NAPSLO PRESIDENT DISCUSSES MARKET CONDITIONS

Wholesalers adjusting to softer market;
keep a watchful eye on potential regulatory legislation

By Phil Zinkewicz

Richard Polizzi is President of the National Association of Professional Surplus Lines Offices (NAPSLO).

The surplus lines insurance marketplace experienced a period of significant growth during the early part of this decade. The severe insurance losses associated with September 11 caused the market, which had already been tightening a bit at the end of the 1990s, to harden considerably. We all know what happens when the standard insurance market hardens. Insurers in the standard market begin to look less favorably upon particular exposures and that business flows into the surplus lines end of the business. In this respect, as it has often been said, the surplus lines market acts as a safety valve for the industry, providing the protection that is needed by buyers of insurance when the standard market retrenches.

However, there are signs that the property/casualty market is now softening in certain areas. How is this softening going to affect the surplus lines industry?

This was but one of the questions addressed at the annual meeting of the National Association of Professional Surplus Lines Offices (NAPSLO) last fall. Other issues discussed both in formal panels and in the halls during breaks included merger and acquisition activity in the surplus lines arena, developments in the regulatory and legislative environments, and the role that Lloyd’s of London plays in the U.S. surplus lines industry.

“This was a most exciting meeting, the largest NAPSLO has ever had, with attendance that topped 2,800,” says Richard Polizzi, president of the Pasadena, California-based Western Security Surplus Insurance Brokers and newly elected president of NAPSLO. “Despite the fact that the annual was held in Florida, which was tortured by four hurricanes one after another—the first time that has happened in 118 years—attendance outpaced previous annuals. This demonstrates that NAPSLO members recognize the importance of an exchange of ideas, information and opinion.”

Regarding the softening market, Polizzi says that there was a special panel of insurers, retailers and wholesalers at the annual who discussed that topic. “Naturally, members are concerned about losing marketshare, but that always happens during a soft market. The surplus lines market is perfectly capable of adapting to normal insurance industry cyclicality. Our market might shrink a bit, but we can handle it. Of course, we hope that the general insurance industry doesn’t take a nosedive into cash flow underwriting the way it did in the early and mid-1990s. The panel discussed to what extent the market is softening and how insurers, wholesalers and retailers can work together to continue providing much-needed coverages and services in the changing market.”

Another area of discussion during the annual meeting was merger and acquisition activity. “While mergers and acquisitions in the surplus lines industry are slowing down, they are still continuing,” says Polizzi. “There is little doubt that we will see more mergers in the coming year.”

Of course, a look at the regulatory environment is always part of a NAPSLO annual meeting, and this one was no exception, according to Polizzi. “NAPSLO continues to work with regulators regarding relevant legislation,” he says. We want to keep our members abreast of what’s going on in the regulatory environment state-by-state and at the federal level.”

In line with this, Rough Notes asked Polizzi what NAPSLO’s view was regarding new proposed legislation that has come out of Congress called the State Modernization and Regulatory Transparency Act (SMART). The draft bill is the product of House Financial Services Committee Chairman Mike Oxley (R-Ohio) and Capital Markets Subcommittee Chairman Richard Baker (R-La.). Its proponents say it is designed to move towards greater uniformity in state regulation without creating an optional federal charter, a federal regulator or any type of permanent federal insurance office. By and large, insurance companies look favorably upon SMART as do agents associations such as the Independent Insurance Agents and Brokers of America and the Professional Insurance Agents, although the PIA has not yet given the proposed law its total endorsement. Consumer activists and NCOIL, on the other hand, see SMART as yet another attempt at federal intrusion into the insurance business.

“We at NAPSLO favor state regulation,” says Polizzi. “We are not opposed to federal guidelines, but we do oppose federal regulation. We’ve had meetings discussing SMART and, so far, it appears that the initial draft treats the surplus lines industry favorably. What is important to us is that we continue to have freedom of rate and form and uniform licensing. Surplus lines companies are able to offer specialty insurance in large part because they are free of rate and form restrictions imposed on carriers in the standard market. That is essential to our business. The surplus lines industry has done a terrific job. A.M. Best has pointed out that the solvency picture of the surplus lines market is as good as or better than the standard market. But, as for SMART, this first draft will undoubtedly be discussed and debated for the better part of next year before any final agreement is reached on all the issues.”

Finally, Rough Notes asked the NAPSLO president where the new Lloyd’s of London, with its dependence upon corporate capital, fits into the U.S. surplus lines picture. “Lloyd’s, of course, is firmly committed to the U.S. market,” says Polizzi. “After all, 40% percent of Lloyd’s business is conducted in the U.S. And, there’s no question that Lloyd’s wants a bigger position in the U.S. surplus lines market. NAPSLO is working closely with the Lloyd’s market. Our committees have made trips to London to meet with Lloyd’s people. I think Lloyd’s may be in a position to bring in more capacity to the U.S.”

Polizzi says that, as NAPSLO’s new president, he hopes to continue to grow the organization and to impress upon the entire insurance industry and industry observers the importance of the surplus lines marketplace. “Since it was founded in 1975, NAPSLO has become the authoritative voice of surplus lines,” he says. “Acting as a source of information, NAPSLO spends a great deal of time identifying and explaining to regulators, other segments of the insurance industry, the media and the public the vital role surplus lines plays in the insurance industry. The NAPSLO logo is inscribed with the Latin phrase ‘Uberrima Fides,’ which means ‘in the utmost good faith.’ This serves as a symbol of the professionalism and purpose of the members and the association. Applicants must meet financial and conduct standards in order to join the association and NAPSLO members must follow a code of ethics in dealing with customers and companies. Dealing with a NAPSLO member ensures that you are dealing with a knowledgeable surplus lines broker or company,” says Polizzi. *

For more information:
National Association of Professional Surplus Lines Offices
Web site: www.napslo.org