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Volume 83, December 2014

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Excess and surplus lines activity in 2015 should be strong.

Emerging markets and market niches require expertise and knowledge that retail agents may not have the time to develop. Many agents have learned that having ready answers for clients does not matter as much as having access to markets that have both the answers and the expertise to work with their clients to develop coverage solutions.

This month, consider how you are preparing for market changes in 2015 and how your current excess and surplus market relationships, or the ones you will develop, will help you grow and thrive.

 

SPECIALTY LINES MARKET OUTLOOK FOR 2015

A prosperous year ahead for those who do things right

By Dave Willis

Economic and market factors are driving growth opportunities for a wide range of specialty lines providers, as well as agents and brokers. Technology, expertise and available capital are helping providers and producers respond to buyer demand. Competition continues to be strong.

For example, says Tom Kunkel, CEO of Travelers Bond & Specialty Products, "Agents are seeing some new entrants into the management liability space. As a result, some carriers have redefined their appetites. We have seen larger limits being deployed and some aggressive behaviors."

Kunkel adds, "The pricing environment for specialty lines has continued to hold a positive rate, especially in areas where margins have been challenged. We believe this is due, in part, to the better use of analytics in the industry which we expect to continue."

According to Bobby Bowden, executive vice president and chief marketing officer at Allied World, "The current market forces great companies to differentiate themselves from peers with disciplined underwriting and product innovation." He says specialty companies are well positioned to be effective if they choose their markets selectively and hire and support underwriters who are experts in their field.

"One of the major themes during this year's Council of Insurance Agents and Brokers conference was distribution," he adds. "Agents need to choose partners wisely. Factors like claims expertise, responsiveness and general knowledge of the risk and industry really matter when they need to rely on their carrier to support their client's needs."

"We're seeing growth among specialty market firms that can provide expertise, industry knowledge, risk control and transfer, and claims management strategies that just aren't available in the general marketplace," says Curtis Kochman, senior vice president at Ascinsure Specialty Risk. "Businesses are moving away from a purely transactional model and into a more risk advisory and consultative approach."

He says buyers expect their insurance agents to not only have insurance expertise, but also a deep understanding of their industry. "They want agents to anticipate problems and exposures unique to their industry and guide them in selecting the best solution for their particular needs," he explains. "Customers want expertise, and they'll pay extra for the peace of mind they get from knowing their agent truly understands the needs of their industry."

Outlook for 2015

Going forward, experts anticipate continued growth in demand. "We expect to see more interest in specialty programs," Kochman says. "More customers understand the need for an insurance solution that recognizes the demands and risks of their industries." He believes the market for niche programs will continue to harden. "It will become harder to find programs that fill those niches," he says. "For this reason, I think Lloyd's is going to become more of a factor for these kinds of risks."

"By looking at certain segments of the U.S. economy and growth or shifts in the GDP, we see a few key industries emerging as opportunities for independent agents and brokers to grow their books of business," explains Andrew Robinson, president of specialty at The Hanover Insurance Group. "In energy, for example, new forms of resource extraction, such as fracking, are getting more sophisticated and will create new exposures and risks."

He's also seen significant growth in the manufacturing sector. "Many companies are bringing their operations back on shore," he explains. "But these are not the manufacturers of years past. So much of the industry is now computer or robotic assisted, there is a higher skilled workforce, and as a result there are new exposures that manufacturers need to protect against."

Robinson points out that, in general, the world has become more digital, wireless and Internet-based. "There has been a significant amount of innovation-the development of drones, for example-that will surely drive regulators to develop new laws and, as a result, we will see a shift in liability," he explains.

Kochman sees greater attention to cyber liability coverage. "Insureds are becoming more aware of the risks that come with doing business in a technological age," he says. "With cyber, it's becoming a question of when, not if, you'll need that coverage." Kunkel concurs. "Cyber concerns will continue for businesses of all sizes and across most industries," he notes. "News of breaches and hacks makes headlines every day. As a result, conversations around cyber coverage and risk mitigation will be a big topic in 2015."

"Large data breaches are becoming more common and insurers should adjust their policies accordingly," says Bowden. "What makes cyber risk so challenging for companies is the various types of breaches that occur. They can take various forms, from hackers who are looking to steal data to those who want to hold an organization hostage for various reasons, and finally, to those hackers who simply want to cause turmoil and chaos within the global economy." He says that, as every example differs, policies must adjust to specific threats.

The professional liability market should continue to see growth momentum moving into 2015. "We're seeing a large portion of the baby boomer demographic retiring from their traditional lines of work and moving into the consulting business," Robinson says. "This creates exposures that make it necessary for them to have professional liability insurance. We expect this trend to continue over the next few years."

Kochman echoes the professional liability growth comments. "In addition," he says, "we're looking at a need for higher liability limits overall. Businesses used to carry $1 million or $2 million primary limits and an umbrella up to $5 million. Now we're seeing more and more requests for $2 million to $4 million primary and $10 million umbrella."

Non-physical damage for business interruption is another important issue in the market. "Adjusting claims based on loss of revenue not directly related to property damage is challenging," explains Bowden. "An example of this is how Ebola is affecting hospitals. Those that have treated patients for Ebola are at risk for loss of revenue as other patients potentially postpone or cancel appointments due to fear."

According to Kunkel, "We will likely start to see the Patient Protection and Affordable Care Act create new forms of liability for various business groups. With nonprofits and public and private employers being held subject to the mandates, these organizations should be asking their agents if they have the proper management liability coverage in place to provide protection for related claims."

Bowden points out that the business of risk and insurance is fluid. "Risk changes with current events and insurance evolves in order to meet customers' needs," he says. "Coverage is adaptable and must be continually reviewed and upgraded in order to meet market demand."

Agent opportunities

To capitalize on the growth of these various industries-healthcare, manufacturing, technology and energy, for example-agents and brokers should specialize. "Specialization is one of the most valuable strategies an agency can pursue," says Robinson. "We continue to see the best agencies hone their skills in a certain segment of business and get a significantly higher return on their overall economics."

He points to a recent Reagan Consulting study that looked at hiring trends among producers. "It found that 55% to 60% of agencies were under-hiring when it came to new producers who could help drive their businesses forward," he says. "In order for agents and brokers to build and maintain a strong specialty lines market presence going forward, they need to have the right talent in place to do it."

He adds, "The study points out that agencies that made 'specialization' mandatory had higher producer success rates than generalists. We're actually seeing some of the best agents hiring new producers from outside the industry-producers who have strong sales acumen in a given industry that they are focused on and can be taught the insurance side of the business."

Quality submissions also can drive success. "The more information that agents and brokers can provide to the underwriter, the quicker and easier the process will be," Bowden says. "Quality data is the key ingredient in developing meaningful risk solutions to meet client needs. With the level of competition in the current market, flooding the market with submissions and weak data is inefficient and unproductive for all parties."

Kunkel encourages agents and brokers to think now about their renewal approach. "Partnering with an insurer that has broad experience and a robust product offering to help your clients harness their risk is a common theme among the most successful agents and brokers," he says.

Robinson agrees. "Most important, agents and brokers should look to align themselves with a carrier that can offer them specialized products and services, along with expertise, and that is committed to helping those agents and brokers succeed." Kochman similarly emphasizes the importance of forming a solid relationship with a true niche player. "You want to align yourself with someone interested in forming a long-term partnership and establishing deep roots," he says. "You want someone you can trust to work collaboratively to provide outside-the-box solutions for your customers in these specialty industries."

Absent such a relationship, he says, retail agents and brokers will find themselves continuing to operate at the transactional level. "This will leave them open to insureds who are simply price shopping and who have no intention of building a long-term partnership," he notes. "Retention will suffer, and their business won't grow to its potential."

He adds, "The old adage, 'You get what you pay for,' holds true here. Expertise comes with a price. If you have a strong partner with industry expertise, you will be able to prove the value of the insurance solutions you can offer to your clients." Robinson sums up the outlook like this: "With the right specialization, the right talent, and the right carrier, 2015 will be a very prosperous year for wining agents and brokers."

The author

Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.

 


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