the products that traditional insurers are selling today at bargain rates and with liberal terms and conditions came out of the excess and surplus lines arena. Those products have now moved into the regular marketplace at, he says, often less than smart terms. "We introduced a claims-made construction defect product into the market for which we determined there was a need. It was, unfortunately, amazingly unsuccessful because there was naive capacity out there in the regular market willing to write the business on an occurrence basis."
However, Quehl believes, as opposed to other prognosticators, that the market will begin to change. "We think we see some first signs of a slowing down of the current energetically competitive market. When that happens, and buyers can no longer get the bargains they are getting today, they will turn more aggressively to alternative markets. One alternative, of course, is the E&S market, but there are other alternatives. In addition to our insurance products, we have established consulting arms that can assist buyers in using risk retention groups, purchasing groups and the like."
Quehl says that, in this respect, a whole new market may be opening up. "The larger risks, the Fortune 500 companies, already have the expertise available to deal with these alternative markets. But smaller commercial risks may not have the expertise even though they wish to take advantage of the alternative market. Here, we can provide a valuable service," he says.
Quehl says that he sees, out of necessity, a more cooperative effort among insurance companies, producers and insurance consultants. "Of course, there is tremendous merger activity among the major companies. And that will undoubtedly continue. But we believe there will also be 'co-competition.' That means that companies and brokers may be competitors with each other on one particular transaction and then cooperate with each other on other transactions."
Quehl says also that this cooperative effort will be essential in the changing marketplace. "I don't think the smaller E&S operations will survive in the changing marketplace unless they adapt. Knowledge of and how to deal with alternative markets is of extreme importance. As I've said, the lines are already blurring, and the only way to survive and prosper is to recognize the existence of alternative markets and learn the most profitable way of dealing with them and assisting a new breed of insurance buyer." *
©COPYRIGHT: The Rough Notes Magazine, 1997