There is a lot to like about the excess and surplus (E&S) market. Direct written premium grew by 5.8% in 2017, more than double the growth of recent years1. And the lack of regulation in E&S – the “freedom of rate and form” – makes it the easiest path into insurance. For some, E&S is a stepping stone to admitted insurance. For others, it is the ideal platform to launch products that address unique, emerging risks such as cyber. In 2018, the market continued to attract a host of new entrants, including alternative capital, insuretechs, and traditional insurers.
The Dark Side of E&S
Despite its attraction, the E&S picture is not all rosy. True, it has seen healthy growth, but “many E&S executives say rates are still not where they should be on several key lines.”1 Alas, E&S is not immune to the soft market that has plagued the industry for the past 14 years2. The catastrophic events of 2017 did nothing to help. In fact, despite extreme losses from floods, fires and hurricanes, capital continues to flood the market. Excess capacity, from alternative capital investors in particular, has offset any potential increase in rates.
And soft rates are not the only challenge. Artificial intelligence (AI) and automation have reduced the cost of covering previously unprofitable risks. With lower barriers to entry, admitted carriers looking for growth are moving into E&S and placing pressure on incumbents. This competitive threat is compounded by start-up insuretechs attracted to E&S for the same reasons.
The Next Move for E&S
E&S incumbents and recent entrants alike need to find creative ways to combat increased competition. Start by making friends with new capital flooding the market. It may be the cause of persistently soft rates, but it is also a source you can tap to pursue emerging risks like drones or cyber.
If you have not yet jumped on the Big Data bandwagon, now is the time. Owning your data and applying analytics will give you a deeper understanding of emerging risks, and the insight you will need to price new products profitably.
Technology for the Long Game
If tapping new capital or analytics is old news for you, consider refreshing your underwriting technology. With rating and claims having drawn the greatest attention, this is an area that is ripe for investment. Look for a system that supports collaboration and reduces inefficient communication. Experiment with AI and machine learning to automate simple tasks, and free your underwriters for more complex risks.
Consider a system that handles both admitted and non-admitted business. It will position you well for the long term. Many E&S products use bureau content as a starting point, and many E&S providers aspire to someday offer an admitted product. Likewise, many standard-lines carriers maintain a surplus-lines division. Regardless of your focus, your business can benefit from a system that includes bureau rates, rules, and forms.
Despite the many challenges facing E&S providers, there is still a lot to like about this market. It is stable and growing, and with the right combination of technology, capital and business acumen, players in this space will be well positioned for the long term.
1 Moynihan, Shawn. The D&S insurance sector continues to innovate and thrive. Property Casualty 360. September 13, 2018.
2 Burand, Chris. State of P/C Insurance Industry, Part 1: The Fate of ‘Hard Market’ Agencies (and Companies). Insurance Journal. July 10, 2017.
Chris Mason is, by his own admission, a millennial as well as a Senior Marketing Associate for Instec. He has 5+ years of marketing experience, and a unique view of the insurance marketplace as a recent graduate of Marquette University in 2012. He volunteers with the IASA, working as a Lead Producer for webinars put on by their eLearning Committee.
Mike Sauber joined Instec in 2016, with over 30 years of experience in technology marketing and sales. Mike has led global marketing teams and programs at IBM, Unisys, and Data General, among others, and prior to Instec was a member of the teams that launched two new enterprise software ventures.Mike holds an MBA from the University of Pennsylvania (The Wharton School), and a BES (Architecture) from the University of Waterloo.