What’s All the Fuss About?

With the Soft Market Here Again, the E&S Market Must Get Back to Its Roots as the Product Innovator

Over my 30-year career, the insurance industry has weathered three hard market and soft market shifts. Yet amazingly, many professionals in the industry continue to be surprised by the market’s cyclical nature and engage in herd mentality — seeking the same business in the same manner and at the same time regardless of the market cycle.

In every softening market there also remain insurance companies that choose to buy market share by charging a cheaper price or offering more favorable terms, despite the impact of their actions on their underwriting results. These insurers knowingly feed this downward pricing spiral, all the while complaining about the soft market and standard market competitors. While insurance professionals should always strive to make available the best possible coverages for any insured, a softening market often leads to prices that do not reflect the actual risk of an account.

This strategy is both self-defeating and counter to the purpose of the excess and surplus (E&S) market. Admitted or standard markets reject risks that do not fit their underwriting criteria. When they do, the role of the non-admitted E&S markets is to step into the void created by the admitted insurers and, if possible, provide coverage. As stated by the Insurance Risk Management Institute: “One of the most important elements of the E&S business is its ability to act as a problem solver.”

Solving problems is what the E&S industry is supposed to do and, rather than slashing rates, we should focus on pursuing risks that others are avoiding, which also happens to be the best way to grow.

Unfortunately, this role as problem solver has morphed into the misperception that the E&S industry only provides coverage for distressed businesses. We need to remember that the unwillingness on the part of standard markets to provide coverage for a particular account does not mean the business has problems. It may simply mean that the account requires unique coverage enhancements or special treatment by way of retentions or claims handling, which the standard market is not equipped to deliver.

There is much more to a quality E&S operation than simply writing high hazard risks at a price cheaper than everyone else’s. Being a quality E&S operation involves the constant monitoring of claim trends and underwriting expertise in non-commodity businesses. But the diligence required to adhere to underwriting standards when one has freedom of form and rate takes discipline and distinctive business strategies. It is this diligence, which is sorely lacking in today’s market.

Back to Its Roots

The E&S market must get back to its roots as the incubator for new ideas, innovative products and the ability to accommodate the neediest insureds with manuscript forms and flexibility in rate-making. By utilizing retentions, we have the ability to write risks with loss histories that do not fit the underwriting requirements of a standard carrier. On a best-in-class basis, we can evaluate those risks that display extraordinary characteristics with which the standard markets are not comfortable due to the high potential for loss.

Historically, the E&S market has also been willing to do its homework in new or emerging markets to provide necessary coverage forms and endorsements that are class-specific. Items that exemplify these characteristics can range from scaffolding and crane contractors to product recalls and discontinued products coverage. A positive aspect of operating in the E&S world is the ability to move into a chosen market in a short time frame with products developed for the benefit of a unique customer base.

Instead of vying to see who can offer the lowest price, we need to sell insurance buyers on the benefits E&S insurers offer. The E&S market provides the creative solutions necessary to meet an insured’s unique challenges that may result in a program better suited for the company’s needs than can be found in the admitted market.

As an industry, we need to understand that now is the time to pursue select opportunities in this marketplace and assume once again the role that E&S companies have been providing for decades — to enhance existing products and create new ones to respond to the needs of the insurance buyer.

Topics Excess Surplus Market