New casualty E&S limit approach “entrenched” even if market turns: panel

In a panel discussion on the casualty market, RT Specialty’s Tim Turner said the excess and surplus lines (E&S) market opportunity has never been better while underwriters suggested the focus on limit deployment is here to stay for good.

On an Advisen casualty webinar focused on the E&S market, RT Specialty chairman and CEO Turner, gave a bullish outlook for the market, and for wholesale brokers in particular.

He noted that the biggest wholesale broker was about $1bn in premium 20 years ago and $3bn ten years ago, while today the top three average $15bn in premiums. “Most of that occurred – astonishingly – in a 17-year prolonged soft market,” he said.

Turner said the percentage of non-admitted business today is about to break the record of about 15 percent of the commercial market. He said that about 80 percent of the P&C brokerage business in a non-admitted channel is controlled by three wholesalers.

“So it is really migrating into this big independent multifaceted platform which is not only broking solutions and expertise, it is underwriting, it is MGUs, MGAs, binding authorities that control 50 percent of the flow into the channel. It is half brokerage and half underwriting,” he said.

“So I believe the non admitted opportunity for carriers, intermediaries and specialists has never been better and our role is magnified today and the marketplace is really counting on us. It is a great opportunity to step up and deliver these needed solutions that our riskier society is generating at a record pace.”

“The non admitted opportunity for carriers, intermediaries and specialists has never been better and our role is magnified today and the marketplace is really counting on us”

RT Specialty’s Tim Turner

Moderating the panel, Lance Becker, vice chairman of the Northeast region at Gallagher, said it seems to him that the hard market is sustainable “and there is really no light in the tunnel here for the next 12-24 months”.

Turner agreed, pointing to carriers’ combined ratios continuing to deteriorate. “This correction is sorely needed, and I see no end in sight through 2021,” he said.

Neil Smallcombe, head of casualty at AIG’s Lexington, believes that even if the market does turn, the focus on limit management that has taken hold recently will not be reversed because there is no sign of the frequency of nuclear verdicts reducing. He noted that 30 states had seen a nuclear verdict in the past 18 months.

“It doesn’t feel like the societal trends that have caused it – whether it is a society that is more willing to compensate, litigation funding, social media and that general availability of information – none of it feels like that is going to go away,” he said.

He said “really smart limit deployment” is one of the key levers that carriers have to defend portfolios against the volatility of these mega losses.

“I don’t think that is going to disappear,” Smallcombe said. “I don’t see a different limit approach coming back as the market cycle changes because I don’t believe the loss drivers are going to simmer away like prior issues perhaps did, like with an asbestos exclusion or a pricing correction. It is just embedded in our society and I think will be entrenched for a long time.”

Submissions momentum slowing

Underwriters on the panel discussion said that the deluge of submissions that the E&S market has seen for more than a year continues, but the momentum may be easing.

Lexington’s Smallcombe noted that the AIG subsidiary switched to a wholesale distribution platform in Q2 2019.

“That combination of distribution change and market force change combined to really drive our submission volume up hugely,”’ he said. “But the momentum has not stalled. Although the rate of increase is not the same as it was a year ago, it is still double-digit submission flow increase.”

“We see just a wealth of opportunities in that mid excess arena plugging these holes in programmes as friction develops in placement of a tower”

Lexington’s Neil Smallcombe

Lajuanda Johnson, head of wholesale umbrella/excess at Zurich, said her company was “experiencing an embarrassment of riches with respect to submission flow”, particularly for tougher classes, accounts with losses or companies looking to build out their towers.

She said it “can be a bit of a beauty pageant” for businesses to get a submission in front of carriers.

“We started seeing an increase in submission volume in mid-2018 and it really ratcheted up by the end of the year and continued through 2019,” she said. “It has probably levelled off right now at a higher level than we were seeing a year and a half ago.”

Lexington’s Smallcombe said that the casualty E&S space is offering opportunities across the board, “both vertically in an individual insurance tower and horizontally across all classes of business.”

He said part of this is the result of the well documented trend of more carriers being needed to complete placements because of the focus on limit management.

“The days of $25mn slugs of capacity or certainly $50mn slugs of capacity have disappeared,” he said. “The $2,000 pricing per million or $3,000 pricing per million for payback periods of 200, 300 years are just a complete thing of the past.

He added: “We see just a wealth of opportunities in that mid excess arena plugging these holes in programmes as friction develops in placement of a tower. We find our broker partners get stuck at certain layers and we’ve had a lot of success deploying a relatively modest amount of capacity to keep a tower moving, certainly the last six months.”

Zurich’s Johnson predicted the market will continue to see the push for higher attachments and even shorter limits.