E&S Markets Medium, Softening Across the Board

Rising property prices and a healthy economy after the election year have encouraged competition for casualty business. Although account size is sometimes a factor in the directions prices move, E&S specialists say they are doing fine selling to a large number of small accounts.

Throughout the southeast property pricing is medium but appears to be softening across the board.

The market in 2005 looks favorable to wholesalers and should continue that way according to Gary P. Alexander, vice president of Alexander General Agency Inc. in Snellville, Ga. “I remember back in the mid-’90s there were people running around saying managing general agents were dead and there was no longer any need for E&S companies.”

Alexander, who is active in several trade associations, said perception is one of the most important aspects of the retail agent and agency.

“Established agencies have a floor under which they do not pursue risks,” Alexander explained. “This is the result of the application of the 80/20 rule. Large established agencies know where their bread is buttered, they keep the top 20 percent, who represent 80 percent of their volume happy and refer others out.”

This, Alexander said, gives newer producers and agencies an opportunity to go for the “low fruit.” These new producers cut their teeth on the smaller risk and the ones who pay close attention to detail either graduate up to larger firms or start their own.

“Conversely, larger insureds are beginning to look at the smaller shop, the proverbial big fish in the small pond gets more personalized service,” Alexander explained. “It all goes back to relationships. Large risks create a buzz in any agency, large or small, retail or wholesale. But if there has been no established interpersonal relationship, renewal time can be disappointing.”

Alexander said there is a new breed in the retail sector called a commercial insurance agent who knows what he’s selling.

“These few will be the ones that will redistribute the volume between the brokers and managing general agents,” Alexander said. “These guys don’t have the time or inclination to wait four weeks for a call back. They want results and they know how to sell. They understand customers’ needs and listen to the frustration on the street.”

Alexander said order takers are a dime-a-dozen and their books turn over yearly. “The new successful agent and broker has a relationship with his customer which translates to loyalty.

“From my seat, the market is in a medium state,” Alexander said. “Certain classes of GL and business remain very tough, I know several multi-million dollar agencies with their only comp facility being assigned risk. That will be changing soon, but for now it remains medium.”

Property prices are softening in Georgia in most classes, according to Alexander; he has seen woodworking classes and plastics manufacturing written at half the rates of 12 months ago.

“To my way of thinking, marketing conditions are what we make of them,” Alexander said. “When the market was soft, I heard people complaining about how hard it was to compete, when the market was hard, I heard the same thing–is the glass half empty, or half full? It’s all about perception and how you choose to do business.”

West Virginia tight but stable
West Virginia’s market is tight, but moving toward becoming stable according to Bill Hehr, president of Hehr & Assoc. in Wheeling, W. Va. Hehr said the state’s market is struggling to find its location with property rates softening. He said employee liability, general liability and professional liability are firm, but stagnant–it’s a seller’s market in these areas. Hehr & Assoc. was established in 1993, Hehr has been in insurance since 1971.

Hehr, active in the Surplus Line Association of West Virginia, said the market is “somewhere in the middle to the strong side,” attributing the jurisdiction of courts one of the root causes.

“Generally speaking, market conditions predict the conditions of an individual account,” Hehr said. “Higher premiums always have attracted more interest than the run-of-the-mill account.” He said they always have and suspects they always will.

Hehr doesn’t know of anyone not getting terms offered, he doesn’t know that insureds are satisfied with pricing, especially if a standard lines carrier has tossed out a class or specific risk. He said sticker shock sets in from the standard to the E&S market.

Kentucky a buyer’s market
The Kentucky insurance market is moving toward a “buyer’s market,” according to Bobby Owens, president of RPS Lexington/Equity-Kingsley in Lexington, Ky. He said markets are softening with a few new commercial lines players making their appearance.

Owens, active in the Surplus Lines Association of Kentucky, said property prices are softening, especially for larger risks. He suggests the strength of the market depends on the line of business and pricing segment in the line: Larger property risks are soft, while small property, casualty and auto pricing is holding its own for now.

He said overall market conditions appear “fairly stable.” There haven’t been wild fluctuations in pricing or companies moving into new lines with significant lower pricing.

The market is moving toward a buyer’s market, depending on the size. Owens sees a stable market, with few fluctuations in pricing and with a few standard companies moving into new lines. For the rest of the year he predicts a “softening” with pricing caution remaining in some lines as reinsurers keep up the pressure.

General liability stable, but high
According to Hehr, no one line is hot, but the leader appears to be general liability; the pricing remains stable, but high.

Hehr, who has been in the wholesale market for 23 years, said it is following the admitted market with soft property prices. The markets are squeezing the small independent agent with commissions and volume and loss ratios.

The markets are consolidating, which makes for fewer players. The pool is not swelling and commercial lines players are disappearing.

Hehr deals only with “A”-rated carriers; he said he can’t afford to expose an insured to less, because he doesn’t want to become a risk-bearing entity.

The market in Georgia is in a medium state, according to Alexander. He said certain classes of general liability remain tough. He is familiar with million dollar agencies whose only comp facility is assign-ed risk and he suspects that will be chang-ing soon.

He said his most challenging risks are manufacturing risks with loss problems, medium-sized general contractors, assisted living facilities and teen night clubs are the ones that are the most challenging.

“Whether it’s a seller’s or buyer’s market depends on the class,” Alexander explained. “On store front, main-street risks and even one off main street risks, it’s a buyer’s market. Whereas the challenging ones I just mentioned, as well as small workers’ compensation and automobile risks will continue to search for any terms they can find as there are so few players.”

Alexander said his sales have always been slightly weighted toward casualty, probably about 60/40.

“I’ve seen some carriers close down property regional facilities, while others continue to ask for more, even after dismal years two to three years ago,” he said. “Property loss ratios run higher than casualty, because, as usual, that was the first line to hit the skids.”

He doesn’t see market consolidation. “Sure, the big fish buy up other big fish and some small fish too,” he explained. “These giants won’t be able to turn fast enough to compete, so they will try to buy out Mr. Little. Mr. Little knows and understands his market, its customers and has developed relationships based on trust and integrity.

“Mr. Little has no need to meet a 10 percent growth edict and is perfectly happy with 10 to 20 employees, all working together as a tight unit. Happily, Mr. Little is here to stay. He will grow by getting more from the 20 percent and cutting off the 80 percent and by expanding geographically. These small firms are what some would call compact, small and efficient.”

Alexander said the failure rate of carriers is consistent in a soft or hard market.

“I know some carriers that carry an ‘A’-rating that are in trouble,” he said. “And, I know some who carry ‘B’-ratings that are more solid than carriers with ‘A’-ratings.” He said the pool of reinsurers seems to be dwindling and they have no expertise.

“While carrier ratings are not always the entire picture, in all but a few cases, as a surplus lines broker, you simply can’t put yourself out there that way,” Alexander explains. “Otherwise you’d have your own (non-rated) insurance company.

“Reinsurers generally rely on actuaries, who rely on “models,” he explained. “They crunch their numbers on computers behind big desks and small cubicles–there are legions of them–not one of which has had an ounce of real-world experience.”

Alexander illustrated that during the last soft market reinsurers took such a beating that they no longer trust anyone. Turnover is high and no one has any authority to make a decision except the top guy. “When the top guy is pitched a new program, more times than not, he declines because the pitch is entirely based on ‘models.'”

Looking into the future
Taking a look into the future, Alexander suggests “anything can happen,” but if he had to give a prediction, he would guess that carriers will continue to expand in personal lines where they think they can earn a better margin. He expects commercial lines to weaken although margins will become thinner.

“Within a few months I expect the interest rates will ease up,” Alexander said. “This will send the market up and lull carriers into a false sense of security–then I expect the downward spiral to begin during the fourth quarter of 2005.”

Alexander said the Georgia market is competitive in and “service” is the most-important factor.

“Many companies simply do not respond, it’s maddening,” Alexander explained. “I had a risk at the end of 2004, my offer was for $960,000 premium–I lost the account because I was 48 hours too late getting in the offer–it was a week before Thanksgiving, but a million dollar premium is something to work extra hard for. The risk was written for $200,000 more than my figure on the day before Thanksgiving.”

Alexander often gets approached with tough, challenging risks. He said that due to carrier response, terms are less of an issue than placement.

He thinks carriers will continue to expand personal lines, where they think they can earn a better margin. He predicts commercial lines will weaken, although margins might become thinner.

“I expect interest rates to ease up, which will send the market up and lull carriers into a false sense of security,” Alexander said. “But then the downward spiral will begin, perhaps during the fourth quarter of 2005.

“Market conditions vary according to risk,” he said. “Some risks survived the hardest part of the market, yet are still under-priced. It’s unfortunate producers don’t understand that and even more unfortunate that they can’t explain it to their customers.

“But, for 90 percent of the risks they will see, as they have in the past, the ebb and flow of the market. This is why it’s easier to keep the insured that has been in business for 15 years or more–they are more likely to understand the peaks and valleys because they have survived it.”

Staying competitive
Surplus lines brokers are competitive, so there hasn’t been much difference between the soft and hard market for small accounts, according to Bob Arowood, president of Appalachian Underwriters in Clinton, Tenn., a member of the Surplus Line Association of Tennessee.

“This market has always been overlooked by the standard markets,” he said. “The larger the account and the larger the retail agent, the more standard markets will take business away from the surplus market.”

Arowood markets to small-to-medium sized agents in the southeast and Midwest with an average $6,500 policy size and average $3,000 E&S policy. Appalachian has been in business since 1998 and finished 2004 with $200 million in premium: $185 million in workers’ compensation and $15 million in traditional E&S business.

Regional issues
Arowood said the biggest regional issues are licensing and tax problems. “There is no uniform way to handle each individual state’s surplus lines licensing and tax issues and it can be a huge hassle,” he commented.

Owens agrees, saying smarter competition keeps the market competitive and the trend will be toward more competition.

Alexander said there is lots of “buzz” at luncheons and associations about the Spitzer case.

“It seems silly that “Retailer X” can sell a hammer for $12 and when a customer walks up to pay, they don’t even consider what the markup is, or what incentive program the retailer has if he sells a particular brand of hammer,” Alexander explained. “With this kind of thinking I expect to soon see an investigation about how retail stores stock their shelves–everyone has heard of retailer studies about how product placement affects sales.

“And what about real estate,” he asks. “There have been more millionaires made by investing in real estate in this country than in any other profession! Why? Because of the deal. To me, this is not about contingencies, it’s about price fixing; one firm gets caught doing something wrong, so the entire industry is painted with the same brush.”

Technology an issue
Arowood said Appalachian has faced technological problems since “day one.” Since we specialize in small accounts and write a lot of them, we have had to dedicate a lot of our resources to automation,” Arowood explained. “We have found that this is not a one-time event–it’s an ongoing and expensive issue.”

Arowood said they keep changing systems to make the agency more and more efficient.

“The carriers have started to come around and be on the same page, but they still have a long way to go,” he said. “We struggle with the sharing of data between our carrier and our agency–it’s just about non-existent. This causes a lot of double entries on our end and I don’t really see anything coming to change this.”

Government effects
With the ongoing New York investigations, although other states are not involved in a big way yet, industry observers believe states could soon become involved in a big fight between state and federal regulations.

“The costs of duplicate investigations by states will become unbearable, which will demand a federal solution,” Owens said. “Spitzer’s investigations and related state investigations are a major distraction and an expensive one for those brokers affected.”

He said trying to comply with the Sarbanes/Oxley Bill requirements is a major expense and a drain on resources.

“Neither of these help us sell insurance,” Owens said. “And, many of our insurance markets share in these distractions.”

“Until carriers regain confidence in legislative and judicial reform, the marketplace promises to remain difficult,” Hehr said. “There are too many cases in this jurisdiction legislated from the bench.”

Medical malpractice
Alexander describes the medical malpractice situation as an “epidemic.”

“Med mal has been expensive for as long as I can remember and it continues to rise,” Alexander said. “This isn’t the insurance industry’s fault it is more of a social statement. People refuse to accept the fact that sometimes bad things happen to good people.

“Medical advancements require new procedures and treatments to be learned and performed. Some people are asked to volunteer, others are simply given a choice, try it or not. Most try it; sometimes the outcome is less than desirable.

“Why is that the hospital’s fault, the doctor’s fault or the staff’s fault? Why is it anyone’s fault? It’s like trying to understand death or accidents. Certainly there are cases that warrant litigation, but the number of ill conceived lawsuits and verdicts have caused the chasm and put many practices out of business.”

Alexander said this sends a message to young academics, “be a lawyer, not a doctor.”

Hehr said recent medical malpractice reforms in West Virginia have lured some carriers back into that market.

“Third party bad faith and valued policies still send chills up the backs of national carriers,” Hehr explained, “especially due to third-party issues.”

Hehr said major admitted carriers are flirting with classes they recently fled. Terms are still dictated by carriers on professional liability, general liability and employers’ liability. He recently noted that a regional admitted carrier decided to eliminate employers’ liability on their entire book.

Topics Carriers Agencies Excess Surplus Georgia Virginia Reinsurance Property Market Kentucky West Virginia