The property/casualty insurance industry and excess and surplus lines brokers in particular are at the world’s beck and call to help navigate what is an increasingly risky environment. The industry continues to respond as social, environmental, technological, political, legal, scientific and economic forces are changing industries, institutions, relationships, communications, products and more.

The fact that the world is getting more, not less, risky explains why E&S leaders expect new business will continue to flow into the E&S market even as some lines of coverage stabilize, why there have been structural changes in the industry, and why brokers are motivated to continue to find new coverage solutions.

“The world’s not a less risky place,” says Neil Kessler, president of E&S market specialist CRC Wholesale, adding that the risks are more complex than ever before.

Whether those risks end up in the E&S market or the admitted market, the industry’s value proposition must be to help retail insurance agents solve coverage issues for the most complex risks, Kessler maintains.

Kessler believes that solving problems is what surplus lines does best. “That’s really where we excel,” Kessler said. “Because the risk profile of what we’re dealing with will continue to evolve and it’s not evolving into a less risky proposition.”

U.S. surplus lines premium continued to show strong growth through the first half of 2024, according to the U.S. Surplus Lines Service and Stamping Offices 2024 Midyear Report, which showed that surplus lines premium accounted for $39.5 billion from 3.2 million items filed as of June 30, 2024. That growth represented a 10.1% increase in premiums and a 10.8% rise in surplus lines items sold in the market compared to the same period in 2023. For comparison, in the first half of 2023, the data showed $35.9 billion in premium representing growth of 15.9%.

“We’re clearly in historical hard market conditions for property and casualty,” said Tim Turner, president of Ryan Specialty, and chairman/CEO of Ryan Turner Specialty, Ryan Specialty’s wholesale brokerage division.

“Annual numbers have validated that the flow of business into the channel continues to grow at a double-digit pace as the dumping and shedding of admitted business into the non-admitted channel just continues to grow,” he told Insurance Journal.

Turner said there are no indications to suggest that this “historic” hard market is like others in the industry’s past where business moved back into the admitted P&C market after rates stabilized.

“We just don’t see the same cyclical aspect any longer,” Turner said. “We see the business, most of it staying in the E&S market, because it’s too volatile for the admitted markets” to underwrite, he said. The admitted markets cannot get the rates filed and the forms filed fast enough to account for the fast-changing dynamics in today’s volatile and risky world.

“We just don’t see that business moving back into the standard market without any kind of disruption,” Turner said. That disruption would mean a “huge increase in appetite” by admitted market carriers. “Those are indicators that we are looking for all the time and they’re just not there,” he said.

Structural Changes

As the market changed over the past few years, so did the way that property/casualty insurers handled its risky business.

Scott Purviance, CEO of Amwins, says part of why he thinks this market cycle differs from the past has a lot to do with “fundamental changes” around the way the E&S market operates today.

“Typically, what we’d see is markets soften (on price), and then our submission flow into the market would also decrease,” he said. “We’re seeing the exact opposite right now,” he said. “We’re seeing submission flows grow … we’re seeing more and more flow into our market.”

He says: “I think why business isn’t flowing back into the standard or admitted market this cycle is because so many of the big standard market players now have dedicated specialty or E&S units, and so they’re less likely to allow underwriters to compete with each other and drive prices down.”

Purviance also thinks carriers in general have done a better job at segregating products and lines of business when it makes sense to remain in E&S. They now say, “OK, these are the products we want to write in the E&S unit versus the admitted or standard units,” he said. “So, I don’t think we’re going to see anywhere near the same level of flow back into the admitted market.”

Ryan Specialty’s Turner agrees that this structural change in how P/C carriers handle E&S business today will keep the business flowing into surplus lines.

According to Turner, the market has seen some rate deceleration and moderation in niche areas in 2024 but some of that has been short lived.

“Anything to do with transportation is coming into the E&S channel now at a record pace,” he said. “Not just trucking, but delivery and shared economy risks as well.”

Turner added habitational business, large venue exposures, sports and entertainment, higher education — all have seen upticks in nuclear verdicts, and remain E&S business.

While “it’s clearly less hard of a market in 2024 than 2023,” Purviance says the growth in aggregate for surplus lines business this year will still be positive thanks in part to the changes carriers have made.

“We went back and looked at the top 25 P/C writers, which includes everybody, State Farm, Allstate, the personal lines guys,” he said. “If you go back to 2000, the top 25, only three of them had dedicated E&S units then. Today, if you look at the top 25, 14 of them have dedicated E&S units,” he said. “So that’s a big segment of the market that’s hopefully not going to be competing and driving prices down” as happened in previous market cycles.

So, while the market saw a turn in property rates for the first time in six years during Q2 2024, property rates are by no means “falling through the floor,” Purviance noted.

Fluidity

Adam Mazan, president of Risk Placement Services, describes the current state of the E&S market as “fluid” — not one part is the same.

“There’s a lot of moving parts in the market right now and it’s not necessarily all acting the same,” he said. “Whether that’s within certain specializations or verticals such as property and casualty or across verticals, there’s just a lot of different factors impacting the business today that’s creating a very fluid marketplace across the E&S space.”

CRC’s Kessler agrees there’s a lot of fluidity in market conditions but that doesn’t mean a slowdown for E&S or wholesale business. “When we look at the data, from my perspective, we’re not seeing a slowdown in the submission volume coming into CRC these days,” he said.

“We’re still seeing a very significant increase, even in areas of the market that you think would be moderating from a pricing perspective,” he said. “In terms of where we are in that pricing cycle and what some people are feeling, there’s definitely been a lot of change in both personal lines and commercial lines. If you’re an insurance company, if you think about frequency and severity, both of those items are way up.

New E&S Players

The growing opportunities in the E&S market from the hard market not only pushed innovation and growth from traditional E&S markets but also spurred the creation of new carriers and investment in the delegated underwriting authority enterprises (DUAEs) market.

One newer insurer, Upland Specialty, formed in September 2020.

“There were a number of new carriers that came to market in the 2020-2021 timeframe but we decided to get together and build an insurance company because wholesale and E&S were very much in our backgrounds,” said Jim Damonte, president of insurance operations, who prior to helping start Upland Specialty served as a senior managing director at Aon’s Reinsurance Solutions Division.

Damonte says that since day one the “overall flow of submission activity is just absolutely beyond robust. I mean, in 20-plus years I had never seen such a huge influx of submissions and there’s just no quit to it.”

For Upland, being new means “you don’t have all these legacy liabilities issues to be as concerned about,” he said. Also being new opens the door for entrepreneurial focused talent, he added.

“We kind of fall in an interesting spot whereby we are attracting underwriters and underwriting teams that are pretty entrepreneurial in nature, but they still have solid recognition that they’re likely better as part of a team. So in lieu of someone starting an MGA, they have the talent and the entrepreneurialism to likely do that, but they recognize the benefit of being part of a broader team and in being more sophisticated with how they handle risk and trade as underwriters.”

Aside from new E&S carrier growth, new managing general agents (MGAs) popped up as cost-effective vehicles for (re)insurers to cover niche or emerging risks, for a fraction of the investment required for new carrier start-ups or for existing carriers to establish in-house expertise. MGAs may bind coverage, underwrite and price select risks, settle claims and bind reinsurance on behalf of an insurance company.

In 2023, AM Best reported that direct premiums written generated by MGAs grew 14.9% year-over-year to $81.4 billion. This followed robust growth of 19.5% in 2022 and 17% in 2021. Specialty, hard-to-place risks are driving business, AM Best noted in a June market segment report.

It seems that MGAs and DUAEs are the “flavor of today,” Purviance said. For Amwins, close to $5.5 billion in business is generated through its MGA platforms, he said. “We’re big believers in specialization, but we’re also investing heavily to build the best infrastructure to do that.”

That’s important as the growth in this DUAE market continues, he said. “When somebody delegates underwriting capital to us, we take it very seriously. Our job is to be stewards of that capital and generate an underwriting profit,” he said.

“We think over the next five years, because the MGA arena has expanded so fast, there’s going to be some haves and have nots, and carriers are going to realize the quality they’re getting from certain MGAs versus others, and there’s going to be a reallocation of that underwriting capital. We hope.”

Personal Lines Changes

Personal lines policies represent a small proportion of the overall E&S market, with premiums for residential, homeowners and other personal property coverages comprising just 4.6% of year-to-date 2024 premium, according to the U.S. Surplus Line Stamping Offices. However, some states have seen a rise in personal lines coverages over the last 18 months in the E&S market attributable to admitted insurers withdrawing from specific markets.

Ryan Specialty’s Turner says his firm has seen an uptick in personal lines for tougher class homes with catastrophe challenges whether that’s wind, coastal or convective storm exposures.

“What we didn’t see until the last year or two was this big wave of high net worth and ultra-high net worth risks that’s really accelerated in places like Florida and California,” he said. “It is moving and getting firmer every day because the big carriers are pulling out of high net worth personal lines in markets like California in the last 36 months progressively,” he said. “Four huge players have pulled out now, and so it’s really become an ultra hard market overnight for the high net worth and ultra high net worth space.”

That has led to opportunity for the E&S space, Turner added. “We’ve really increased our resources, our underwriting, our delegated underwriting authority talent, and our broking expertise in high net worth,” he said. “When we see these niche firming phenomenon happen, A, you have to have the broking talent, and B, you need capacity and preferably proprietary and preferred capacity.”

That led to Private Client Select Insurance Services (PCS) entering into an agreement with Ryan Specialty as a distribution trading partner in July. The independent managing general underwriter started by American International Group (AIG) and Stone Point Capital will use Ryan Specialty as its exclusive wholesale broker for U.S. high net worth and ultra high net worth business.

“We’ll be their sole distributor of high net worth and ultra high net worth non-admitted capacity going forward,” Turner explained. “The agreement gave us a tremendous boost in our ability to market these accounts because you can’t deliver the solution in most cases with one carrier. You need a combination of carriers, so you need broking capabilities as well as preferred capacity. And we now have a combination of that as we do in most of these highly specialized niche firming areas.”

For CRC, personal lines is a high growth area as well, according to Kessler.

“We’ve hired a significant number of new personal lines producers over the last year and a half and have really looked to grow and invest in that business nationwide,” Kessler said. “It is a small but quickly growing part of our business, and we are working to make some significant investments to make it an even bigger part of our business,” he added.

Future

David Corry, head of casualty for Argo Group, sees a more stable and disciplined market in the future when it comes to E&S business, different than the days of the past.

“When I got in the industry in the mid-1980s, we were in the classic hard and soft market cycles,” Corry said. “You priced your business and you underpriced the business. Interest rates were higher, and it was more cashflow underwriting.” But eventually carriers got to a breaking point, he said.

“So then it became a hard market and rates would go up excessively, if you will, to try to make up and you had these peaks and valleys,” he said. “Whereas the last few years, I would describe the market as more stable in the sense of the CEOs, the CFOs, the board of directors, the senior management, the carriers are very disciplined in how they approach their business and what they’re writing, and trying to stay ahead of where their pricing needs to be for their costs,” he said.

“It is not perfect,” Corry said. “There are carriers that have to enter and exit markets and products and exit lines of business. Some carriers suffer financially but overall, if you look at the industry, the number of carriers that are out there, there’s more discipline than there is foolishness and chasing market share.”

Nevertheless, this market cycle and the future for E&S looks different. “I believe that carriers today, certainly at Argo, we are working very closely as underwriters with our reserve actuaries, our pricing actuaries and our claims department to analyze the industries that we write, the products that we offer to those industries, and ensuring that we’re pricing our product to stay ahead of future loss costs and claim trends.”

For Turner, the historical hard market has been nothing but positive.

“It’s been a tremendously positive experience,” he said.

“The challenge has been to keep up with these real structural changes that have created record-breaking historical flow. Capturing that business has been the ultimate challenge, while being efficient and keeping your performance level very high, while at the same time managing these record-breaking flows of business and migration of business. That’s been a challenge, and we welcome it.”

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