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Today's Viewpoint: A MarshBerry Publication

The U.S. Excess & Surplus lines insurance sector (E&S) saw greater than 20% growth in surplus lines premium during the first half of 2021. 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, according to the U.S. Surplus Lines Service and Stamping offices. The first half data follows robust premium figures reported by stamping offices for the full year 2020. Based on the excess growth of premiums over unit transactions, MarshBerry estimates that insurance rates, on average, increased greater than 14% in the overall E&S marketplace.

The strength was broad-based, with all 15 of the stamping offices reporting premium increases in the first six months of 2021. This was the first increase in transactions since the 2019 report, with 14 offices having higher transactions. Stamping offices comprised 62.7% of U.S. premium volume in 2019, according to A.M. Best and the stamping office.

The ongoing healthy demand in the E&S space was aided by growth in residential and commercial construction, with several states noting that building booms and “the addition of new households” contributed to premium increases. Furthermore, businesses are still looking to E&S insurers to handle the risks that are more challenging to place. Market experts see further expansion in the last six months of 2021 as factors like moderating industry reserves, economic uncertainty, and tighter policy wording by large underwriters remain in place.

Here are three factors that are likely to impact E&S market strength in the second half of the year.

  1. Greater demand for E&S solutions are expected to continue as economic uncertainty, COVID-19-related volatility, and higher claims costs impact traditional insurers. Some admitted market insurance carriers have moved towards increasing rates, reducing capacity, and applying more conservative factors to risk selection. Others have cancelled coverage and reduced limits to improve profitability. The move towards greater risk aversion in the admitted marketplace has allowed surplus lines companies to insure greater numbers of risks.
  2. Severe weather events and natural disasters (e.g. wildfires, flooding and storms) are becoming more prevalent. Adverse weather, drought conditions, and excessive heat drove a number of wildfires in West Coast states, impacting the Property & Casualty (P&C) market. While the threat from U.S. wildfires grows, insurance capacity is decreasing. The insurance market continues to restrict capacity to cover wildfires as the events become larger and more frequent, noted Aon plc. In three of the last four years, insured losses from wildfires in the U.S. cost over $13 billion and economic losses were over $20 billion. In terms of both weather and climate events in the U.S., there’s also been 10 or more billion-dollar weather and climate events each year since 2015.
  3. Current low interest rates, volatile investment market, and economic uncertainty could also contribute to increases in premiums as carriers try to offset risks to profitability. As noted by the Federal Reserve (Fed) at its June 2021 meeting, its target range of the benchmark federal funds rate remains at zero to 0.25%, unchanged since March 2020. This very low level of yield has forced carriers to generate greater underwriting profitability. Hence, we are seeing a renewed focus on avoiding tougher classes of business.

In sum, not only will surplus lines see tailwinds from the global economic recovery, but E&S lines should continue to benefit from a pullback by standard lines carriers seeking to divest themselves of marginal and 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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