AM Best: enduring E&S tailwinds mean abundant opportunities for new participants

By David Bull

Feb 28 - (The Insurer) - AM Best has predicted that the tailwinds driving attractive conditions in the E&S market will be sustained beyond the short term, creating an environment of plentiful opportunities for new players in the sector.

In an update on the broader U.S. P&C industry, the rating agency noted that more business has moved to the E&S market and stated that its outlook on the segment remains positive.

It attributed this to “efficient use of capacity as a safety valve for the declining capacity in the admitted commercial lines and some of the personal lines markets”.

The firm noted that E&S property continued to see “material growth” in recent years as admitted carriers pulled back or exited cat-prone areas altogether.

“Further supporting the positive outlook has been the strong underwriting results, which have driven the segment’s favourable operating performance and strengthened capital positions, as well as market conditions that have supported the entrance of new participants, along with incumbent carriers’ pursuit of E&S lines participation,” AM Best commented.

It added that the integration of new, complex technologies in various industries means it is likely that specifically tailored surplus lines coverage solutions will remain in high demand.

With admitted carriers becoming more selective and stringent in their underwriting criteria, more accounts are instead coming to the E&S market in search of coverage.

In the E&S market, carriers have more flexibility to provide tailored coverages, AM Best observed.

“These accounts are written with customised policy conditions and rates commensurate with the risk,” it added.

The firm noted that property lines continue to see higher loss activity and higher reinsurance costs accompanied by risk retentions that have been pushed up by reinsurers amid persistent inflation and a focus on insurance-to-value.

These drivers are all pushing premium to the E&S segment, said AM Best, noting that other lines being “cast off” by admitted carriers and finding their way to surplus lines carriers include commercial auto and D&O liability.

Others such as cyber liability and the expanding legal cannabis industry are also continuing to seek coverage from E&S carriers.

In the report, the ratings agency observed that E&S market participants are posting more favourable underwriting results and greater top-line growth than those in the broader P&C industry.

It added that while surplus lines carriers also face general insurance industry headwinds such as social inflation and reinsurance capacity, for them the impact of these factors is less because of their “core competencies of risk selection, price, and policy terms”.

“To date, the approach of the new entrants has been measured and judicious. Given the current market conditions, as well as the historical viability of E&S providers, especially considering their financial impairment rates (which are much lower than those of admitted insurers), opportunities for new participants abound.

“AM Best believes that, given the overall dynamics of the insurance industry, tailwind conditions for US E&S lines carriers will remain in place beyond the short term,” the report concluded.