E&S market facing “years and not months” of pricing correction

It will be years before rates in the excess and surplus (E&S) lines market return to adequacy with rising loss costs and dwindling reserves putting pressure on carriers’ profitability.

That was the message from a panel of E&S underwriting executives at The Insurer’s New York Insurance Forum 2020 this morning.

David Bresnahan, executive vice president at Berkshire Hathaway Specialty Insurance (BHSI), said that, as a starting point, “it’s years and not months” of pricing corrections that are needed in the E&S market, although the length of time required for profitability to return varies by business line.

“Property still has a couple more years to go,” Bresnahan added, highlighting how even in 2019 when US insurers’ exposure to catastrophe losses was far lower than in the two preceding years, their results were not particularly good.

“The property P&L for the industry still has some ways to go,” he stated.

“If you think about the longer tail lines, if we are still two or three years away from trying to get the combined ratio down to a level that makes sense for the market participants,” said Bresnahan.

As Bresnahan explained, “the troubling aspect is the loss trends are in double digits”, so even on loss-free books where exposures have not changed, pricing will increase to factor in this potential “new normal’.

“Those are real possibilities because in the casualty and financial lines space, the claims-made space, the [NAIC] Schedule Ps are not showing any of this pain yet,” added the BHSI executive.

Lou Levinson, president and CEO of Lexington, called the recent rampant price increases “a market correction”.

“We’ve got two quarters of rate increases under our belt but no one is ready to declare victory. We have a tremendous amount to do – we’re in the bottom of the first and it’s a long game,” Levinson said.

“Unlike other markets where its either hard or firming, I think it’s a market correction and that’s why it’s sustainable - there’s too much unknown out there,” he explained, adding: “The best hedge for us in the insurance industry is to keep our limits short, keep our rates high, focus on risk selection and really be stewards of our capital and capacity, and that’s what’s going on in the market systemically.”

As previously reported, Lexington has been a key driver of change in the E&S marketplace with its strategy to refocus on the wholesale distribution channel and significantly tighten its underwriting approach, including shortening of limits.

James Drinkwater, president of wholesale broker AmWINS Group, pinpointed New York contractors, California wildfire, recyclers, woodworkers, residential real estate and habitational as some of the business lines experiencing significant challenges.

However, he added that “there’s a lot of business lines that are very stressed”.

“Personally, I found this 3/1 renewal cycle probably the toughest, but I’m saying that every single month, because it seems like it gets a bit more difficult every month,” Drinkwater added.

On the same panel, Dave Obenauer, CEO of wholesale at CRC Group, described the current market as income statement driven, with greater similarities to the cyclical change that happened in the mid 1980s than that of the early 2000s.

“As a result we’re seeing a lot more discipline both with existing players in the market and new players. So I think from that perspective it has longer to run,” he suggested.