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Today's Viewpoint: A MarshBerry Publication

The U.S. Excess and Surplus lines (E&S) insurance segment has seen positive momentum over the last few years with 2021 turning into a banner year. Surplus lines premium volume was over $24 billion with more than 2.6 million transactions through June 2021, an increase of 21.9% for premium and 7.2% for transactions year-over-year. MarshBerry estimates that insurance rates, on average, increased more than 14% in the overall E&S marketplace.

The strength in the E&S market has been geographically broad, driven by both an increase in demand and shrinkage in supply. The changing risk appetites of admitted insurers is one of the major drivers of increased surplus lines premium. Increased uncertainty, including economic volatility and increased natural disasters has led to more risk aversion in the admitted market, shifting increased business to E&S.

As the industry enters the final quarter of the year, strength in the segment is likely to continue. “The surplus lines market will likely see double-digit premium growth into next year (2022),” noted David Bresnahan, an EVP at Berkshire Hathaway Specialty Insurance.

Here are three reasons the E&S segment will likely outperform the overall Property & Casualty market into 2022.

  • Decline in capacity from changes in risk appetite. Large underwriters continue to have tighter policy wording. An ongoing low interest rate environment, resulting in lower yields, has also led to insurers in the admitted market shying away from tougher classes of business. Supply shrinkage is also being impacted by losses from factors such as natural catastrophes, COVID-19 related issues, and higher social inflation from increased awards and settlements. This has led to decreased capacity and a potential increase in demand for specialty coverage.
  • Continued rate and premium increases for surplus lines and other specialty lines. Willis Towers Watson’s most recent Commercial Lines Insurance Pricing Survey (CLIPS) showed that nearly all lines saw significant price increases in the second quarter, with the largest increases coming from E&S. James River Group Holdings, Ltd., reported that its second quarter E&S gross written premium increased 14%, exceeding expectations. Business flows in the E&S market will likely still expand due to rates in the admitted markets going higher, albeit at a more moderate pace. Most insurance brokers projected a continued rise in rates going into the second half of 2021.
  • High demand for harder to place risk. Risks remain heightened in the second half of 2021, as weather events; natural catastrophes like floods and wildfires; and new exposures from new technologies and businesses contribute to increased needs for specialty insurance. AM Best noted that “the growing complexity of risks sparked by new technologies in a host of industries, and the outflow of more-complex specialty accounts from admitted insurer portfolios, has helped drive surplus lines premium growth.” The E&S industry tends to provide coverage for emerging risks, which are on the rise. New technologies in construction, manufacturing and engineering businesses tended to have higher risk profiles, which many admitted market companies have been hesitant about insuring. Another factor that may boost demand for E&S coverage is the economic recovery and subsequent rise in “new businesses without premium-and loss histories that often initially find coverage in the specialty markets,” noted Meyer Shields, an analyst with Keefe, Bruyette & Woods. 

Overall, E&S lines’ results should continue to benefit from increased demand from new and difficult-to-place exposures and lower supply, as standard lines remain conservative and avoid unprofitable business.

If you have questions about Today’s ViewPoint or would like to learn more about activity in the E&S market, please email or call Gerard Vecchio, Managing Director, at 212.972.4886.

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