E&S market set for strong 2022 as admitted carriers reduce risk appetite
US E&S lines carriers may surpass $100bn in written premiums by the end of 2022
With US excess and surplus lines premiums up more than 25% in the first nine months of the year, participants say the market is stronger than it has ever been
Natural catastrophes, social inflation and the emergence of cyber threats have impacted the US insurance market and dimmed the risk appetite of many carriers – except, it would appear, those operating in the excess and surplus (E&S) market.
Date suggests US E&S lines carriers may surpass $100bn in written premiums by the end of 2022, after posting strong rates of growth in recent years.
According to AM Best, total premiums reached $82bn in 2021, compared with $66bn the year before. As recently as 2015, premiums were barely 50% of last year’s number.
As a result of this growth, non-admitted insurance amounted to around 10% of the US property/casualty (P&C) market at the end of 2021 and represented more than one out of every five dollars of commercial insurance sold in the country.
“The market is stronger than it has ever been,” says Kyle Burnett, the head of E&S property at Swiss Re.
The growth of E&S lines in the US is directly associated to the overall hard insurance market, the data compiled by AM Best shows.
In 2018, when the market cycle started to turn, E&S premiums increased 11.2%, compared with 5.8% the year before. The performance was replicated in 2019, and in the following two years, growth was 17.5% and 25%, respectively.
‘We have the ability to be flexible and creative. In E&S, one size does not really fit all. It is important to find solutions that fit both our needs and the insured’s needs’
Underwriting profitability also improved, with the combined ratio of E&S companies followed by AM Best falling from 99.5% to 94% last year, which is five points below the P&C market average.
And, in 2022, this good health continues. The Stamping Office of Texas, which registers non-admitted insurance transactions, reports that E&S premiums in the Lone Star State closed the first nine months of 2022 nearly 27% higher than in the same period a year earlier.
“Market trends that have driven commercial lines insurance have been helping excess and surplus carriers to grow their business. Commercial lines have been hardening and part of that business has gone to the wholesale market,” says David Blades, a senior financial analyst at AM Best.
US-based companies that focus mostly on E&S lines and followed by the rating agency reported around 25% year-on-year growth in the first half of the year, according to AM Best. State stamp service offices around the country have published numbers that are slightly higher than that.
The two leading companies in the market, Berkshire Hathaway and AIG, had market shares of 5% each. US carriers usually have individual subsidiaries that work in the E&S space, and US-domiciled companies had almost three quarters of all premiums in 2021, a proportion that should rise by the end of this year.
At the end of 2021, Lloyd’s carriers accounted for 16.6% of US E&S premiums. Blades estimates Lloyd’s carriers will post growth rates in the low double digits by the end of the year.
Changing risk appetite
One of the drivers of growth has been the readjustment of the risk appetite of admitted US carriers after a few torrid years of catastrophic losses.
It is, to a large extent, the reason why E&S lines have flourished, with buyers turning to the non-admitted market when they are unable to place risks in the admitted sector.
Natural catastrophe risks have traditionally been transferred to E&S carriers, especially in periods following significant catastrophic losses when admitted insurers have recalibrated their risk appetites. But now, E&S carriers are not only working with primary perils such as windstorms, they are also assuming secondary perils like wildfire that have increased pressure on the market.
With the rise of litigation in the US, buyers of covers such as general liability, product liability and professional liability lines are also taking the E&S path. Directors’ and officers’ and employment practices liability lines have suffered a significant reduction in admitted appetite and have moved in ever higher volumes to non-admitted carriers.
The E&S market has also been taking on an increasing amount of cyber risk. The National Association of Insurance Commissioners (NAIC) estimates that in 2021 cyber insurance premiums written by surplus carriers based abroad grew 30% to $1.7bn, compared with $4.8bn assumed by all US-domiciled carriers.
One advantage of the E&S market is the increased flexibility to offer capacity for complex risks than most admitted insurers. That freedom is extended to charging rates and demanding conditions that are more in line with the levels of risks taken.
“E&S carriers have had the opportunity to set the rates and conditions for the coverages that they are extending, and they are seeing plenty of new business coming into the market,” Robert Raber, a director at AM Best, says.
Having more leeway to come up with solutions to non-traditional risks means E&S carriers have often specialised in niche products. The legal cannabis industry is one example of a sector that is very much reliant on E&S capacity to transfer risks like product liability, transportation, property, and general liability, as the industry has a wide variety of exposures and requires a very specific kind of underwriting.
“We have the ability to be flexible and creative. In E&S, one size does not really fit all. It is important to find solutions that fit both our needs and the insured’s needs,” Swiss Re’s Burnett says. “E&S lines were traditionally considered a market of last resort where distressed business went, and it is not the case anymore. Nowadays, we are seeing every single risk coming across our desk.”
Swiss Re is keen to expand its presence in the US E&S market and has adapted its approach to the sector as a result of new demand for capacity. While in previous years, like other E&S carriers, Swiss Re would rather focus on the higher layers of programmes, now the company is eager to provide E&S capacity at any point of the programme, even as a primary underwriter. “No two deals are the same, and we are always looking for the best spot for us,” Burnett says.
The good performance of the E&S sector has driven more companies to enter the market, with at least two new sources of capacity being introduced in the past couple of years.
AM Best has also noted that the entry of new, innovative players such as insurtechs and managing general agents, which have provided a further boost to the sector. Another major factor is the wave of M&A deals involving wholesale brokers, which constitute a vital cog in the industry.
“In the distribution side, at the higher end, many of the bigger wholesalers are buying smaller rivals and, therefore, are creating more buying power,” Blades says. “That has increased their ability to access the different surplus lines insurers and to provide more lines of coverage and classes of business.”
The attractiveness of the market is reflected by the multiples with which sellers have been able to negotiate their businesses. But the concentration could have an impact on the results posted by E&S carriers in the future, Raber says.
'Carriers have had no issue in finding willing surplus lines intermediaries to place business with them'
E&S insurers rely quite heavily on intermediaries and usually do not write cover directly. A contraction in the number of intermediaries could mean carriers see their ability to define prices and fees come under pressure. However, there is no sign this is happening yet. “Carriers have had no issue in finding willing surplus lines intermediaries to place business with them,” Raber says.
Like other insurance companies, E&S carriers now need to consider how to deal with threats such as inflation and supply chain disruptions, which are putting pressure on loss ratios. Even then, they may be in a better position to face the storm than their admitted peers. All P&C underwriters have to deal with higher costs of parts and raw materials, as well as wage inflation and other booming expenses. But they may have a greater flexibility to adjust rates accordingly.
“E&S carriers can push rate increases much more easily than regulated carriers,” Raber says. “Companies that sell approved rate insurance are really in a pinch right now, as they cannot get rates to move enough to keep up the impact of inflation.”