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Why the Excess & Surplus Property Market Is Growing but Not Profitable

As carriers in the standard market increased rates due to catastrophe frequency and severity and property undervaluation, the excess & surplus market responded by providing inexpensive capacity.
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why the excess & surplus property market is growing but not profitable

The last few years have been unique in the property insurance industry. As carriers in the standard market increased rates due to catastrophe frequency and severity and property undervaluation, particularly in the cyber and property market, the excess & surplus market responded by providing inexpensive capacity, resulting in an increase in submissions.

But while U.S. property-casualty insurers specializing in the E&S market saw growth, it did not bring profitability to many in the E&S space, as demonstrated by a 107% direct combined ratio across all E&S companies in 2020. The primary reasons for this: natural catastrophe and a host of other unforeseen losses.

“Natural catastrophes exposures continue to evolve across the U.S.," says Michael Garrison, head of Navigators Wholesale, The Hartford. “Tornados are touching down more frequently in states not accustomed to such activity, and substantial flooding is hitting areas not previously identified as flood zones—for example, the remnants of Hurricane Ida across the northeast."

Winter Storm Uri was another unprecedented event that no underwriter could have anticipated. “Recently, I heard an underwriter say, 'if you had asked me a year and a half ago what is one event that could cause a loss in southern, western and northern Texas, I would have said nothing,'" says Christa Nadler, area executive vice president-property, Risk Replacement Services. “A loss of this scope and magnitude is not something that under­writers were necessarily rating for."

Yet, it is imperative for all successful insurance companies “to have a sound risk management and catastrophe management program as a core discipline within their organization," says Jeffrey Kamrowski, president and CEO, Mesa Underwriters Specialty Insurance Company (MUSIC), a subsidiary of Selective Insurance Group Inc. “We should not be surprised that hurricanes, straight-line wind or hailstorms happen in greater magnitude."

“The E&S property market will push rates higher on natural catastrophe perils going forward," Garrison says. “Market recovery will depend on carrier appetite for these perils as we move into 2022, and a more prolonged 'firm' market in this space can be expected."

“This last year and a half has been a little bit different than what we've seen in the past," Nadler agrees. “We all understand and expect that there could be hurricanes and flooding and maybe an earthquake, but that affected the market in the last year or two."

One of the biggest factors contributing to the lack of profitability among some insurance carriers is a massive uptick in the costs of labor and construction materials worldwide, according to the RPS State of the Property Market: Third Quarter Update.

“Replacement valuation coverage and corresponding rating due to substantial increases in building costs and time to build are trending across E&S property insurers," Garrison says. “Such increased costs are driving up the cost of construction and creating a mismatch between what is reported as replacement value and actual costs."

“Agents can help their customers understand the fluctuating property market, along with the factors that can affect it, including increasing building and repair costs, and insurance to value," says Eric Blecker, president, Northfield Excess & Surplus Lines. “Underinsurance is something that occurs in the property market and is important to avoid. This goes back to educating the customer about insurance to value, as market value and replacement cost can be two very different numbers."

Social unrest has also had a negative impact on the E&S property market. “Again, this is something that underwriters aren't necessarily rating for," Nadler says. “For example, they were not expecting there to be a huge loss to an auto parts supply chain in Kenosha, Wisconsin, because of rioting. And so again, this was an unexpected unforeseen loss that a lot of carriers had to pay claims on."

“We exist in an ever-changing marketplace," Nadler continues. It is important that agents “make sure that they're able to provide a tailored product to the insured."

As carriers assess their current and future positions on E&S property, one of the most important things an independent agent can do “is to choose to work with a carrier that has been committed to the independent agent space for an extended period of time, helping them to maintain that relevancy and to build opportunities for client engagement and solve client problems that will keep them both at the forefront of what is important to their customer base going forward," Kamrowski says.

“We continue to see rate increases across all lines, albeit at a lower level than earlier in 2021, and we expect this to continue through 2022," Garrison says. “New entrants are entering the market, and we anticipate the wholesale E&S market will have more choices as we begin 2022."

“That said, as demand for E&S property insurance continues to increase due to post-pandemic reopening and an increase in infrastructure projects, we will see this trend continue," he says.

Olivia Overman is IA content editor.

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Sunday, February 6, 2022
Commercial Lines