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E&S growth will outpace market in commercial lines for years to come: AM Best 

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AM Best has forecast that excess and surplus (E&S) segment growth will outpace the overall commercial lines market in the coming years, further boosted by new technologies that will enable specialized insurance coverage to be embedded in everyday life.

According to the ratings agency, the surplus lines share of P&C commercial direct written premium (DWP) rose above 20% for the first time in 2021 and ended 2022 at 21.6%. This compared to 8.3% growth in 2001.

“In AM Best’s view, the excess and surplus lines segment should continue reporting favorable underwriting results and organic capital generation,” the company wrote in its annual surplus lines report.

US surplus lines – DWP as a % of P&C industry commercial lines DWP.png

Volatility in the investment markets could constrain overall operating earnings, it added, but E&S insurers have historically fared well during cycles when market conditions stress standard market insurers.

The report also noted that “true surplus lines insurers tend to flourish during turbulent times” as they lead to greater market demand for products that can help businesses deal with risks amid considerable market uncertainty – historically favoring the product and price flexibility of surplus lines carriers.

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Such was the case for the recent spike in E&S demand, attributable to global economic tumults after the Covid-19 pandemic as well as worsening climate conditions.

Property risks sustained hardening market conditions, across both personal and commercial lines, especially for accounts that suffered large or multiple catastrophe losses. This was attributable to a contraction in reinsurance capacity for catastrophe-exposed property risks.

The commercial auto market, particularly for trucking risks, also remains “quite firm” because of consistently poor underwriting results, which have lasted for a longer period than property.

These factors helped drive premium growth for surplus lines carriers, which topped 10% for the first time in 2021 and continued to grow through 2022 to 11.4%.

In line with historical norms, DWP remained weighted toward commercial lines rather than personal lines.

Segments and top companies 

For the first time, the 2023 mid-year report by US stamping offices provided a breakdown by line of E&S business in 2021 and 2022.

Commercial liability was the leading segment in terms of premiums written, accounting for 39% of the 2022 premium total of $63.3bn. Commercial property accounted for another 29%. Personal property lines, on the other hand, constituted a small portion of less than 5%.

Berkshire Hathaway’s National Fire & Marine again generated the largest amount of surplus lines premium in 2022, taking over the last few years from AIG’s long-time leading Lexington Insurance Company.

Lexington was the largest single US surplus lines company by DWP from 1994 through 2019, according to AM Best data. The top five companies – including Scottsdale Insurance Company (Nationwide Group), Evanston Insurance Company (Markel) and Indian Harbor Insurance Company (XL America Companies) – accounted for approximately 14% market share in 2022, down from 14.7% in 2021.

US D&O – Admitted vs surplus Line DWP and loss ratio.png

Potential headwinds

While AM Best projected the surplus lines market is to play a growing role in the overall P&C insurance space, it also wrote that a rapid emergence of softening market conditions could whittle away at underwriting or pricing discipline among E&S insurers.

In fact, US stamping office data showed that surplus lines premiums reached nearly $36bn in H1 2023, marking a 15.9% increase year on year. This was indicative of continued price moderation, as it fell short of the 32.4% year on year growth in H1 2022.

“[The] deceleration in the rate momentum creates challenges for surplus lines insurers seeking growth,” the report read. “Building a portfolio that will deliver underwriting and operating profits will be a significant challenge if overall market conditions business chip away at price adequacy.”

US surplus lines – DWP by segment.png

In addition, it noted that entrance of new external capacity could lead to market de-stabilization if the new capacity is deployed too aggressively. An increase in supply could temper the pricing pressure on coverage lines that still need improvement.

However, the ratings agency did not see the large-scale moderation in pricing to have an “outsized impact” on underwriting performance.

“Over the near term, as long as the competitive pressures that accompany additional market capacity don’t lead to loosening of underwriting terms and conditions, the prospects for the surplus lines insurers should remain favorable,” it wrote.