The Relevance of Standard Carriers to Commercial Lines

Question: Are standard, admitted, insurance carriers relevant commercial markets?

Arthur J. Gallagher stated in their 2020 10K that 50% of the total U.S. commercial property/casualty market is written through alternative markets. An Aon report several years ago placed that number at 52%.

According to the latest A.M. Best estimates, as of 2022, surplus lines premiums, almost all of which are commercial, now constitute 11.3% of all direct written premiums (this percentage increased in 2023). Relative to commercial lines, surplus lines direct premium written equals roughly 25% of all commercial premiums. Commercial premiums, excluding reinsurance, are approximately 45% of total premiums.

With 50% of commercial premiums being in alternative markets and 25% written in surplus lines, this means standard admitted carriers are now only writing 25% of commercial premiums. Roughly 975 carriers write commercial insurance in the U.S.

The top 50 commercial writers (including surplus lines writers and reinsurers) write almost 80% of all premiums. The top 17 write 51%. Those remaining 925 carriers write approximately 20% of the 25% written by standard admitted carriers (which equals 5%) of all commercial premiums. Split between 925 carriers, this equals an average market share of .0054%. In other words, these carriers writings, generally, are immaterial to commercial lines. Worth noting is some are niche companies relative to a line of business or a state, or even a line of business within a state, and in that environment, they are important. But we only have 50 states and typically these are workers’ compensation carriers.

Interestingly, at least in 2022, the largest commercial writers’ loss ratios were materially worse than the industry segment, so big does not equal profitable. But this is heavily skewed by three carriers who are primarily personal lines carriers. Their losses averaged to be almost 21 percentage points worse than normal.

And this point is a good segue. Dabbling in insurance is a bad strategy. Dabbling in commercial lines when your primary focus is personal lines is a bad strategy. Dabbling in auto dealers when your primary focus is multi-family property is likely a terrible strategy.

Which brings me back to whether standard carriers are relevant to commercial lines. Obviously around 500 carriers are not relevant. But are admitted carriers overall relevant?

According to A.M. Best’s 2023 Market Segment Report, Feasibility and Utility Sustain Rated Captives’ Excellent Profitability, the “Captive Insurance Composite” has “outperformed those [five-year average combined and operating ratios] of the [Commercial Casualty Composite] by wide margins.”

A 10-percentage point profit advantage is common with well managed captives, which indicates to some degree, though not entirely, that the better risks have migrated to the alternative market. Additionally, the percentage in the alternative market space is larger than these numbers suggest.

Take a highly profitable account that is rated, at least partially, within the law of large numbers. This means they will be subsidizing the worse accounts, meaning their premium is inflated. They move to an alternative market and decrease their premium by 10%.

Total commercial premiums in non-alternative risk markets are around $360 billion. Add the other 50% and total premiums are approximately $720 billion. But if I take $100 billion out of the regular market and reduce premiums by 10% because they are the best accounts, that is actually the equivalent of moving $110 billion. Apples-to-apples then, if the premiums had remained the same without reductions, the alternative risk marketplace would have much more than 50% of the market.

This also means the remaining business in the standard market is not as good and is no longer subsidized to the same extent by good accounts.

Additionally, surplus lines is no longer a market of last resort for commercial lines by any means of the imagination. Many of the surplus forms are superior to what the admitted markets offer. Many vital coverages are only available in surplus lines. And some carriers are now preferring, through their own surplus subsidiaries, to place business in these surplus lines markets to get around outdated regulatory rules.

If the majority of premiums have moved to alternative markets and the only market for critical coverages is in surplus lines, the standard admitted commercial market is by definition, some combination of a niche market and adverse selection market.

Reality and Strategy

Given this current environment, if I were running a standard carrier writing admitted commercial lines, assuming it is not a highly specialized niche segment/state, then I would:

1. Recognize Reality. Recognize the reality of the market and understand what is left to write. Accept the reality that as an admitted market, I am now, at best, the Jack and not the King. I’ve lost the pre-eminent position at which admitted commercial lines carriers have traditionally been placed. These numbers are real, and it is time to move past denial. All the data presented here is publicly available. Some differences exist between data sources and timing and therefore, variances should be expected, but whether the result is 25% or 20%, the story is the same.
2. Decide on a Strategy. Is the strategy to recover the best accounts that have left the regular market because carriers were too focused on premium growth rather than pricing better accounts more accurately? I see a lot of carriers taking quality accounts completely for granted these days and I see more and more good accounts are losing patience. If the commercial carriers do not wake up to their position, their market share will continue to decrease with adverse accounts growing as a percentage of their books. As the old saying goes, you can’t charge enough for bad accounts. Or is the strategy to simply take the better accounts from the other admitted carriers and become a bigger fish in a shrinking pond?

Agents and Brokers

If you are an agent or broker, the strategy is more obvious. Leaving your best accounts with carriers that are inept, dabblers, or need them to subsidize the adverse selection they’ve already incurred is a bad strategy. Better brokers and agents have and are creating and using better alternatives. They will take your better accounts.

The next step that will seriously move the needle is when someone begins developing programs for property, homeowners, and small commercial multi-peril liability and property. Based on some of the press releases I’ve read recently, at least one broker has initiated such a program.

The commercial market has changed. The facts are undeniable. What strategy will you implement to adapt?

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.

Topics Carriers Commercial Lines Business Insurance