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3 Strategies for Succeeding in E&S

If your agency is looking to get a piece of the excess & surplus lines pie, here are three strategies to keep in mind to maximize your potential for success.
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Picture this: Your client, a large multibillion-dollar chemical company, is going through the process of selling a former superfund site. The client doesn’t want to have to purchase insurance, so they work out an indemnity deal with the investment firm that’s buying the remediated land.

Or this: Your client discovers that, unbeknownst to the C-Suite, two employees have been involved in a regional price fixing scheme and are now facing potential litigation from the Department of Justice.

As the agent in either case, how do you proceed? Just ask independent agent Sean Hickey, p-c practice leader and executive vice president, Rose & Kiernan, Inc., a Best Practices agency headquartered in East Greenbush, New York—both are real-life anecdotes from his involvement in the excess & surplus lines insurance market.

In the first scenario, Hickey’s agency put together an excess indemnity liability insurance policy in the E&S market “that satisfied both the lender and our client because it was a much more cost-effective solution with broader, long-term coverage,” Hickey says. “And the client had the ability to bear risk. It was a win-win-win for all the parties involved.”

In the second scenario, the agency worked with carrier partners to craft a product from the ground up that would meet the client’s discreet needs in the form of litigation containment. “We see a lot of customization in the E&S space for clients in private equity and emerging technology, such as renewables,” Hickey says. “We’re seeing more and more robust, creative solutions.”

E&S makes up 13% of total commercial lines revenue at the average independent agency, according to the 2018 Future One Agency Universe Study. Among agencies with revenue from E&S products, an average 62% have producers who are licensed to write E&S, ranging from 59% among small-midsize agencies to 85% among jumbo agencies. That’s significantly higher than in 2016.

If your agency is looking to get a piece of the E&S pie in the years to come, here are three strategies to keep in mind to maximize your potential for success:

1) Develop a niche. E&S is a “highly specialized marketplace,” says Jim Lynch, chief actuary, vice president of research and education, Insurance Information Institute. “That means you should probably have something in mind about what kind of business you’re going to write, and you should probably have some pretty sound reasons why that niche is going to be one that you’re successful in writing.”

Compared to the standard market, “there’s a different kind of trust that’s being placed in the agent in an E&S position,” Lynch explains. “If you want to write construction vehicle rentals, for example, you have to be good at finding those risks, understanding them and getting them processed. You have to make sure you know that niche and you know it intimately. That can be very different from the world that you’re occupying in the standard market.”

Matt O’Malley, president, E&S casualty at AXA XL, agrees that most of the agents he sees with E&S licenses tend to specialize in a particular niche, such as nightclubs, environmental or cyber: “For an agency that might be traditionally focused on standard retail lines of business, they may be able to bring in a producer with specific expertise where an additional E&S license will help them handle that class of business directly.”

In other words, if your agency already specializes in a particular niche within the standard market or recruits a producer with a deep expertise in an emerging line, that could be the perfect springboard for entering the E&S space.

“Most of the E&S producers we deal with will build an expertise and then build a team around the goal of being the best at placing that challenging class of business, and working to find markets that are going to tailor solutions to their customers’ needs,” O’Malley explains.

“If you feel you have that expertise, that’s probably the best way to enter into that marketplace,” Lynch agrees. “Otherwise, you’re coming in as a less sophisticated agent, and any time you lack sophistication, you’re going to be at risk of being at the wrong end of a situation.”

2) Partner up. Nearly nine in ten agencies work with E&S carriers, according to the Agency Universe Study, but larger agencies are more likely to access these carriers directly, while smaller agencies typically place E&S business through MGAs and wholesalers. Across all agency sizes, only 10% place E&S business directly exclusively, whereas 59% place E&S business through an MGA or wholesaler and 20% use both approaches.

“The more expertise you have, the more you can handle the business yourself,” Lynch says. “But if you’re still trying to develop that niche into a deep expertise, you’re more likely to want to partner either through the MGA level or through a wholesaler.”

Bryan Sanders, president of U.S. insurance, Markel, and vice president of the Wholesale & Specialty Insurance Association, points out that “wholesalers bring significant E&S market access that many retail agents may not have. There’s an expertise wholesalers possess that is as close as a phone call or a relationship away for an independent agent. And post-claim, the advocacy the wholesaler brings to the table is substantial.”

When considering whether to enter into a new wholesaler partnership or continue an existing relationship, Sanders encourages agents to ask themselves three questions: Does the wholesaler have a good reputation? Do they have the necessary market access? And do they have the proper errors & omissions coverage in place?

If all that checks out, accessibility is the final test. “Response time is very important,” Sanders says. “Let’s say the independent agent is working with one of their markets on a piece of new business and it looks like they’re going to be able to get it done, but then at the last minute, there’s something about the risk that their standard carriers don’t like. The wholesaler needs to be able to provide a solution very quickly. If you're doing business with a wholesaler that doesn’t come through for you in a short order, you probably should be looking to work with another wholesaler.”

3) Customize your approach. Independent agent Krystal Lugg says her agency’s approach to E&S is to make “a diligent effort toward placing business with admitted carriers first, then move to E&S as a last resort.” The challenge from there, she says, “is reviewing it once it’s on the books for improved placements.”

That means there are times when E&S makes more sense for a client and vice-versa, but don’t expect your initial assessment to last forever. “The way I approach it is from a coverage standpoint and claims payment standpoint,” Lugg explains. “If we feel there is the potential for either of those to be disrupted, we would try to steer it the other way.”

Depending on where a client is located, their class of business and the severity of the claims they could potentially face, “we want to know whoever we’ve partnered with is going to give our client the excellent, top-of-the-line, top-notch service we would expect,” Lugg says. “As the agent, it’s our job to make the best judgment call for the client, and that goes back to finding the right coverages.”

In E&S, “there aren’t any hard and fast rules,” Lugg adds. “Review the coverages, understand how everything works together, and make a judgment call on how it could benefit or hurt the insured. You have to ask the tough questions.”

Hickey agrees on the importance of digging deeper, citing a quote from Jay Fishman, the late former chair of Travelers, that the insurance agent’s job is to be a client’s “chief worry officer.”

“One of the things our industry needs more of is a little more circumspection around lifelong learning and attention to how clients’ needs are changing,” Hickey says. “The more brokers take that to heart as they work in diverse teams, that’s really going to be beneficial to our industry as it continues to mature.”

Jacquelyn Connelly is IA senior editor.

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Tuesday, June 2, 2020
Commercial Lines