E&S pricing momentum to carry into 2020: QBE’s DiBattista

E&S underwriters are heading to San Diego this weekend for the annual marketplace of the Wholesale & Specialty Insurance Association. The mood at the meeting is likely to be upbeat, if this publication’s conversation with Jude DiBattista, head of E&S property casualty at QBE North America, is anything to go by.

“A lot of good things are going on in the marketplace,” DiBattista told The Insurer. “I haven’t seen it this positive in a number of years.”

Rates are surging in the E&S market. As is premium growth, fuelled by the higher pricing and the strong US economy.

An AM Best report released this week revealed that surplus lines premiums grew 11.2 percent in 2018. The pace has not let up so far this year: the Surplus Lines Stamping Office of Texas last month estimated US surplus lines premium growth of 12.7 percent in the first half of 2019.

“I think people are starting to see the value of the E&S segment,” said DiBattista. “It’s also diversifying out into states that we never really saw it before. Historically it’s been the typical New York, Illinois, California, Texas, Florida. That was the bulk of it. But now we’re starting to see a big pick up in states like Arizona, Minnesota, Utah.”

DiBattista expects further growth.

“It is probably going to be close to a $35bn, $40bn industry by year end, and I see this industry over the next two to three years getting to $50bn, $60bn. I think it’s going to be a very exciting time because there’ll be more products out in the E&S market and I see the segment just continuing to expand,” he said.

Developing product areas

DiBattista identifies three developing areas that need product solutions: drones (see box), medical marijuana and shared economies. QBE is not writing business for these but is monitoring them.

“We’re just trying to figure out what the need for the client is and how we can possibly tailor some type of solution for it,” he explained. “Is it on our existing GL product offering or excess product offering, or is it a separate product that’s going to be needed? So we’re just monitoring them, seeing what is needed and then ultimately how to price it.”

“People tend to say E&S is the market of last resort. I don’t look at it like that. I think we’re the first ones”

These newer exposures are perfectly suited for the E&S market, which has more flexibility than the admitted market to come up with new products.

“People tend to say E&S is the market of last resort,” DiBattista said. “I don’t look at it like that. I think we’re the first ones. A product comes into the market and no one knows how to price it on the admitted side so it naturally goes into the E&S market. We set the tone, we dictate what’s needed and how something should be priced and the coverages.”

Cannabis was also one of three new growth areas for the E&S market identified by AM Best in its report, along with wildfires and cyber. The ratings agency was more focused on the opportunities emerging from the legalisation of marijuana for recreational use in some states. Admitted insurers have been cautious about entering a market that is classified as illegal under federal law, meaning surplus lines players provide the vast majority of the coverage solutions for this market.

AM Best said most of the roughly 25 carriers currently providing coverage for cannabis businesses in the US are surplus lines insurers.

Double-digit rate hikes

Australian insurer QBE when revealing its half-year results last month highlighted the double-digit premium rate increases it had achieved in the E&S market.

DiBattista is bullish about E&S premises exposures in particular. QBE’s E&S unit was set up in 2016 when DiBattista joined from Aspen. It focused on general liability and excess casualty for premises risk such as real estate, hospitality, retail stores.

“We went out with a limited class of business,” he said. “The rates have been hardening, which has been great, and capacity has been restricted from a market standpoint. So that’s been good for us to refocus our book and grow it more in terms of the classes that we want to grow.”

”We’re going to continue to see the hard market. Maybe not at the significant double digits, but I do think it’s still going to remain hard throughout 2020”

QBE in 2018 de-risked parts of its E&S exposures by refining underwriting guidelines and non-renewing risks that were outside of its underwriting appetite.

Market reports suggest the E&S casualty area is achieving rate increases in the 15-20 percent range. Looking at the real estate area specifically, a July update from AmWINS reported that the shortage of markets is continuing to intensify.  “Every quarter, every month, another casualty market seems to step away from this space, and unlike in previous years, a new carrier is not stepping in,” the wholesaler broker noted.

QBE adopts a limited distribution strategy for E&S, working only with three major wholesalers: RT, CRC and AmWINS.

“And within those national wholesalers, we have a limited amount of doors open,” DiBattista said. “So we’re not open to every single RT office, it is only a select few that we’d be open to. We target the offices that have our business and then we drive the business straight through those offices into QBE and this division.”

AM Best’s report suggested other E&S writers are increasingly adopting a similar approach in response to the deluge of submissions in the market at the moment. “Some carriers are thus looking to cut back on the number of brokers they do business with,” the report said.

DiBattista commented that this limited and preferred approach is more efficient in time and cost.

“It helps build the partnership with the brokers,” he said. “It’s an easier way of doing business. You’re seeing opportunities that you want and you’re seeing classes that you want rather than just getting stuff just sent in randomly.”

DiBattista does not see the pricing momentum in the E&S market abating soon.

“I think the momentum is going to continue to be there at least through the first half of 2020,” he said. “All indications from the reinsurance market, which kind of dictates what the insurance side does, is that the casualty market will continue to remain hard. You have carriers out there that are really diversifying their portfolio. They’re doing what we did last year. They’re spreading their risk, and they’re restricting capacity.

“As long as that continues, we’re going to continue to see the hard market. Maybe not at the significant double digits, but I do think it’s still going to remain hard throughout 2020.”

The buzz about drone insurance

The increasing use of drones is bringing a host of exposures to the construction industry that will provide the E&S market with opportunities.

Drones are being used for tasks such as progress reports on projects, pre-project mapping, inspections, accident and casualty investigations, monitoring of trade contractors, and inventory management.

But a recent AmWINS report also discussed a number of risks associated with drone technology.

These include physical damage to the drone (which is considered hull damage), a contractor deciding to outsource their need for drone technology instead of purchasing and operating the drone in-house, the threat of anti-drone technology, and data theft from a drone.

A big issue is the threat of serious liability caused by drones. AmWINS said that a drone that crashes into a crowd of people can cause injuries, especially if the drone is a rotor-wing, whose blades can circulate at speeds of more than 100 mph.

An example of this risk came in 2014 when a drone narrowly avoided a collision with an Airbus A320 taking off from Heathrow airport. “Similar to bird strikes, drone collisions can be catastrophic for airplanes,” AmWINS said.

Also in 2014 a Brooklyn restaurant flying two small drones with mistletoe on to encourage customers to kiss lost control of one of the drones, struck a patron in the face and clipped off the end of her nose and cut her chin.

Another big issue is privacy risks. For example, if drones are used on a construction site, it could also be filming an adjacent building.

AmWINS noted that insurance companies that insure manned aircrafts likely will insure hull and liability risk for unmanned aircrafts. It said insurers writing specific coverage designed for drones will have coverage tailored for the exposure such as not excluding losses arising from electronic malfunction.

In addition, standard property and liability insurance companies may attempt to insure drones on policies not designed for this exposure, although underwriters will have limitations about the types of drone that can be insured this way.