Premium volume surges in domestic US surplus lines market

The domestic non-admitted market is seeing a strong surge in business as Lloyd’s and certain US carriers led by AIG retrench from loss-struck lines.

Hard evidence of increased premium volume came from the Surplus Lines Stamping Office of Texas (SLTX) earlier this month when it reported a strong uptick in activity.

Data for the first quarter recorded by the SLTX revealed an 11.2 percent increase in premium processed in the state to $1.45bn.

At the same time, surplus lines filings were up 3.6 percent to 251,056 suggesting increased volume of deals as well as rate increases.

As the chart shows, there was strong premium growth in January, February and March compared to 2018 and 2017.

The first quarter growth comes after what the SLTX said was the highest grossing year for the domestic wholesale industry.

Figures it released earlier this year said that in 2018 premium for the domestic industry climbed by 11.3 percent to $31.4mn.

It suggested the growth was a reflection of the sector’s rapid response to “hard-to-place, unusual and unique, or high capacity” coverage needs.

And senior wholesale broking executives canvassed by The Insurer in recent weeks said that there had been meaningful acceleration through the first quarter and into the first half of April, both in terms of volume of business and pricing.

One commented: “There’s a ton of disruption and a ton of opportunity and it’s amazing how quickly it’s changed. Going into 2019 we thought it would be the same as 2018, up mid-single digits but still getting things done. It’s hard now though.”

The CEO of another firm said he had seen his biggest first quarter organic revenue increase as submission flow into the wholesale channel significantly increased.

Another executive said the market is “on the move”.

His firm had seen a “huge increase” in activity in the first half of April with a surge of business into the non-admitted P&C channel – mostly from London and AIG dumping business.

“I see that continuing and other markets in pain, having to non-renew business and restructure portfolios, so it’s going to be a very interesting year,” he said.

Sources have talked about submission flow increasing organically to more than 30 percent in some areas.

As previously reported, the most challenged areas of business include commercial auto, trucking, habitational business on the property and casualty side.

The Insurer revealed in February that a hardening E&S property market where rates on clean cat-exposed accounts are up 10 percent is seeing the return of opportunities for writers of buffer layers in programmes.

And this publication understands there is a similar story emerging in the trucking and transportation market, where standard lines carriers are raising attachment points and no longer willing to come in above a $1mn primary.

That is leading to demand for buffer layers between primary and excess coverages, and putting deals back in the E&S market.

At the same time, many coverholders across several challenged lines of business have been impacted by the retrenchment at Lloyd’s, driving a further squeeze in capacity.

“There’s no new capacity coming in. people are losing capacity in MGUs, MGAs, consortium, programs and especially risk premium groups (RPGs) – capacity is drying up,” said one wholesale broker.

They added that a “massive restructuring on huge complex accounts” was also taking place as AIG retrenches in the market – both as an admitted carrier and by cutting limits in its Lexington E&S platform.

“If it wasn’t for AIG over the last 25 years these accounts would have been in the E&S market, and now there’s no saving them from coming into the E&S market and getting restructures, which is what’s happening,” said the executive.

“It’s clearly not an aberration. There’s movement everywhere.”

The Insurer comment

In their preview notes for the upcoming Q1 earnings season, several analysts have highlighted the focus on pricing momentum expected in calls with management to discuss 2019.

And the forecast is that the E&S space will see a more meaningful uptick than the broader commercial sector.

That is no surprise. The natural push-pull between the admitted and non-admitted (or standard lines and non-standard lines) marketplace tends to follow a set pattern when underwriting conditions deteriorate and the cycle begins to swing from soft to a hardening transition period.

As underwriting pain is felt across a broader swathe of business, standard markets retrench from pressure points and more complex or loss-affected segments of the market.

Unable to find capacity for those risks in the admitted space, retail brokers turn to wholesale brokers and the submission flow quickly ramps up into the E&S marketplace.

That is why in harder markets, premium growth for non-admitted carriers tends to comfortably outstrip their admitted peers, as increased pricing combines with a greater volume of deals being restructured and placed in the E&S market.

What is interesting in the current market, however, is that the pressures are coming from both sides.

Demand for the E&S product is up as admitted markets retrench. But supply is also being squeezed as Lloyd’s deals with an enforced suppression of its appetite in the post-Decile 10 environment and Lexington cuts limits on swathes of its book.

The squeeze is real, and that can only mean more fuel to a fast-growing E&S marketplace in 2019.