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Standard markets entering E&S can’t ‘just dabble in it’: BMS’s Irvan


Standard lines businesses struggling to maintain underwriting profits are increasingly eyeing entry into the E&S property market as a way to bolster their bottom lines, but making that leap can be a risky one, according to Jeff Irvan, the chief property officer at BMS Re.

“It’s tough to do better than a 100 combined ratio writing standard lines business,” Irvan said in an interview. Irvan and BMS published last week a white paper on the phenomenon, entitled “Would you trade increased volatility for a chance to break 100?”

Regional companies in particular, he said, are looking to enter the E&S market.

“Companies that have [stayed in the admitted channel] for more than a century are starting to get frustrated,” Irvan said. Adding to that frustration is the fact that the E&S property market has seen rates double in the past three-to-five years, he said.

Emotional and economic factors drive E&S expansion

Even when the admitted writers do everything right, it’s still difficult in the present environment to dodge a 100% combined ratio, Irvan wrote.

Competition has created a long-term environment that makes writing non-cat exposed business at anything less than a 60% loss ratio difficult, and when adding the cost of catastrophe reinsurance and a reasonable expense ratio, the net CR quickly reaches 100%.

According to the executive, motivations by standard lines carriers to venture into the E&S market are both economic and emotional in nature.

“They thoughtfully analyze their business to identify problems and adjust their strategy, they cautiously grow their business by adding new lines and/or expanding into new territories, they build loyalty with their producers and policyholders and they add to surplus in most years,” he wrote.

“Even with these purposeful actions, they run around 100% net combined ratio. This is the main element that is pushing them to rethink their strong desire to stay the course.”

That Irvan says, is pushing these carriers over the edge, which the reinsurance broker says, can be a scary place when it comes to the E&S property market.

Cat-focused property ‘a different ballgame’

“There are a lot of different ways to enter that space, but each one of those ways is very risky,” Irvan explained. According to the long-time property executive, executing on such an expansion takes a well-thought-out plan and some expertise. “You can’t just dabble in it.”

A lot needs to go right to build a non-cat-focused E&S property book that runs better than a 60% loss ratio, which also requires a significant investment to do well, Irvan wrote.

“If you have local market knowledge, spend the money on inspections and third-party data sources, and stick to a line guide, you can produce a 47.5% expected loss ratio. But if you get one of these three things wrong, that figure can easily double,” he warned.

“Catastrophe-focused E&S business is a different ball game,” Irvan continued. “Expertise makes a huge difference in this arena, which requires specialist expertise in catastrophe modeling and underwriters who recognize the need to wear three hats: risk selection and pricing, attachment point selection, and capital management from a marginal PML perspective.”

“Writing a new HO policy in a given territory may not move the needle on your overall capital or catastrophe reinsurance needs,” he added, “but the same cannot be said for a shared and layered program in the Southeast.”

Expansion through programs is one route

One approach companies have taken has been entering the E&S property space by supporting specialist MGAs, Irvan wrote, in part because specialist underwriters are moving into the MGA world and bringing their relationships with them.

“Wholesale brokers are also building in-house MGAs to capture a bigger share of the wallet with respect to the business flowing through their organizations,” he wrote. “But again, this option has risks.”

Tamping down those risks requires building controls and formulating a plan to make sure everyone’s interests are aligned.

However, the temptation to grow in the non-admitted channel is driven by its potential rewards.

“If you get everything right with a cat-exposed E&S property portfolio, whether you build it or partner with a third party, you can run at an expected total loss ratio of around 50% on that book,” Irvan said.

However, carriers must expect the additional volatility that comes from exposure to different types of natural peril events, and downside risk also grows.

“If you reinsure yourself properly, your downside risk can be limited as well,” Irvan told Inside P&C. But partner with the wrong company or hire the wrong people, and downside risk can quickly expand.

“If you get it wrong, the repercussions are terrible.”

Irvan said he expects that in the next year, the proportion of business flowing from admitted to non-admitted will continue to increase dramatically. He predicted between five and 10 new entrants into the E&S space as well.

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