What's prompting the Excess and Surplus lines market's continued growth

Authored by Karl Fischbach, Head of Wholesale Distribution, Americas, AXA XL

The Excess and Surplus (E&S) lines insurance market represents a critical component of the insurance industry that caters to non-traditional, unique, or higher-risk insurance needs. As the global business landscape becomes increasingly complex, many companies are finding the traditional insurance market insufficient to meet their specific requirements. In these situations, the E&S market plays a pivotal role.

In fact, with more companies turning to the E&S market for insurance, it’s seeing impressive growth. According to a recent report issued by the Wholesale and Specialty Insurance Association's (WSIA), the U.S surplus lines market continued to grow in the first half of 2023, rising 15.9% to reach nearly $36 billion. And that’s after a record-breaking 2022 where the market saw $31 billion in premiums and 32.4% growth.

The growth is driven by a number of E&S market characteristics, and AXA XL is uniquely poised to respond to most of these with over 40 E&S products spanning Casualty, Professional, Property and Specialty lines of business.

Customization and flexibility

Traditional insurance policies are often based on standardized underwriting criteria, and thus may not fit businesses with non-conventional risk profiles. The E&S market, on the other hand, offers customized solutions tailored to specific risks, demands, or unique business models. This flexibility ensures that companies can access coverage that fits their particular situation, regardless of how unconventional it may be.

According to Mike Takigawa, Head of Commercial E&O, “The flexibility of the E&S market allows us to really tailor coverage to the specific needs of service professionals and their respective areas of practice. From consultants to lawyers, from insurance services to real estate professionals, we recognize that our policyholders have unique professional liability risks. Surplus lines bespoke coverages give our policyholders confidence that - as they continue to adapt to evolving client needs - their assets will be protected.”

According to Laura Johnson, Head of E&S Primary Casualty, “Loss trends across different lines of business are causing some admitted insurers to withdraw from certain risk classes as they try to shore up their portfolios. For example, many hospitality accounts are still recovering from the financial strain of the pandemic lockdowns, and their lower revenues may make minimum premium thresholds untenable. That’s where the flexibility that E&S insurers offer can help.”
 

The E&S market offers customized solutions tailored to specific risks, demands, or unique business models. This flexibility ensures that companies can access coverage that fits their particular situation, regardless of how unconventional it may be.

Handling higher risks

Some industries and businesses inherently carry higher risks due to their nature, location, or operations. Whether it's an emerging technology company, an enterprise working with hazardous materials, or a business in a catastrophe-prone area, the E&S market has the capacity to underwrite such risks. Traditional markets may shy away from these scenarios, while the E&S market embraces and specializes in them.

For instance, trends like social inflation have continued to impact the market, especially excess casualty coverages.

According to Kimberly Smid, Chief Underwriting Officer of Excess Casualty & Head of E&S Excess, the litigation environment continues to be unpredictable. ‘Social inflation’ remains an issue. Large awards are occurring more frequently and driving settlement values. That’s why we’ve continued to see solid growth in the E&S umbrella/excess casualty markets over the last few years. While we’re seeing more competition in the current market from admitted insurers, particularly on lower excess layers, the market demand is still strong.”

“The importance of the Environmental E&S marketplace only continues to grow as our society must face the ongoing challenges of waste management and disposal, an increased awareness surrounding contaminants like PFAs, or finding innovative ways to access clean water,” said Nick Shubert, an underwriting manager in AXA XL’s Environmental business, one of the industry’s pioneers in pollution insurance. “Our team of knowledgeable and experienced professionals has the insight and understanding required to provide our clients with valuable risk management tools to help navigate the current legal environmental and protect the company’s assets from any unexpected environmental liabilities that can arise from their business operations.

Capacity for innovation

With the rise of new industries, technologies, and business models, there's a constant demand for innovative insurance solutions. The E&S market is often at the forefront of developing products for new and emerging risks and has proved to be a fertile ground for innovation and creativity in risk management.

Julie Marvel, Underwriting Manager for Cyber & Tech E&O, notes: “Many of our competitors are also on non-admitted forms, which allow E&S brokers to get creative finding solutions for our insureds. The E&S market also has the expertise to address hard-to-place risks; they have the access to carriers that some retailers do not have, and relationships with underwriters to find solutions and capacity in the marketplace.

“Cyber rates were at an all-time high in 2022 as ransomware claims were on the rise-both from an extortion and business interruption loss standpoint. The market in 2023 has stabilized although a new claims trend is emerging with respect to privacy claims and theft of data,” Ms. Marvel added.

“The construction industry has seen its share of innovation too. According to Anna Zittle, Senior Underwriter, “From new project delivery methods to the use of innovative building materials like cross-laminated lumber, new ways of doing things can be too challenging, at first, to standard line carriers. The E&S market offers contractors another alternative for coverage when construction risks fall out of admitted market’s comfort zone. Working in the non-admitted environment allows us to be flexible and customize our coverage specific to an Insured’s specific needs.”

Response to economic fluctuations and market changes

The E&S market is known for its ability to adapt to economic cycles, market shifts, and industry changes. When the standard market contracts or becomes overly conservative in underwriting, the E&S market often expands to fill the void. This counter-cyclical nature ensures that businesses have a reliable option for obtaining coverage, even in turbulent times.

The commercial property insurance market continues to see rate increases as a result of continued natural catastrophe events. This is giving businesses even more reason to tap into surplus lines insurers to needed property protection.

According to Chris Lee, AXA XL’s Head of E&S Property, “Our E&S Property insurance team has increased its appetite for more generalist classes of business, non-frame habitational accounts, and high-hazard occupancies such as manufacturing.”

A viable option

For businesses that have been declined by standard insurers or those looking for a more competitive pricing structure, the E&S market offers a credible alternative. With the presence of reputable and financially stable E&S insurers, companies can access quality coverage without sacrificing security.

The E&S market is not merely a fallback option but a dynamic and essential part of the insurance industry. Its unique characteristics make it an attractive choice for many businesses. By offering customized solutions, handling higher-risk scenarios, encouraging innovation, providing a global reach, and responding to economic and market changes, the E&S market has become a preferred destination for a diverse array of companies.

As the future continues to bring new challenges and opportunities, the role of the E&S market in risk management is likely to grow even further. Its ability to adapt, innovate, and provide tailored solutions ensures that it will continue to be an invaluable asset to businesses navigating an ever-changing world. By turning to the E&S market, companies are not merely purchasing an insurance product; they are engaging in a specialized risk management approach that resonates with the intricacies of modern business operations.