SPECIALTY LINES MARKETS
Other than disappearing markets, rising rates,
more extensive underwriting, and mold problems,
how are things going?
By Larry G. France
"Standard markets have withdrawn or reduced their capacity in virtually every sector of the P-C business, particularly in the property market for 'trophy' properties in urban areas."
--Nick Cortezi, NAPSLO President
We were reeling from 9/11 last year at this time. Today, terrorism is still a major concern for the industry. Large property risks are experiencing difficulty finding a home regardless of price. Markets for professional liability, especially accountants, medical risks, and for-profit D&O have become so few and far between that some clients in this class are going bare. Carriers that didn't "have it together" prior to 9/11 were immediately swept out of business by poor financial ratings that were "disguised" by creative bookkeeping in prior years. Well, let's now add capacity issues to that list.
New NAPSLO (National Association of Professional Surplus Lines Offices) President Nick Cortezi addressed issues regarding the surplus lines market, capacity and hardening of the market at the association's annual conference.
"Surplus lines carriers have seen a large increase in submissions with rising price levels for virtually all lines of insurance during the emergence of the hard market. In 2001, according to the most recent edition of A.M. Best Annual Excess and Surplus Lines Review, direct premium writings of domestic professional surplus lines carriers increased by more than 35% to more than $15.5 billion, as the surplus lines market expanded its traditional role as a 'safety valve' for the insurance industry."
Cortezi said that a number of factors have contributed to the current hard market conditions, including a reduction in reinsurance capacity, the prolonged struggles of the equities markets, increasing claims cost, the 9/11 terrorism attacks, and mold concerns. The most significant factor, according to Cortezi, may be that in 2001 the property/casualty industry lost money on an operational basis for the first time in its history.
"As a result, standard markets have withdrawn or reduced their capacity in virtually every sector of the P-C business, particularly in the property market for 'trophy' properties in urban areas," said Cortezi. He further noted that medical malpractice and other professional lines also have been hit hard. A number of professionals believe that the current hard market could last for two more years, Cortezi said.
This was not the feeling earlier in the year when some people in the industry were looking at the possible disappearance of the hard market in 2002. That question came up during a panel discussion at the annual CIWA (California Insurance Wholesalers Association) meeting in June. The panel consisted of a retail agent and representatives of a carrier, an MGA/wholesaler, and a reinsurer. The answer given was that the market will stay tight or hard until carriers show a 10% to 12% return on equity (ROE). If you follow the current financial picture, those returns will not emerge in
the near future. ROEs are more like 2% to 4%.
If you don't think that what occurs outside the United States affects your markets, look at the floods and wind damage in Europe. If a carrier writes business in Europe and suffers losses, you can bet that this has an adverse effect on that carrier's operations in the United States regarding rates
and capacity.
To the north in Canada--our largest trade partner--many citizens own property in the United States. Chubb, Zurich, and Royal & SunAlliance are examples of carriers that operate in both countries. Many carriers are domestic to Canada.
Ontario-based Cross Border Underwriting Services is a wholesaler that has partnered with a U.S. wholesaler to provide access to Canadians with locations and operations in all states except Hawaii. Paul Martin, CIP, president, assesses the Canadian and U. S. markets as having some of the same problems such as capacity, rate increases, obtaining experienced personnel, and the importance the agents and brokers play in today's hard market.
"The Canadian insurance market has gone through a rapid transformation over the past
12 months," he says. "Due to the dismal stock market performance, the much-needed correction in insurance premiums is even more critical for the survival of some insurance companies. Ontario automobile insurance continues to be the main driving force behind industry woes, and even with a double-digit rate increase the companies continue to struggle with inadequate rates and soaring claims costs."
Martin says the insurance industry also has added pressure due to the lack of experienced professionals in the industry. The return to actually underwriting the risk has put the underwriter front and center as the most important person in protecting the company's balance sheet. The lack of underwriting experience also forces the industry to focus on renewals, which leaves little room for writing new business.
Another sign of extreme hardening in the market is clients going without coverage due to the high cost of premiums.
Martin says: "The heightened phobia of U.S. sales and risks, as well as the legal climate and large long-tailed claims has spurred a re-underwriting that has put many Canadian clients with U.S exposures into a new premium category that I am afraid some cannot pay. In the long run, these risks going without coverage could become a real burden on those who carry coverage as the courts search for deep pockets."
Trained professional agents and brokers have the advantage in the hard market. That does doesn't mean their job is easier, but the ones that just took orders and renewed by cutting last year's premium will find it difficult to stay afloat.
"One real positive that is coming from the present marketplace is that the value of the broker has increased," says Martin. "The broker is no longer selling the savings, but the markets they bring to the table instead. The broker's professional credentials and experience will open doors to accounts that are presently dealt with by brokers that are too inexperienced to handle this rapidly changing market. Insurance companies are also looking to these brokers to be their partners in growth and target marketing in
the future."
With the exception of direct writers in Canada, brokers are the norm, not agents as is the case in the United States. There is also less regulation regarding rate and policy form.
On professionalism and added value, Cortezi said: "The current surplus lines marketplace, with its 'freedom of rate and form,' offers insureds and their market representatives the opportunity to find basic coverage as the capacity shrinks and the marketplace continues to be difficult. This is the role that surplus lines were primarily designed to play. Market participants should look to the surplus lines market and the professional surplus lines wholesaler as a 'problem solver' and partner who can assist them in negotiating in what has become and will likely continue to be a difficult insurance market."
The 2003 edition of The Insurance Marketplace marks the 40th anniversary of its publication. This year's edition will contain more than 650 coverages, programs, and industry services. New additions include Excess Property with limits of up to $1 million, Hazard Industries Mono-line Workers Compensation, High Value Commercial Property starting at values of $50 million, Medical/
Physical Rehabilitation Therapy, Sports Promotion Indemnification, and Zoos/Zoological Societies. The Insurance Marketplace is truly
A to Z now.
You can log on to the site (www.insurancemarketplace.com) without a password; just agree with the privacy agreement, click on the category, state/country and you are all set. With the markets changing on a daily basis we have added The Insurance Marketplace Specialty Lines Bulletin Board as a new feature to the Rough Notes Web site (www.roughnotes.com). The bulletin board lists new products, enhancements to existing products, carriers/MGAs looking for agents, products no longer available, and contact information changes. All listees in The Insurance Marketplace can utilize this feature to update information in the printed version.
To bring the markets closer to you, we have scheduled several specialty lines seminars. The next one is in Tampa, Florida, on December 11. Check page XX for a registration form or call (800) 428-4384. *
