The excess and surplus lines and specialty insurance market is booming and looks set to continue its upward trajectory. The question is whether the sector currently has the resources to take advantage of these business opportunities.

The financial statistics are testament to this success: E&S saw double-digit, year-over-year growth for four consecutive years, from 2018 to 2022. According to S&P Global, the market grew by 20 percent in 2022, reaching $75.5 billion in premiums. (Editor’s Note: For more recent data, see related article: “Continued Growth for Surplus Lines in 2023 as Premiums Up 14.6%“)

The E&S market is expected to continue to grow in the coming years, with a compound annual growth rate of 15.2 percent from 2020 to 2027, taking the market to $125.9 billion, according to a 2020 report from Allied Market Research. In November 2023, AM Best changed its outlook for E&S from stable to positive, citing increased business due to declining capacity in commercial lines and some personal lines markets.

Shift to E&S/Specialty Market

Over the last few years, the industry has seen tremendous growth in the U.S. E&S and specialty markets. This shift from “admitted” business and Lloyd’s to U.S. E&S is being driven by a multitude of issues. Let’s unpack the reasons.

Capacity issues are being driven in part by the volatile nature of the property-catastrophe market (CAT). Capital is more costly to support CAT risks and is accessed according to stricter underwriting rules and pricing models to help ensure there is enough capacity throughout the year. It is the volatility of CAT business that makes the cost of capital so expensive. Pricing should be adequate to support the capital being used to write the account, while still being relatively affordable for the client.

CM Editor’s Note: At a recent investor conference, the CEO of a U.S. specialty lines insurer gave his take on the dynamics of the Lloyd’s and U.S. E&S markets. See “No Need to Build Capacity in One Room: U.S. E&S vs. Lloyd’s“

Additionally, capacity at, and the utilization of, Lloyd’s is also shrinking, partially driven by the expense ratio associated with doing business at Lloyd’s. The impact of this is an expanded use of the U.S. E&S/specialty market.

Concurrently, we are seeing movement from the admitted space to E&S as the market follows capacity. The issue here is the availability of coverage and capacity, not price. This trend is primarily driven by rising claim costs due to factors like weather events, social inflation (increased litigation costs), and supply chain disruptions affecting car repair costs.

In addition, carriers are leaving U.S. states like Florida, Louisiana, and California due to high hurricane risk, wildfires, mudslides, and concerns about the legal environment, further reducing capacity in the market.

Private Flood Cover

All of the above factors mean that E&S is not just being used by commercial insurers. Carriers that insure single-family residences are also turning to the E&S market. As it becomes increasingly difficult and expensive to get coverage (capacity) through the federal flood program in the U.S., the spillover into E&S for private flood insurance has grown. While prices have not come down, there are more capacity and coverage options available to the brokers and clients in the E&S market.

Beginning in 2021, a new flood risk rating system was implemented in phases for National Flood Insurance Program (NFIP) policies, which aims to shift the U.S. government-backed NFIP to a more accurate and equitable pricing methodology. The new pricing model has driven up rates and sent more property owners to the private E&S market, creating a surge in demand.

Evolving Risks

Besides the movement from Lloyd’s and admitted markets, E&S growth is being driven by increasing complexity of risks, along with the specialized insurance products needed for those risks, which are not available from traditional insurers.

For example, specialty insurance has stepped in to cover less mature exposures such as cyber and, because of the immaturity of the market, cyber insurance is in a constant state of change. Responding to cyber policies in an admitted market would be challenging—first because of the time it takes to get through the filing process with state departments of insurance.

In addition, every time market conditions change, and a modification is needed to rates, underwriting rules, Increased Limit Factors (ILFs), or policy forms, those filings would need to be amended, with regulators. Carriers could miss the market cycle or be exposed to losses they did not want or need to cover.

Utilizing E&S “paper,” carriers can respond quickly to market conditions as needed.

Additionally, there’s more need than ever for a swift and agile response from carriers as cybercriminals find new, more sophisticated ways to weaponize artificial intelligence (AI). AI chatbots can generate malware in a matter of seconds, embedding it into YouTube tutorials on how to download popular software, and even adding fake likes and comments for authenticity.

What’s more, AI can crack passwords at record speeds and deploy social engineering scams to trick targets into revealing sensitive information with convincing, fraudulent communications. AI can also identify digital vulnerabilities and review stolen data to facilitate cybercrime. As AI develops into reproducing people’s voices and images, there will no doubt be further unknown exposures down the line.

Related articles:

• • “Report: Ransomware Attacks ‘More Frequent, More Sophisticated, More Effective'”
  • 6 Emerging Risks to Watch: Frost Quakes, AI-Assisted Hackers, Flood Magnets

Almost Too Much Business?

There is no doubt that the E&S and specialty market is growing in leaps and bounds, but that growth may come with a price. E&S carriers may struggle to take advantage of the growth opportunities, overwhelmed with the amount of business that’s coming in the door. The question is no longer “how do I get more business?” but instead becomes “how do I underwrite (or evaluate) more of the business I have received?”

E&S carriers that don’t have the resources to figure out which submissions are good, and which should be avoided, will lose out. They may not even get a chance to deliver a quote.

Modernization Is Key

Carriers already in or entering the E&S space need to improve the submission process to get to more of those submissions. Currently, most of the industry is still relying on emails to transmit applications from the broker to the wholesaler and ultimately to the carrier.

How many times does the same information get entered and re-entered?

Once received by the carrier, the manual work continues. The data gets entered and the prospect cleared. Other data is sourced and evaluated. The data gets re-entered, and a quote is produced.

After all that—finally—the underwriter can evaluate the complete submission, understanding how much premium they have the potential to collect for the limits exposed.

Innovative insurers, however, are starting to benefit from the transition to dynamic, adaptable, API-native platforms that enable them to respond efficiently and effectively to the risks that admitted carriers are less likely to write.

Automation, data, and application programming interface (API) have become the way forward. These tools that enhance and connect data and services, allow the underwriter to triage those submissions and glean insights early in the submission process, which saves time and enables smarter decision-making, improved accuracy, and increased efficiency.

This same workflow could be used to process renewals to refresh pricing and underwriting requirements. That efficiency gain and the ability to get to more of those submissions also allows the underwriters to focus their time where it benefits the organization and clients the most.

Investing in modernization offers a range of benefits. It improves front-line distribution, smoothing the entire insurance journey and supporting everyone in the chain. It also streamlines back-end distribution and enables carriers to support broker partners with tools for quoting and comparing coverage. Carriers can also create personalized coverage for clients, and quickly adapt to market trends, emerging risks, and changing underwriting rules and rating algorithms.

What Should Happen Next?

The infrastructures of most organizations look different. Some have a “build mentality,” some have kept their core “legacy” systems intake rather than doing a rip and replace, and others are at the blazing edge of insurance technology. But often the E&S and specialty divisions of those organizations are left with Excel files, Word documents, email templates, or old legacy technology. These inadequate tools were put in place to satisfy the needs of the E&S company to respond rapidly to the ever-changing needs of the market—something that couldn’t be supported by legacy Agency Management Systems (AMS) or Policy Administration Systems (PAS).

For insurers looking to thrive in the specialty market, building a robust digital infrastructure, partnering with the right technology providers, and making an ongoing commitment to digital solutions will set them on the road to success.

This should begin by conducting an audit to identify problems in the current process, areas of disconnect, critical gaps, siloes, data inconsistencies and bottlenecks. From that, a strategy will be developed to plan workflows that align with growth objectives to organize and activate the revenue organization. After building and activating the tech stack, it is essential to be prepared to keep up with the latest upgrades to optimize the technology.

Embracing digitalization will ensure that new and existing players can better take advantage of the opportunities in the growing E&S segment, quickly responding to evolving customer needs by adapting to market trends in an agile way and through data-driven decisions.