Fitch: Excess and Surplus Insurance Lines Will Outperform P/C Industry
E&S underwriters outperformed the property/casualty (P/C) industry's combined ratio by an average of 8 percentage points from 2011-2015. E&S market direct premiums written (DPW) grew 4% in 2015, representing the fifth consecutive year of positive growth. However, initial data for first-half 2016 shows a slight decline in DPW from the prior year.
"As E&S insurer premium rates began to flatten in 2015, Fitch does not expect positive rate movement due to competitive market conditions and recent industry consolidation, and profitability will likely deteriorate modestly in 2017," said Gerald Glombicki, Director, Fitch Ratings.
The E&S market provides an alternative for hard to place nonhomogeneous risks that require substantive underwriting expertise. Fitch believes that successful companies in this environment are traditionally strong underwriters, have solid niche market positions, and have geographically diverse product offerings with which to take advantage of attractive rates in select areas of the market.
"The E&S market is increasingly becoming an attractive alternative for reinsurers with E&S underwriting capabilities to offset reduced reinsurance premiums," added Glombicki.
Underwriting outperformance in the E&S market is concentrated in the commercial multi-peril and medical professional liability lines, both exhibiting a strong advantage over the P/C industry. The E&S market did not underperform the P/C industry in any line over the past five years; however, performance varies from year to year and by company.
Although the E&S market is highly specialized, it remains dominated by large, standard market insurers and the top two, Lloyds of London and American International Group, Inc., account for almost 35% of total premiums. While Fitch does not expect many new entrants into the market, we note that Berkshire is rapidly expanding, with direct written premiums growing nearly 50% two years in a row.
Insurers with the most favorable and least volatile underwriting results for the 2011-2015 period include Alleghany Group; QBE North America; and Travelers Companies, Inc. Insurers with the worst and most volatile results are American International Group, Inc.; Fairfax Financial Holdings, Ltd.; and State National Insurance Company, Inc.