By Phil Zinkewicz
A little more than 10 years ago, the standard insurance market provided no home for the more "exotic" exposures such as directors and officers liability, legal malpractice and other professional liability lines. Ergo, excess and surplus lines carriers, as well as agents that had strong relationships with E&O carriers, capitalized on the marketing opportunities that arose as more standard lines companies avoided the "unattractive" risks.
Today, however, we are seeing greater competition between E&S underwriters and the standard market for business that standard markets had shunned before. Particularly in the professional lines arena, the standard market has become extremely aggressive with special programs that many in the excess lines industry consider underpriced.
So questions arise: Will the E&S market see a greater erosion into their premium dollars as standard companies continue to compete? Are standard companies over-extending themselves into areas where there is more volatility than they realize? Are standard companies once again, as they were during the late '70s and early '80s, becoming slaves to cash flow underwriting? And, where does the independent agent, already plagued by severe market dislocations in standard personal lines business, play a role in this shift on the excess and surplus side?
According to a recent report on excess and surplus lines by Crittenden Newsletters, E&S writers will face increased competition as they fight for their share of the $8 billion plus specialty lines market in 1997. Crittenden predicts that admitted carriers will continue the trend of recent years, taking on more specialty business with niche admitted programs. Crittenden also predicts that Lloyd's of London, which has retrenched during the last five years because of internal strife, will resurface as a major player in the E&S market and take 15% to 20% of the U.S. non-admitted market next year.
Says Crittenden: "If anything can be certain for 1997, it's that AIG will dominate the E&S specialty and non-admitted markets. AIG's Lexington and American International Specialty Lines will end 1996 as two of the top three E&S underwriters in total premiums written. Lexington has been number one for each year for at least 15 years."
Predicting that Lexington will finish 1996 with premium totals approaching its $1.2 billion gross premiums for 1995, Crittenden also said that AI Specialty Lines should finish 1996 with $700 million or more in gross premiums. Crittenden says that Scottsdale's E&S premiums for 1996 will be in excess of $1 billion and will likely be number two in volume in the coming year.
Other leading writers in the coming year will be CNA's Columbus Casualty, Zurich's Steadfast, General Star Indemnity, United National, Reliance of Illinois, St. Paul's Surplus Lines and Evanston.
Other companies named as major competitors and seen as becoming more aggressive by Crittenden include TIG Specialty, Gulf Insurance and Gulf Underwriters, Employers Re, Frontier, among others. "Much of their premiums will be on admitted paper. Companies such as Frontier, RLI, TIG Specialty and Chicago Interstate F&C have developed admitted specialty programs in response to agents' and brokers' demands for admitted paper. Several groups have created admitted subsidiaries to keep business that formerly was written on a non-admitted basis," says Crittenden.
"The E&S market has changed considerably," says Harry Rhulen, executive vice president of Frontier. "Professional liability has become Main Street business. It is no longer a specialty line. We are seeing tremendous competition in the program areas such as directors and officers, legal malpractice and such. And, there is the possibility that the trend will continue to other areas such as contractors general liability, which has traditionally been in the specialty market."
However, as competition increases in the standard market for this type of business, Frontier will continue its philosophy of seeking out the "unattractive" business that standard markets continue to ignore. "In the specialty lines arena, carriers have to be nimble, to seek out the opportunities for new products that are not available in the standard market. For those E&S carriers that do not follow this route, standard companies will eat into their marketshare," says Rhulen.
Edgar S. (Sandy) Clark, executive director of the Surplus Line Association of California, says that there is no doubt the standard market is making inroads into the excess and surplus lines arena, but says that one has to view the situation from two standpoints. "I'm speaking for California, but I think our situation mirrors the experience in New York and Texas, the two other major excess and surplus lines markets."
Clark agrees with Rhulen and other experts who say that the competition in the professional liability arena is intense. He adds, however, that even that competition must be considered with a grain of salt. "Half of that competition is coming from a combined market of groups that own both admitted and non-admitted companies. But then there is an open market where the surplus lines industry plays an essential role in terms of providing capacity which is essential."
What's certain, according to Rhulen and Clark, is that companies in the standard market are slashing back rates to compete with the E&S market after specialty business. Clark says that he hopes these companies are not returning to the disastrous days of the early '80s when companies practiced "cash flow" underwriting. "Then again, it could be that the admitted market is subject to regulatory and political pressures to keep rates down, pressures that don't so much hamper the non-admitted market," said Clark.
Rhulen said he did not think companies were intentionally returning to cash flow underwriting, because interest rates are not nearly as high as they were during the early '80s and so the temptation is not there. However, he said that companies might be relying on expected investment yields in the equity markets to offset as yet unrealized losses in the specialty areas they have entered into.
What does all this mean for agents? Well, one scenario might be that, as more standard insurers enter specialty lines areas and provide new markets, agents who were not able to tap E&S markets in the past could have new opportunities. However, there are some caveats here. Agents who seize upon these opportunities must become more proficient in dealing with specialty lines risk or face higher loss ratios leading to a debacle similar to the mid-'80s when standard companies moved wholesale out of lines they finessed a few years earlier. Also, agents who have become specialists in E&S lines and have established strong relationships with E&S markets might be facing increased competition from agency forces which are just now entering the business.
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The author
Phil Zinkewicz is an insurance journalist with some 25 years' experience covering the international insurance and reinsurance arenas.