Midwest Surplus Lines: A Market Unto Itself

Gone are the days when the Midwest’s surplus lines market saw all sorts of business, from high-liability risks to garden variety commercial property coverage. For the region’s surplus lines business, the softening of the traditional insurance market means shrinking volume overall.

And that’s just the way things should be, according to the experts. “There’s been no collapse of the market,” said Robert J. Ruby, CPCU, director of the Surplus Lines Association of Iowa in Des Moines. “Stuff that’s typically in the traditional market is staying there.”

At the Surplus Lines Association of Illinois, volume is definitely down, noted David L. Ocasek, executive director. In a first-half-year comparison of the 15 stamping offices compiled by the Surplus Lines Stamping Office of Texas, there was an average 5.9 percent increase in premiums between 2004 and 2005. Performances differed dramatically on a state-by-state basis, however. For example, surplus lines premiums in Arizona went up 23.2 percent, while in Illinois they decreased 1.5 percent. (In the Midwest, only Illinois has a stamping office, although there are surplus lines associations in Iowa, Michigan, Minnesota, Missouri, and Ohio.)

Because the Illinois stamping office requires the original insurance policy for filing, the process takes longer and there is a time lag in policy count, Ocasek noted. But still, business is slightly slower than it was last year at this time, he said. The six-month comparative report shows that Illinois six-month premiums in 2005 were $528.8 million, compared with $536.7 million in 2004, with 54,580 policies in 2005 compared with 55,979 policies in 2004, a 2.5 percent drop.

On average, six-month item count went from 1,669,026 in 2004 to 1,687,376 in 2005, a flat 1.1 percent increase, according to the Texas survey.

“The traditional markets are stepping in, especially for commercial property,” he said. “The anecdotal evidence shows there is a definite downturn.” Ocasek says he is still seeing surplus lines growth in markets like general liability, professional liability, errors and omissions, directors and officers, package policies, contractors and other high-risk exposures.

The story is similar in Iowa, especially over the past six to twelve months, said Ruby. The primary market is still property and general liability-the type of business that belongs in the surplus lines market. He doesn’t see any particular growth lines, except perhaps trucking and construction.

Ruby attributes part of the change to the fact that agents and underwriters may have become more savvy about what constitutes appropriate pricing in the traditional market.

Wholesalers, who play a critical role in the surplus lines process, also are aware of the downward trend. “It’s like someone turned a switch on the first of the year,” said Bob Schneider, spokesman for the Minnesota Association of Special Risk Underwriters and president of Robert A. Schneider Agency, in Minnetonka, Minn., referring to the migration of larger renewal business and midterm cancellations back into the primary insurance market.

As the president of a wholesaler and managing general agency that’s been around for more than 30 years, Schneider has been around market cycles long enough to know what goes up, must come down. Beginning in January of this year, he noted more accounts that migrated to surplus lines during the hard market going back to standard regional carriers “where they belong.” The trend is especially prevalent in large property accounts, large trucking accounts and large casualty accounts, he noted.

Schneider’s “bread and butter” business, such as E&O, D&O and smaller accounts are still there, but in some cases, the change has been dramatic. For example, at half-year 2004, the wholesaler’s residential contractor business renewals were 94 percent; this year at the same time, they had dropped to 65 percent.

Less dramatically, surplus lines business such as bars and restaurants renewal rates last year were 94 percent, and this year were 84 percent; commercial property monoline renewals were only 70 percent this year.

“It’s a premium-driven market,” Schneider said. “In today’s market a large builder, even one with a poor loss experience, can get a 25 to 30 percent rate reduction.”

Still, he hastened to add that standard insurers aren’t doing anything reckless in the way of cut-throat competition.

“In general, the market is stable; companies are being smarter and repositioning themselves, not just selling on price alone,” he noted.

Topics Excess Surplus Illinois Property Market Iowa Professional Liability