Surplus Lines Financially Sound Despite Market Pressures and Economic Challenges
OREANDA-NEWS. Underwriters of surplus lines in the United States generated growth in direct premium of 2.5% in 2015, the smallest annual increase in the last five years, according to a new A.M. Best special report.
The Best’s Special Report, titled, “Surplus Lines Financially Sound Despite Market Pressures and Economic Challenges,” states that this small increase is attributable to competitive market conditions and sluggish growth in some industry sectors that impacted exposure bases. Despite the lower growth and the inability to sustain what had been two straight years of underwriting gains entering 2015, surplus lines underwriters still generated pre-tax and net profits for the year, albeit reduced by more than 30% from the above average levels achieved in 2013 and 2014. Although the sector has historically benefited from favorable prior year loss reserve development, in 2015, adverse loss reserve development was a primary contributor to the drop in operating profits. Nonetheless, in spite of instability remaining in the capital markets and interest rates remaining low, growth in investment income helped surplus lines companies again add to their bottom lines.
A.M. Best’s domestic professional surplus lines (DPSL) composite, which is a consolidation of 72 U.S.-based DPSL companies that wrote more than 50% of total direct business on a surplus lines basis in 2015, represented more than 70% of the total surplus lines market in 2015. While the composite experienced far less favorable underwriting results in 2015 compared with the previous year, the market position of surplus lines insurers continues to be favorable overall, with most carriers being well-capitalized and consistent performers.
These solid results are due to effective strategic analysis, product diversification, underwriting discipline and an environment conducive to opportunistic mergers and acquisitions. A.M. Best believes the surplus lines market is financially sound at present and should remain solid for the foreseeable future despite competitive market pressures and challenging economic factors.