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