September 03, 2020
By Matt O'Malley and Kyle Burnett
Excess & Surplus, AXA XL
Last year, the excess & surplus insurance market grew by nearly 15%, riding a wave that began in 2018 and that analysts expected to continue in 2020 as admitted insurers tighten their belts and key markets shed unprofitable lines of business.
Steadily rising rates in the primary market have made it more difficult even for businesses with good loss histories to maintain comprehensive coverage at affordable prices. More and more often, those businesses are pushed into the E&S marketplace, hoping its characteristic flexibility and creativity will produce solutions.
The E&S market has always been the home for these difficult to place risks, picking up the tough exposures that primary carriers have no appetite for. This year, more risks are falling into that category, due in large part to the disruption of COVID-19 and more recent civil unrest.
While this creates new opportunities for E&S insurers, it also brings unique challenges. Carriers that can adapt quickly and communicate clearly are best positioned to take advantage of these opportunities to drive sustained growth into 2021.
Disruption Upends Understanding of Risks
The E&S casualty market is extremely strong as we have continued to see submission increases over 2019, and much of that surge is due to trends that were manifesting before the outbreak -- things like deteriorating underlying auto and social inflation.
The pandemic is helping to accelerate that surge. On recent earnings calls, many of the standard market’s chief executives have indicated significant impacts based on exposure to COVID-related losses, and with that there’s a continuous look at what capacity they want to continue to deploy. As that capacity shrinks, we’ll see more opportunities come into the casualty E&S marketplace.
The same is true for the property business, where insureds and underwriters are facing a new and thoroughly unanticipated risk landscape. Vacancies and loss of revenue are the two biggest concerns right now, and there’s little that can be done to mitigate them until the pandemic ends.
Then there are businesses that have found a way to stay open by completely repurposing their operations. For example, hotels that have made empty rooms available to recovering COVID patients or to frontline workers in quarantine. Manufacturers that have stopped making T-shirts and started making face masks or switched from auto parts to ventilator pumps. Vacant buildings transformed into field hospitals.
Risks that we thought we understood suddenly look completely different. That’s why so many so-called standard risks no longer fit the standard marketplace.
Risks that we thought we understood suddenly look completely different. That’s why so many so-called standard risks no longer fit the standard marketplace.
Public entities have also been hit hard by decreased tourism and low ridership on public transit systems. The . Government buildings and structures have also been targeted in recent riots ignited by the death of George Floyd at the hands of Minneapolis police officers.
Losses could potentially be compounded by natural catastrophes. With four months left in what is predicted to be an above-normal hurricane season, policyholders and their insurers should be prepared for more property damage and business interruption.
With all of these threats in the mix, there’s no doubt that higher rates and a hardening market are here to stay, at least for now.
E&S Must Adapt to Unprecedented Challenges
While E&S insurers certainly benefit from these unfortunate trends from a business perspective, they are not immune to the challenge of helping clients find solutions to unique and ever-changing problems.
Exposures have changed in ways we couldn't anticipate, and we can expect that to continue for at least the next six to 12 months, potentially longer. In the E&S market, you have to be adaptive and creative. We’ve found new ways to write risks, creating new forms and manuscripting endorsements to help insureds weather the storm.
Facilitating insureds’ ability to pivot and take on unprecedented challenges and opportunities is the hallmark of E&S insurance.
The biggest hurdles for E&S carriers will involve reconciling creativity and innovation with marketplace realities.
Rates are also rising for non-admitted coverage, though not as severely, at the same time that many businesses are facing financial hardship. Underwriters will have to work closely with brokers and insureds to craft coverage that sufficiently addresses exposures without breaking the budget.
Balancing the rate increase we need as a company and a portfolio without decimating insureds’ bottom lines or cutting down their key coverages will be a challenge. We want to make sure they have what they need to keep operating and finding that happy medium requires communicating early and often. We have to work together to find solutions that make all parties happy.
One of the biggest things needed going forward is increased collaboration. We constantly need to be meeting with our broker partners and insureds to discuss the changes that are occurring and understand their hardships, but also to make sure they know what to expect at renewal.
Looking Ahead
Though the economic impacts of the COVID-19 pandemic will be felt for some time, many businesses will return to normal operations at full capacity once the existence of vaccines and effective treatment put an end to the outbreak.
Among them will be sharing platforms and members of the gig economy -- a burgeoning sector characterized by hybrid commercial/personal exposures still underserved by traditional insurance solutions.
Those entities are perfect opportunities for the E&S market because most of these businesses have no prior track record and really unique risk profiles, and this is where the ability to tailor coverages specific to insureds' needs allows us to be creative to meet that demand. Once the economy starts to rebound, we’ll see an influx of submissions from those businesses.
The E&S market will have the chance to share their expectations and concerns with colleagues at the upcoming WSIA conference in September - albeit virtually.
About the Authors
Matt O’Malley is President, E&S Casualty for AXA XL. He can be reached at matt.omalley@axaxl.com. Kyle Burnett heads AXA XL’s Property E&S book of business. He can be reached at kyle.burnett@axaxl.com.
