“When a market attracts investor interest and capital that is always something which has good credibility and sustainability to it.” Bernie Heinze, AAMGA
and continue to grow in prominence relative to top-line growth, have been those with well-capitalised, Bermuda-based parents such as Ironshore, AXIS and Arch. Some believe that many of these newer surplus lines insurers have driven competition in the surplus lines market.”
Heinze says that while he welcomes new entrants to the market, they should be wary of factors such as entry costs, regulatory pressure and mergers and acquisitions activity.
“Barriers to entry are substantial—primarily monetary investment. You
requirement for data and technology,” he explains.
“Then there’s regulatory pressure. Regulators are continuing to take increasing Operating under a freedom of rate and form structure that doesn’t require
lines underwriting guidelines.
“In the admitted market, regulators can take time to approve the forms and
rates, which doesn’t work when there’s been a catastrophe or terrorism event,” says Heinze.
both subject to negotiations between the retail broker and MGA or insurer who has the binding authority.
“The E&S market receives all the things that the admitted market hasn’t had time to rate and put through analytic models. It’s the incubator where those
CHALLENGES
rating agency states that the surplus lines market in the US more than doubled from 3.3 percent of total P/C direct premiums written (DPW) in commercial lines DPW, surplus lines insurers went from a 6.1 percent share to 13.7 percent, demonstrating the interest in the sector.
obstacles and intense competition. This includes aggressive pricing and liberal coverage from standard market carriers seeking organic growth, and the alternative risk transfer market’s appeal as another means of covering potential surplus lines risk, according to AM Best.
remain competitive, which carries over to surplus lines,” says the report. “Additionally, some of the new formations that have emerged in past years,
interest in challenging freedom of rate and form in both the US and UK. If this could detrimentally impact the sector’s ability to respond quickly to new events, and ultimately force other solutions to be sought to provide that cover.”
With regard to the wave of M&A activity that is being seen throughout the industry, Heinze says that the consolidation is somewhat of a double- edged sword, as it indicates continuing interest and competitive strength in the market, but also lessens the number of existing market participants while at the same time, making room for new ones.
relationships will be the deciding factor for surviving surplus lines insurers.
to heightened competition, the most successful surplus lines insurers likely will be those that can preserve strong relationships with their distribution partners and maintain high policy retention,” the company said in its report.
“Many are investing heavily in developing, implementing and using
technological platforms to support those distribution relationships and improve their competitive positions.
“Adherence to strict risk selection and pricing fundamentals to strengthen the quality of business portfolios will, of course, also be a cornerstone of future success for surplus lines companies, especially given the higher hazard risks that surplus lines carriers entertain.”
Successful insurers in the sector will also be able to meet the challenge of
covering emerging risks such as cyber liability, environmental liability and advancements.
To conclude its report, AM Best says that it views the surplus lines insurance
coverage dissipates.
Spring 2015 | INTELLIGENT INSURER | 13
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