Specialty Lines Markets
SPECIALTY LINES 2021
When the going gets tough, specialty writers find opportunity
By Joseph S. Harrington, CPCU
A hard market for insurance appears to make doing business easier, or at least more rewarding, for carriers, intermediaries, and producers that concentrate in marketing specialty line products for niche classes of business.
As an indication of that, the Wholesale & Specialty Insurance Association (WSIA) reported in a July 2020 news release a 10.3% jump in surplus lines premium reported to state surplus lines stamping offices for the first half of 2020, compared to the same period in 2019. (Premium reported to states with stamping offices accounts for roughly two-thirds of total surplus lines premium.)
The increase to $19.7 billion in reported premium came despite a 2.6% decrease in the number of transactions, a reflection, perhaps, of decreased economic activity due to the COVID-19 pandemic.
“When the market hardens, it’s often an industry-wide development that bodes well for specialty lines,” says Prateek Sangal, chief commercial lines officer for NSM Insurance Group, a leading specialty insurance provider focused on program business.
“In a hard market, carriers in standard markets become increasingly selective of the risks they want to pursue and the capital they want to expose, and they become more stringent in their underwriting,” Sangal says. “As others scale back, there’s more opportunity for specialty providers like us, who have the in-depth niche expertise.”
Standard markets were already hardening as we entered 2020, and conditions became no better for them as they confronted a global pandemic, large-scale civil unrest, record levels of wildfire, and other natural disasters.
“It’s certainly a volatile environment when it comes to risk management,” Sangal says, “and when it’s volatile, it gives rise to more specialty needs.
“This is a very exciting opportunity driving our continued growth,” he adds. “We’re confident we can meet the increasing demand.”
Greg Schiffer, head of special lines reinsurance for Swiss Re, regards a hard market as a welcome opportunity to re-establish underwriting discipline and the role of niche experts.
“Unfortunately, during soft cycles, specialty business is handled as if it’s part of standard business,” Schiffer says. “If you are going to write some-thing like California earthquake or U.S. hurricane exposures, it’s best to consult experts who are close to the risk and who know it best.
“In the soft cycle, we have seen these risks written from London and other faraway places,” he adds. “It is imperative to include the right people with the right expertise.”
Today, Schiffer approvingly cites the emergence of tougher terms and conditions for coverage across a range of classes, such as higher deductibles and sub-limits for high-frequency or high-severity losses, as well as higher rates.
“Across specialty lines,” he says, “rates are being restored, but they are far from their levels of 2005 and 2006.”
That assessment is echoed by Joel Cavaness, president of Risk Placement Services, Inc., an excess and surplus lines wholesaler and managing general agency.
“We are seeing a change in the risk appetites of underwriters,” he says. “They are showing more discipline and more price consciousness, and a determination to get the appropriate rate for the appropriate exposure.”
In this environment, Cavaness says that “opportunities are endless for specialty lines and specialty carriers.”
Cyber as specialty
It’s never easy, however, to distinguish a “specialty” line or product from a “standard” one, especially since some products marketed as specialties are created entirely from standardized elements.
Cyber insurance represents a unique development in that respect.
Specialty products, at least for property and general liability coverage purchased by nearly all accounts, have tended to be modifications of standardized approaches. In contrast, cyber insurance emerged in non-standard markets as a product for specialists in specialized operations. Yet cyber insurance has become part of the coverage portfolio of enterprises of all types, regardless of their depth of expertise in IT.
So is cyber insurance slated to become a “standard” product?
“Cyber will always straddle the line between standard and specialty,” says Sangal. “Some plain vanilla policies will provide coverage in admitted markets, but larger companies will have much different exposures five to 10 years from now. That will always be a challenge when it comes to cyber coverage.”
Schiffer is more emphatic. “Cyber risk is a specialty line of business,” he says. “It requires unique expertise.”
Will agents and brokers share in the benefits of a favorable market for specialty lines coverage?
They certainly can, according to Cavaness. “Communication is key to set-ting expectations,” he says. “You need to put clients on notice when rates increase or conditions are tightened.”
If an account faces a steep rate hike or reduction in limits, Cavaness advises that “it always helps to come to the table with an option,” such as a higher deductible or coverage limitation that can soften the impact of the change.
Cavaness emphasizes that producer flexibility depends on the expertise of a carrier or intermediary in translating the intent of coverage into the policy documents, an exacting task that has taken on particular importance as more carriers are needed to support programs in the hardening market.
There is no substitute for developing expertise in the classes of business and specific types of accounts you want to serve, says Sangal.
“To succeed as an agent in the specialty marketplace, the number one thing you need to do is really focus on the niches that you want to pursue, ”he says. “Then, align yourself with a knowledgeable and sustainable partner who has a strong understanding of the underwriting and pricing needed for that market. This will streamline your growth and help you achieve long-term success with your clients.”
For more information:
NSM Insurance Group
Risk Placement Services, Inc.
Joseph S. Harrington, CPCU, is an inde-pendent business writer specializing inproperty and casualty insurance cover-ages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.