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Hard to Tell

As the soft market begins to harden, a growing presence of the surplus lines sector should follow.

By  Kevin Amrhein

Those looking for the event that might eventually break the lingering property-casualty soft market may have found it. That event is a four-digit number: 2-0-1-1.

According to Swiss Re, insured catastrophic losses in 2011 reached $70 billion in just the first half of the year, up from $27 billion during the same period in 2010. The $70 billion figure vaults 2011 to the not-so-coveted position of second place on the list of costliest catastrophe claims years ever, surpassed only by the $120 billion in 2005 (with U.S. hurricanes Katrina, Wilma and Rita blamed for $90 billion of that total). With time remaining, including possible tropical storm activity, a planet that continues to shake, winter storms in the U.S. and Europe and who knows what else, catastrophic losses could continue to mount, and 2011 will inch ever closer to infamy.

Property and casualty rates are already on the rise. According to A. M. Best Co., rates are increasing across all major lines for the first time since 2003. While average increases are not substantial (most lines are rising less than 2% over the previous year), this is significant as 2003 is widely credited as the beginning of the pervasive soft market.

These conditions have placed a heavy burden on the surplus lines marketplace as well. A. M. Best reported that, through 2010, the excess and surplus marketplace saw prices fall for a fifth consecutive year, a trend the agency called “unprecedented.” As soft market conditions begin to fade, the natural progression is a tightening of underwriting guidelines across the admitted marketplace. A growing presence of the surplus lines sector should follow.

Wholesale brokers historically represent the eyes and ears of the non-admitted marketplace. It’s no surprise that many members of the wholesale distribution channel have been hit especially hard by the prolonged soft market. But members of the segment insist that it remains viable and is positioned to assist retail partners as conditions force more accounts into the excess and surplus lines marketplace.

I’ve spoken with members of the wholesale community about what they expect to happen as markets harden.

A common feeling is that wholesalers will regain footing lost to standard markets in the large-property account sector. For example, many high-valued property risks with some catastrophe exposure or unfavorable loss history have been able to meet all of their coverage needs in the admitted market over the last several years. Both changing conditions and 2011’s catastrophic losses have wholesalers, particularly those specializing in high-risk property placements, expecting a surge of submissions over the next year. Commercial vacancies continue to rise across segments of the U.S., and many wholesalers believe these accounts will find their way back to the E&S marketplace.

The types of catastrophes that have fueled significant losses worldwide have wholesalers expecting an uptick in submissions for products that have historically thrived on the surplus lines side. The Tohoku earthquake in March, the most powerful quake ever to hit Japan and one of the five most powerful in recorded history, triggered a firestorm of discussion about global supply chain interruption and its insurability, a risk some wholesalers describe as ideal for the E&S marketplace.

Earthquakes are also responsible for billions in damage in New Zealand. Closer to home, a 5.8 magnitude quake that struck Virginia in August was felt widely along the East Coast. While the U.S. earthquake pales in comparison in terms of catastrophe, its location has fueled a resurgence of interest in products designed to cover such losses, including difference-in-conditions (DIC) coverage. Hurricane Irene revived interest among many Northeast property owners in products designed to cover catastrophic flood and wind damage. Major flooding in Australia and the U.S. has also contributed to interest in such products.

In addition to renewed interest in property lines, wholesalers also predict that hardening conditions will cause a bump in submissions for certain casualty exposures that are often sold in the admitted market. For example, employment-related claims are expected to continue to produce record loss activity as high unemployment lingers. Like property, professional liability markets historically jettison higher-risk exposures as markets harden, opening the door for E&S markets to offer the necessary products for public and private entities.

Wholesalers are optimistic that the excess and surplus lines marketplace is prepared for hardening conditions. Several retailers with whom I’ve spoken share their optimism in both the E&S marketplace and the wholesale distribution channel. They believe that recent trends—consolidation as well as retailers becoming more selective in their wholesaler partners—have the segment well positioned for the anticipated influx of activity.

Amrhein is wholesale editor.


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