Specialty Lines Markets

What's ahead for specialty lines?

Outlook remains upbeat despite tough economy

By Phil Zinkewicz

In Rough Notes’ December 2008 overview of the specialty lines market, those quoted were concerned about the prolonged soft market and its impact on the excess and surplus lines industry. Some were optimistic, saying that the market might turn around in 2009. We know that didn’t happen. Others, who perhaps were more realistic, saw the market beginning to harden in 2010. And one executive said he feared the turnaround wouldn’t happen for two or three years.

The difficult economy was blamed for part of the soft market problem. People who have been laid off don’t buy additional personal lines insurance or they make changes in their existing policies to lower their premiums. Businesses close, so the commercial market dwindles as well. Insurers are scrambling for premium dollars, so competition remains fierce.

For the specialty lines market, the results and outlook are considerably less pessimistic. When Guy Carpenter & Co. recently surveyed specialty program carriers, it found that the program administrators and managing general agents (PA/MGA) market showed little change from 2008 to 2009, despite the global financial crisis. Though the number of respondents who see growth in the market has declined, the outlook generally remains upbeat, the report said.

Seventy-six percent of respondents estimated the total PA/MGA market in 2009 to be at least $20 billion in gross written premium, down from 92% in 2008. Twenty-seven percent selected a range of $20 billion to $30 billion, while 29% estimated the market at $30 billion to $40 billion.

Twenty-one percent of respondents in 2009 believed that the PA/MGA market generates gross written premium in excess of $40 billion. Twenty-four percent believed the market generates less than $20 billion, up from 8% in 2008.

Nearly half of all respondents—46%—believed that the PA/MGA market would remain flat, with 37% forecasting growth and 17% anticipating some contraction. (In the 2008 survey, 32% believed the market was flat, 56% thought the market was growing, and 12% thought it would shrink.)

The perception that the PA/MGA market is profitable remained unchanged, with 92% of respondents estimating a combined ratio between 90% and 100%. Forty-nine percent put the combined ratio at 90% to 95%, down from 68% last year.

Market conditions have reshaped the challenges that program administrators and MGAs are facing, according to the Guy Carpenter study. Only 67% of respondents in 2009 viewed new business production as a challenge, down from 77% in 2008. Concern about premium growth also declined, slipping from 66% last year to 58% this year. Maintaining current rate levels was perceived as being slightly more challenging, with 61% of respondents citing it this year compared to 58% in 2008.

The 2009 survey results suggest growth potential across a wide range of program types and sizes. Eight percent of respondents are targeting programs with gross written premium below $5 million, equal to last year, although only 6% are seeking programs greater than $20 million in GWP (half the 2008 amount). The remaining 86% seek program sizes between $5 million and $20 million.

In commercial lines, program administrators and MGAs continue to focus on growing business across a number of lines in 2009, especially inland marine, property, and auto liability. Interest in professional liability and general liability increased. Umbrella liability, which grew from 26% in 2007 to 62% in 2008, remained stable at 61% in 2009.

For personal lines, only 21% of respondents expressed an interest in growing business in the homeowners segment, back to 2007 levels after jumping to 31% last year. Interest in auto business remained at 15%, virtually unchanged from last year, and interest in personal umbrella declined from 16% to 8%.

Carriers remain flexible about the services that PAs/MGAs provide, including system use and claims handling. Ninety-five percent of respondents expect the PA/MGA to underwrite, rate, quote, and bind the business, as well as issue and service policies—an increase of 15% from 2008. Loss control and premium audit services remain important to some carriers, but they are roughly unchanged from 2008. Respondents also continue to have robust auditing procedures in place to monitor results and control the processes involved in working with PAs/MGAs.

Reinsurance

Reinsurance continues to play an important role for program issuing carriers, with 37% working with reinsurance intermediaries and 63% using a combination of intermediaries and direct reinsurers. This represents a substantial shift from 2008, when 83% of respondents used both intermediaries and direct reinsurers.

Structural preferences for reinsurance purchasing also changed, with 33% of respondents preferring quota share, down from 50% in 2008. Excess of loss grew from 50% last year to 67% in 2009.

According to the survey, MGAs are somewhat less willing to compensate reinsurance intermedi­aries when program-specific reinsurance is not purchased, with 16% saying they would not be willing to either pay a finder’s fee or increase MGA commissions. Forty-eight percent would be willing to pay a finder’s fee (down from 69% in 2008), while 45% would increase the MGA commission to pay the intermediary (up from 31%).

John Barrows, Program Manager Solutions Specialty Practice, Guy Carpenter, commented: “Despite the most severe financial crisis in 70 years, the outlook for the PA/MGA market remains remarkably positive. Though the perception of overall market size has declined somewhat, there is still strong interest in growing programs of all sizes, across both commercial and personal lines. This remains a buyers’ market, but the ability to develop new business while maintaining rate levels remains critical.”

Certainly that buyers’ market is having negative effects on rate structures although John F. Wood, president of Specialty Risk Associates in Shreveport, Louisiana, says he is hoping the soft market will turn around by the end of 2010. “That’s just my hope, though. Rate decreases in commercial lines are slowing down a bit. But the economy is still dominated by tight credit, which hampers consumer confidence and impedes new business development. Usually investment income helps during a soft market, but that’s not true today. I’m not sure when recovery will come, but it’s something I think about every day.”

Robert Schacher of Ron Rothert Insurance Services in Portland, Oregon, says that the last few years have been tough for specialty lines writers, although the personal lines segment is doing well. “The personal lines area might improve in 2010, but that depends on the economy,” he says. “The only thing to do in this market is to hold the line and control expenses. Companies are trying to increase rates, but there is just no cash flow.”

Euclid Black of Black/White Associates says pricing in the specialty marketplace is still soft, although less so than earlier in the year. “Admitted markets are still coming into the specialty arena and taking business away,” he says.

“The faltering economy is having its impact on specialty lines,” Black continues. “Sales are down. Payrolls are down. There is a lack of demand for insurance products, plain and simple. Insureds are going out of business and unemployment is on the rise. I read somewhere that there is an uptick of people taking early retirement and they’re not being counted among the unemployed. We’re still not far enough along in stimulating the economy and until we are, the market will stay soft.”