Surplus Lines Experiencing Softening Market with Rest of Industry

Insurance Journal recently surveyed several surplus line associations regarding their thoughts on the current atmosphere of the surplus lines marketplace, and their expectations into 2005. Executive director Ted Pierce of the Surplus Line Association of California, manager Kendal Lyman of the Surplus Line Association of Washington, and Gerry Silver, manager of the Surplus Line Association of Arizona, took some time out of their busy schedules to answer some questions regarding surplus lines issues in their respective states.

Insurance Journal: What are the issues faced by surplus lines wholesalers right now, both legislative and general?

Ted Pierce: The Surplus Line Association of California monitors California legislation and only pursues legislation in tangent with the California Department of Insurance. This year, the CDI is planning to introduce legislation that would create penalties for the late payment of surplus line premium taxes by surplus line brokers.

On another front, we arewatchingwith great interest the federal initiatives foruniform state-based insurance regu-lationthat may besought by the United States Congress. If the U.S. Congress decides to deregulate commercial insurance under the guise of “federal standards,”we agree with NAPSLO that deregulated commercial insurance transactions should qualify for export to the nonadmitted market without requiring agents and brokers to make a diligent search for coverage in the licensed markets. This would give insurance consumers the best chance ofobtainingneeded coverage in a competitive marketplace that offers parityin access to both licensed and nonadmitted insurers.

One other area in which the U.S. Congress could play a positive role insupport of state-based insurance regulation would be to establish auniform standard for the allocation of surplus line premium taxes by stategovernment on multi-state risks.

Gerry Silver: The legislative issues facing the Arizona DOI and the Surplus Lines Association are “clean up” in nature. We have had some new interpretations relative to Surplus Line Licensing, and we are currently looking at bills to clarify any misconceptions. They relate to exactly who has to obtain a license, how many licenses are needed in each office location, and further verbiage indicating that Courtesy Filings are illegal in Arizona.

The prevailing issues that are of great concern are the same that we all are faced with. The uproar over broker compensation and the proposed NAIC language of disclosure. The continuing difficult marketplace with respect to certain classes of business such as medical malpractice, general liability on both residential and commercial general contractors, and certain classes of product liability.

Kendal Lyman: [Our legislature] has been in session now for a month. We are not running any particular bills in the legislature. What we do is monitor the legislative bills that have been dropped in, or prior to, hopefully, and see if there are any that inadvertently or maybe intentionally have got surplus lines issues in there, particularly for surplus lines brokers. There have been a few bills that we have addressed to either include surplus lines, or exclude them. We’ve addressed a few bills that have come in because we need to make sure that the markets stay open via the inclusion of the surplus lines mechanism.

I think generally the entire surplus lines industry is still completely and radically misunderstood by most legislators and particularly by insurance departments because they have no real knowledge of how it works, and a lot of times they will inadvertently do something that’s going to harm the insurance buyers at the end of the day by trying to cut off or regulate the surplus lines industry.

IJ: Is there any concern for surplus lines insurers over the issue of broker compensation fee disclosure?

Lyman: No, for a couple of reasons. In this state, we addressed the broker compensation issue, meaning the fee and commission, in 1994. The state legislature passed a very good concise law on brokers and agents who would be dealing in commissions and/or fee business for their clients. Very specifically, it excluded wholesalers because they do not deal with the general public. And so the law requires full disclosure in writing, signed by both the broker and the insured, retained for five years. The law specifies the broker dealing directly with the insured, which means this law is encumbent upon the retailer.

Surplus lines is not involved in the first place, because it deals on a policy-by-policy basis. If a retailer is the surplus lines broker, then he is already disclosing under his broker’s license; the wholesaler isn’t involved with the client either way.”

Silver: I am afraid all the dialogue will continue to place the industry in a very bad light with the public who for the most part don’t understand the industry in general, least of all the Surplus Line Market. While no one condones a law breaker, it is equally unfair to paint an entire industry with the same brush as a few law breakers.

IJ: What’s your forecast for the property/casualty market in 2005?

Pierce: More challenging times are ahead for theinsurance industry as a result of the following lingering issues, among other things: continued market softening, continued reserving deficiencies, elevated scrutiny of insurance practices by regulators, and the possibility that theTerrorism Risk Insurance Act will not be renewed when it expires at the end of 2005.

Last year we saw a definite slowing in the pace of increased premium volume in the California surplus line market. While the total number of policies written in surplus lines increased by over 18 percent to 441,221. The total premium volume only increased by 8.24 percent. Compare this to the 43.1 percent increase in 2003 and a 104.5 percent increase in 2003. In addition, the average premium per policy in 2004 was only $12,508 compared to $13,718 in 2003. This validates widely published market data trends, which indicate that increases in commercial insurance rates have been declining since the first quarter of 2004 and will continue to do so through 2005.

The most difficult risks to place will continue to be terrorism, professional liability, med-mal and construction.

Silver: I keep hearing from brokers the market is softening, however, our non-admitted premium volume in Arizona continues to grow. I am sure part of the increase is created by growth in the state; however, the premium increases contradict the softening market predictions.

Lyman: The market is starting to settle down a little bit now. I’m not exactly sure whether it’s turning absolutely soft or not, because the surplus lines market will lag behind, but the market seems to be settling down, and we’re seeing relatively fewer submissions or affidavits come through, but the prices are still up there in the realm of where they’ve been. Let’s just say the rates have increased, and growth in the surplus lines market, has slowed, generally. The slowing in the premiums has not really occurred to any significant measure yet, but I think we will start seeing that this year. It’s changing.

Topics California USA Agencies Legislation Excess Surplus Pricing Trends Arizona