Surplus lines insurers achieve impressive growth, improve operating profitability

NEW YORK: The surplus lines market nearly doubled its pace of premium growth in 2018, driven by new investments in operating platforms and a healthy U.S. economy, according to a new AM Best report.

The Best’s Market Segment Report, “Surplus Lines Insurers Achieve Impressive Growth, Improve Operating Profitability,” notes that this specialty insurance segment grew 11.2% last year, a notable increase from just under 6% in 2017.

While the segment’s premium has grown for seven consecutive years, catastrophe-driven losses and market competition led to an underwriting loss for the segment for a third consecutive year. AM Best’s composite of domestic professional surplus lines insurers—those that write more than 50% of their business on a nonadmitted basis—recorded a combined ratio of 104.5 in 2018, an improvement over 2017 but 5.3 percentage points greater than that of the overall U.S. property/casualty industry.

Owing to investments, the surplus lines segment’s pretax and net income grew significantly in 2018, following three years of profit declines.

Pricing sensitivity is especially felt during periods when standard market companies have the capacity and desire to take on borderline risks generally handled in the surplus lines market. “However, average rates have been rising for most commercial lines of coverage, as nonadmitted and admitted insurers focus on generating more favorable underwriting results despite competition from standard market companies for borderline surplus lines accounts,” said David Blades, associate director.

Unlike the traditional ebb and flow of premium driven by competitive supply and demand market dynamics, the pricing environment of late has been driven by a number of factors, as companies assess each line of coverage that they write for current profit potential and future viability.

A larger amount of detailed, high-quality, data-driven, state-specific information available for different lines of coverage and classes of risks is helping the property/casualty market react more quickly and definitively than in the past, when longer soft pricing market periods have been followed by short, extreme spikes of hard market conditions.

Mergers and acquisition opportunities for carriers and insurance intermediaries remain plentiful—particularly on the distribution side. Specialty and surplus lines insurers remain primary targets because they can provide new growth opportunities (especially during the current economic expansion), desirable market expertise, diversification opportunities, and generally, favorable loss experience. Technology-driven service providers have proven their value to companies seeking strategic acquisitions, as evidenced in the AIG-Validus and AXA-XL Group deals.

“Effective assimilation of acquired entities is still a challenge for acquiring companies,” said Robert Raber, associate director. “Operational, cultural and other differences can be impediments to the success of combined entities as projected in pre-deal analyses.”

Edited by Kiran Khan

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