Today's Viewpoint: A MarshBerry Publication

State of the E&S Market: Challenges and Opportunities in a Hard Insurance Market

The ongoing hard insurance market offers a great opportunity for strategic MGAs, wholesalers and program administrators to surpass competitors and cement one’s future as a leading independent operator.

As market volatility continues, including the recent averting of a U.S. default, growth in surplus lines premiums continues at an impressive pace, with a one-way flow of hard-to-place admitted market business into surplus lines. The long-running hard market pricing environment has turned into a market in “transition,” offering opportunity for the specialty brokers who implement effective strategies in the current environment.

E&S Sees Faster Premium Growth vs. The Admitted Market

It is anticipated that growth in surplus lines premiums will continue to outpace admitted market premiums. The U.S. domestic Excess and Surplus (E&S) carriers grew top-line gross written premiums by 20% in 2022, or 4x the growth of admitted segment.1 According to AM Best, excluding Lloyd’s of London syndicates, E&S direct premiums written in the U.S. rose by 30% in 2022.2 MarshBerry projects that most rates will firm in the next 12-18 months, but this could take longer until equilibrium, defined as loss-free accounts renewing at expiring rates with no increase or decrease, is reached.

While E&S companies are growing at an impressive pace, they are also facing challenges. The E&S segment has historically produced superior underwriting results (especially during hard markets) as compared to the admitted segment, but this differential has disappeared over the last eight years. Surplus lines typically had lower combined ratios and better loss results due to underwriting compared to admitted counterparts. However, more recent macroeconomic factors impacting the E&S market are changing this, including new types of risk – rising interest rates and losses from more frequent and severe catastrophes.

A Hard Market is Likely to Continue

Premium price increases continued in most lines in Q1 2023, according to The Council of Insurance Agents & Brokers’ Quarterly P/C Market Survey.3 The average rate increase for the past four quarters (Q2 2022 – Q1 2023) was 8.0%.4 Rates are also rising faster for large account business that have the greatest pricing power and are leading the change in price increases. Fifteen of the top 25 E&S writers grew premiums faster than their competitors.

bar chart of e&S carrier's growth

There are multiple reasons for the current hard insurance market, including continued weak investment portfolio returns for carriers (resulting from lower bond values and a volatile stock market), forcing E&S carriers to reach sustained profitability through continued rate increases (e.g., improved underwriting results). Increasing claims frequency and severity are also driving E&S carriers to seek rate increases. Nuclear jury verdicts, inefficiencies in claims-handling, and emerging risks such as intellectual capital theft are just some examples of increased claims costs.

Finally, reinsurers are placing pressure on their Property & Casualty (P&C) carrier partners to pass along significant price increases on their property books, and indirectly on their casualty books. According to Aon plc, poor reinsurer results resulted in a $100 billion (or 15% reduction) in global reinsurance carrier surplus for virtually all of the major property reinsurers. This decrease brings total global capital back to 2014 levels while all types of exposures (e.g., cyber, intellectual property, cat exposed property, umbrella) have continued to increase

Will You Capitalize on this Market Environment or Become Complacent?

With carriers seeking higher insurance rates to maximize returns while retail brokers and insureds remain challenged by further rate increases, E&S brokers are finding this market environment more difficult to navigate than during recent history. As such, market equilibrium is expected to take longer to achieve than in recent hard markets.

A firming E&S market may allow some insurance brokerage owners to put off making hard decisions about technology improvements, process efficiency upgrades and securing growth capital. This approach may likely result in near-term profits; but beware of this trap! For those MGAs, wholesalers and program administrators who implement strategic technology upgrades and underwriting improvements, this period could be a perfect opportunity to surpass competitors and cement one’s future as a leading independent operator. By reinvesting excess profits back into your business, you can lower costs, improve operating efficiencies, and help your carriers by placing more profitable business with them.

Strategic Paths within Your Market Niche

Furthermore, access to capital for the more forward-thinking MGAs and program administrators is likely to be critical to implement these key strategies. By accessing capital, specialty distributors may consider some or all of the following strategic paths to help create a more sustainable competitive position in one’s market niche:

  • Attract and complete acquisitions
  • Attract, train and retain underwriting talent
  • Improve operating efficiencies
  • Invest in technology upgrades
  • Fund risk-taking facilities (such as captives)

To remain competitive, a truly focused strategy is becoming more important than ever in demonstrating and reinforcing one’s value proposition.

Investment banking services offered through MarshBerry Capital, LLC, Member FINRA Member SIPC and an affiliate of Marsh, Berry & Company, LLC. 28601 Chagrin Boulevard, Suite 400, Woodmere, Ohio 44122 (440.354.3230)

Contact Gerard Vecchio
If you have questions about Today's ViewPoint, or would like to learn more about how MarshBerry can help your firm determine its path forward, please email or call Gerard Vecchio, Managing Director, Specialty Practice Co-Head, at 212.972.4886.

2 AM Best Data & Research

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