A.M. Best report shows E&S carriers maintain financial strength

Despite rising loss costs, low investment yields, and in most cases going forward, price decreases as the market softens, the A.M. Best Company expects surplus lines industry results to remain strong, according to a review of 2004 insurer financial information.

The Annual Review of the Excess & Surplus Lines Industry, the 12th annual study by Best, was released in San Francisco at the 2005 Annual Convention of the National Association of Professional Surplus Lines Offices (NAPSLO). The report was based on 2004 financial information and was completed prior to Hurricane Katrina.

A.M. Best expects the current level of insolvencies for writers in the property/casualty industry to remain below historical norms in the near term as insurers, overall, have experienced a strengthening of their balance sheets due to improved operating profitability brought about by the hard market conditions of recent years.

Premium Growth
In 2004, after growing significantly for three consecutive calendar years, direct premium volume for the surplus lines industry remained relatively flat. Overall direct premiums written by the industry were $33 billion, less than a one percent increase over 2003, and markedly lower than the increases of the previous two years. In 2002 direct premiums were up by 62% and in 2003 were up by 28%. 

Overall the surplus lines market represented 14.14% of the commercial lines industry in 2004, compared to 6.43% in 1994 and 3.95% in 1984. Over the past 20 years the U.S. property and casualty industry has grown by approximately 375% while the surplus lines segment has experienced a nearly 1,400% increase, going from $2.4 billion in 1984 to $33 billion in 2004. 

Larger insurers (as measured by direct premium volume) continue to dominate the surplus lines market. Size and flight-to-quality trends have benefited the larger, well-established surplus lines carriers, with the top 25 groups commanding an 82% share of the market.  

Ratings
On average, surplus lines carriers retained a greater percentage of financial strength ratings in the “Secure” category compared with the total property/casualty industry. During the past four years, overall profitability trends have improved markedly, primarily a result of improved market conditions. As a result, the surplus lines composite fared better than the industry, with a smaller number of companies being placed under regulatory supervision than the broader property/casualty insurance market over the last three years.

Operating Performance
Underwriting results for the surplus lines market showed it outperformed the property and casualty industry by more than 5 percentage points, with a combined ratio of 92.7, compared to 98.1 for the total industry. Best said that many of the loss ratio advantages of the surplus lines market are achieved by their ability to set pricing and coverage terms.

Legislation
Legislation and regulation was a topic of the report as the U.S. insurance industry issues became major headlines in 2004 and 2005, primarily due to the insurance probe launched by New York Attorney General Eliot Spitzer.

Some of the other key industry issues addressed include insurance carrier utilization of finite reinsurance, and the uncertainty surrounding the possible renewal of the federal terrorism backstop (TRIA), and the merits of federal regulation of the insurance industry via the SMART Act.

Annual Study
The Annual Review of the Excess & Surplus Lines Industry, commissioned by the Derek Hughes/NAPSLO Educational Foundation, is the 12th 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
The excess and surplus lines industry 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 NAPSLO Board of Directors established the Derek Hughes/NAPSLO Educational Foundation 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.

Copies of the report are available from NAPSLO at (816) 741-3910