Alternative Markets and E&S Lines
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The big picture

Market reaction
Since the beginning of 2002, the insurance market has undergone a number of changes including:
  • Drastically reduced capacity
  • Increased retentions that may force some carriers to go back to net lines or go out of existence
  • The return of a "proportional" market
  • The "un-bundling" of products

    Along with these changes there have been increasingly higher underwriting standards for property and umbrella lines as well as construction and products liability insurance.

    Prices and retentions continue to be hard. Increases are still between 30% - 100% for large lines commercial property, liability, and workers' compensation. Small accounts pricing, however, appears to be stabilizing.

    What does all this mean? For starters, there will be realignment of remaining surplus, as well as lower investment returns. There will be drastically reduced capacity in certain areas. This will produce increased retention prices. Ultimately, this means that more accounts will be pushed out of the standard market and, by necessity, will have to turn to the E&S market.

    The effect of reinsurance
    Many reinsurers are still unstable in their earnings and forecasting. Some recent failures have also destabilized the standard market. With an estimated average doubling of reinsurance price and retention of risk at the primary level, the market would see a minimum of 10% cost increase to the insurance buyer.

    The surplus lines role
    The surplus lines industry is important because it provides a market for insurance for hard-to-place risks that are not acceptable to the standard marketplace.

    There are three basic types of surplus lines risks:
    1. Non-standard risks that have unusual underwriting characteristics
    2. Unique risks for which the admitted carriers do not offer a filed form or rate
    3. Capacity risks in which an insured seeks a higher amount of coverage

    So basically, surplus lines companies are able to offer specialty insurance. To a large degree, they are free from rate and form restrictions imposed on other carriers.

    It is important to note that such surplus lines companies are not regulated in the same sense as traditional carriers are regulated. Nevertheless, they must be licensed (admitted) in one of the 50 states and must meet solvency requirements of that state. As a result, the state of domicile becomes the regulator of that carrier.

    Why use the E&S markets?
    So why turn to the E&S markets for insurance? Here are some reasons:
  • Coverage may not be available in the standard marketplace.
  • Market diversity and depth of markets range from Lloyds of London to regional or intra-state companies.
  • Business placed is generally that of a difficult nature to place-a business that standard carrier might not write or on which they may impose underwriting and coverage restrictions.

    Besides being able to offer specialty or hard-to-place insurance, the E&S marketplace can serve the needs of those in the insurance industry themselves in a number of ways:
  • A new insurance broker without a track record may not be able to obtain company appointments and may only be able to write business through an E&S lines broker.
  • Insuring through the E&S market protects the agents from loss of a carrier through bad losses, poor underwriting, poor placement of risk. "Once burned, twice shy" really does apply to underwriters.
  • Standard carriers have restrictions on what they may and may not write based on the contracts with their reinsurance carriers. This is what they mean when they say "our reinsurance won't let us". Insuring via E&S lines allows you to bypass this concern. An example restriction is the insuring of aircraft manufacturing.
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    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.