Outperforming E&S sector well positioned to respond to macro challenges

By David Bull

April 30 - (The Insurer) - Leaders at carriers and brokers are confident that the flexibility and responsiveness that have supported the E&S market’s recent growth will leave it well positioned to navigate macroeconomic uncertainty caused by U.S. tariff policies.

Speaking on E&S Insurer’s “A market in uncharted territory” webinar earlier this month, Zurich North America’s head of E&S Christopher Lewis, Axa XL’s head of wholesale solutions Tim Whisler and Amwins CEO Scott Purviance were asked about the sector’s outlook against a backdrop of volatility.

The E&S market has delivered double-digit growth in each of the last seven years, doubling in size overall, while in commercial lines it is already in excess of 25% of overall U.S. commercial insurance direct written premium.

“The question is why?” said Lewis. “And as I look at the E&S market, one of its fundamental sources of strength is its ability to deal with uncertainty and rapid change … (and) you can’t define an economic environment that’s more subject to change than what we have right now.”

The executive said tariffs are potentially inflationary in that they are assessed on the price of imported goods, but as a consumption tax on U.S. consumers they also represent a contractionary fiscal policy, leading to talk of recession and stagflation risk.

With inflation a potential driver of loss costs – including from post-event rebuilding costs – and the insurance industry’s top line tied to GDP, both metrics are being keenly watched by insurers.

Lewis suggested that the E&S market’s freedom of rate and form means that it can respond faster to inflation and other shifting dynamics than the wider insurance industry and can “actually do better in a fast-changing environment”.

“When you have a situation where you’re entering into a recessionary period or an inflationary period, it actually can help over the short term, because you may see more business displaced from the standard markets into E&S.

“So long as we respond, then I think that actually is going to position us relatively well to the industry,” he added.

The executive said E&S carriers will need to make adjustments to ensure they reflect loss cost inflation in relation to automobiles, auto parts, steel and lumber.

And he cautioned that softening market conditions in E&S property would not be sustainable if replacement costs rise significantly.

Whisler, who moved to Axa XL earlier this year from Lexington’s Western World business, agreed that higher loss costs driven by inflation would be a challenge for the whole industry.

“But if I think about the industry broadly, there's no better sector to address those challenges than the E&S segment, where we have the freedom of rate and form.

“So although it's an overall challenge for the industry … if you think about where business will be best underwritten, I continue to think E&S is the best home for it,” he said.

Purviance acknowledged that if the economy does enter a recessionary environment, that would create headwinds to growth for an industry that is a “GDP plus grower”.

“You look at it today, and it’s impossible to predict how things are going to play out. Certainly, there are a lot of uncertainties today, but sitting here, I don’t feel nearly as much trepidation as back in 2008 to 2009 and what we were dealing with as an industry then,” he commented.

If the E&S market has to respond to inflation by pushing up rate, the Amwins CEO said it would be a “tough message” to deliver to buyers at a time when their businesses are struggling.

Whisler identified other lines of business that could be affected by the tariffs fallout beyond increased replacement costs in property.

These could include D&O if there is an economic downturn, as well as vacant properties and concerns around strikes, riots and civil commotion.

NO SLOWDOWN IN SUBMISSIONS

Despite softening in property – as E&S Insurer explores in its other lead article this month – the panellists agreed that there is no sign of the flow of business into the sector slowing, which was taken as a sign that the outlook for the market remains strong.

Whisler highlighted the California homeowners market as an example of an area experiencing strong flow, even before the wildfires earlier this year, with E&S carriers able to underwrite the business differently than admitted markets.

“Casualty is another example. The world is not becoming a less risky place and casualty continues to be a challenge with the size of verdicts … All these challenges that started the flow of business into the E&S market a number of years ago really haven’t gone away.

“There’s more capacity in the E&S market because of the freedom we have to underwrite business, but it’s still a challenge to underwrite some of these classes of business in the admitted world. So I continue to remain bullish on E&S being a home for a lot of the segments of our market,” he said.

Amwins’ Purviance described current dynamics as a “very different softening market” compared to prior soft phases over the last 20 years, based on the broker’s own data.

He noted that historically, the volume of submissions has eased off as rates have started to come down, albeit with a lag.

“We’re not seeing that this time at all. As rates come down, submissions are increasing. I think that just goes to the structural change in the industry, with more and more capital providers having dedicated E&S or specialty units.

“They’re underwriting these products in those units and they’re not going to let the admitted or retail side of the house necessarily compete and chase business down,” the executive suggested.

Meanwhile, Lewis said that to be successful in the E&S market, carriers need to have a dedicated company focused on wholesale distribution to achievement alignment with those firms.

“Our wholesale partners are our customers, and we’re working together to satisfy the needs of the retailers and the ultimate customers … products need to be designed in a way that meets the needs of the wholesalers.

“You need to have the underwriting quality with the third-party data that gives you the ability to quickly make decisions and get back at a speed that is needed in the wholesale channel, which is very different than on the retail side,” he commented.

The executive added that the E&S market has seen a long-term structural change, where in the past it has been very cyclical.

“It is still cyclical, but now it’s actually oscillating around the long-term trend in terms of the overall market share, because its strength is how to manage in a very rapidly changing environment. We are in a very rapidly changing environment, and I don’t see that changing anytime soon,” said Lewis.