Surplus lines industry solvency record continues to mirror total industry's record, according to A.M. Best annual report

Septmeber 13, 2000 - 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 was released today in Chicago at the 2000 Annual Convention of the National Association of Professional Surplus Lines Offices (NAPSLO).

Since 1971, surplus lines company insolvency rates have mirrored that of traditional insurers, with an average annual failure frequency rate of 0.80 percent, according to the A.M. Best study. The similarity of failure frequency rates between the non-admitted and admitted markets attests to the pricing discipline of the surplus lines market, according to Best.

Over the past five years, the underwriting performance of the surplus lines market has continued to outperform that of the property & casualty industry, according to the study. The favorable underwriting results generated by the surplus lines market are attributed to its focus on maintaining a disciplined underwriting approach, solid underwriting expertise and strong risk management techniques.

From 1983 to June 2000 both the traditional and surplus lines industry had an elevated failure rate compared to 1970 to 1982 because of increased occurrences of major catastrophe losses and inadequate pricing, A.M. Best said. However, since 1992 insolvency rates have stabilized in part because of competition in the market which encouraged healthy insurers to rescue ailing insurers before they became insolvent. The number of surplus lines insolvencies in a given year typically range between zero and two and has averaged 1.5 per year for the past 30 years. The most prevalent characteristic of the nearly 50 identified surplus lines insolvencies since 1971 is modest surplus size, with 92% maintaining surpluses of less than $25 million.

Premium Growth

According to the report, direct written premium growth for the surplus lines industry increased in 1999 at a rate of 7.6 percent to $10.6 billion. This increase reflects primarily the movement of business from the standard market into the surplus lines market. In terms of commercial lines market share the surplus lines market increased to 7.0 percent, up from 6.5 percent in 1998.

Stricter underwriting standards in the admitted market have made surplus lines underwriters more competitive, causing some accounts to return to the surplus lines market. Beyond increased submissions, surplus lines carriers are also experiencing rate firming on certain risks. However A.M. Best said it was premature to call it a market hardening as some admitted carriers continue to insure risks traditionally insured in the surplus lines market. Additionally, A.M. Best believes that deregulation of the admitted market will negatively impact premium growth for surplus lines writers.

A.M. Best indicated that it believes that E&S carriers will be under pressure to increasingly align with larger diversified specialty organizations that offer greater operating efficiencies and flexibilities. Struggling carriers are more susceptible to tougher regulatory regulatory requirements and fierce price competition because their business is concentrated in a particular distribution system or product mix.

Ratings and Recommendations

The median Best’s Rating for the domestic professional surplus lines writers continues to be "A" (Excellent) in 1999, which compares favorably to the standard market which registered a median rating of "A-" (Excellent). Overall 94 percent of domestic professional surplus lines companies have secure ratings, compared to 88 percent of the property casualty industry.

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 by the adoption of minimum surplus standards outlined in the Non-admitted Insurance Model Act . A.M. Best also encouraged states to established a stamping office, if they have not done so.

• Stiffer punishment and fines. Stronger and more effective laws should be passed by state legislatures and federal legislatures that would more severely penalize management of insurance companies (domestic or alien) and brokers that operate illegally or with gross negligence.

• Greater access to information. 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 National Association of Insurance Commissioners, and other insurance related entities. A.M. Best said that lists, such as the California Unacceptable Non-admitted Carrier List, the IID Alien Insurer or "White List" and the black lists generated by many states should be distributed more widely.

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

Annual Study

The Annual Review of the Excess & Surplus Lines Industry, commissioned by the Derek Hughes/NAPSLO Educational Foundation, is the seventh 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.

Background

Although the excess and surplus lines industry has modest market share, it provides important insurance coverage for hard-to-place or unique risks that do not fit the underwriting guidelines of the standard commercial lines market companies.

The excess and surplus lines industry can be divided into five segments: U.S. domiciled companies which underwrite more than 50% of their direct premiums in surplus lines; Lloyd’s of London; regulated alien companies; domestic carriers which write small amounts of surplus lines risks; and unregulated alien insurers.

NAPSLO is a national trade organization headquartered in Kansas City, Mo., representing the surplus lines industry and the wholesale insurance marketing system. The Derek Hughes/NAPSLO Educational Foundation was established by the NAPSLO Board of Directors in 1991 to improve education for members of the insurance industry about the surplus lines industry.

A.M. Best Company, located in Oldwick, N.J., was founded in 1899 and is the nation's leading provider of insurance company ratings and financial information as well as a specialized publisher of insurance periodicals and electronic products.