The solvency record of the domestic surplus lines industry continues to mirror that of the total property/casualty industry, according to a study by the A.M. Best Company.

The Annual Review of the Excess & Surplus Lines Industry, commissioned by the Derek Hughes/NAPSLO Educational Foundation, was the eighth annual study of the surplus lines industry which analyses the various segments of the U.S. excess and surplus lines market and provides A.M. Best’s perspective on the industry’s operating performance, financial condition, solvency trends, stability and emerging issues in the market.

In addition to examining the solvency of the surplus lines industry, the report reviewed the status of Commercial Lines Deregulation and the impact of Mergers and Acquisitions on the industry.

Copies of the report were sent to members of NAPSLO and NAII, and to U.S. insurance commissioners. It was also used at NAPSLO’s E&S and Advanced Schools and at a number of industry functions.

The full report is also available for download to NAPSLO members from the Foundation section of the NAPSLO web site (www.napslo.org) and the Executive Summary is available to the public.

Solvency rates
The annual review found that since 1972, surplus lines company insolvency rates have mirrored those of traditional insurers, with an average failure frequency rate less than 1%. The similarity of failure frequency rates between the admitted and non-admitted markets attests to the pricing discipline of the surplus lines market, particularly considering the lack of rate regulation.

During the period from 1987 to 2002, both markets have experienced a higher failure frequency rate compared to the 1972-1986 period, although insolvency rates for the property/casualty industry had generally stabilized in the late 1990s.

Premium Growth
At year-end 2001, direct premium volume for the surplus lines industry increased by nearly 35% over the prior year. This increase primarily reflects the increased rates and prices of the hardening market and the migration of business from the standard market into the surplus lines market. This compares very favorably to the 11% growth experienced by the property/casualty industry during 2001.

Ratings
Consistent with prior years, Best found that most professional surplus lines companies have maintained higher ratings than that of the property/casualty industry. The median Best’s Rating for the professional surplus lines composite remains A (Excellent) versus the industry’s median rating of A- (Excellent).

Recommendations
As part of its study, A.M. Best made the following recommendations to lawmakers, policy makers, regulators, and insurance executives:

• Establish consistent eligibility requirements from state to state and urge states to establish a stamping office, if they have not done so.

• Stiffer punishment and fines.

• Greater access to information that would enhance the industry’s ability to detect problematic brokers or companies should be made more readily available by state insurance departments, the NAIC, and other insurance related entities.