Out on a limb
High profile events such as the school shootings on the US east coast in December 2012 and the jihadi attack on an oil refinery in the Algerian desert in January throw into sharp relief the true purpose of insurance: to protect policyholders and pick up the pieces should the unthinkable occur. While predictable risks can easily find a home, hard to place and price risks tend to turn to the excess and surplus lines (E&S) industry to provide coverage. And as re/insurers look to source complementary lines to their more bread and butter business, they are increasingly turning to opportunities in lines such as E&S. It is evident that there is demand for such coverage, but writing the line is not without its risks for those companies operating in the space.
Hiscox Bermuda is just such a company, and it is familiar with the opportunities—and accompanying headaches—of running E&S lines. Late last year the company rolled out its aptly named Solo Strike liability coverage, which provides hospitals and large healthcare facilities with liability protection and immediate crisis management support in the event of a ‘“lone wolf attack”’—violence committed by a single assailant on an emergency room or similar facility. In 2011 Hiscox introduced US terrorism coverage for laboratories and hospitals. As Ian Thompson, senior vice president on Hiscox Bermuda’s healthcare team knows, some E&S lines can be hard to swallow; but “while they are fairly unsavoury, they’re things that we as insurers have to address and have to protect our customers from”.
Unsavoury as they may be, there is demand for E&S coverage that could prove important to players in a competitive Bermuda re/insurance marketplace. As Thompson told Bermuda:Re, “There are limited pots of reinsurance to go around and they are pots that are getting smaller. We’re at the point now where re/insurers need to look for somewhere else to diversify, to expand.”
Those seeking diversification, particularly for traditional treaty business, could do worse than E&S lines. According to AM Best, in the first quarter of 2012 direct premiums written for surplus lines increased 7 percent over the first quarter of 2011. Surplus market leaders, including Lloyd’s and AIG, generated significant operating incomes. According to AM Best, less competitive pressure from standard market carriers has reversed a four-year decline in premium produced—perhaps not enough to signal a decisive shift in the market, but certainly a step in the right direction. Furthermore, broadening coverage means a growing market.
David Bresnahan, president of AIG subsidiary and surplus lines specialists Lexington Insurance company, said: “The industry has evolved quite a bit, so the range of risks that we’re seeing has evolved as well. If you go back a number of years, surplus lines companies were exclusively focused on the strange, the unusual, the difficult to place risks. What we’ve done quite successfully over the years is leverage our freedom of rate and form to deliver a consultative and customer-centric approach and product. We’re seeing a broad range of risk coming into the market, especially now that the market is beginning to firm.”
According to Bresnahan rates and submission activity are increasing, a signal that business is shifting from the admitted market to the nonadmitted market. In addition, the Non-Admitted Reinsurance Reform Act, part of the 2011 Dodd-Frank Act, eased access for insureds into the E&S space. Bresnahan said: “It’s nice to have that added development so that as the market changes and customers feel the need to entertain E&S quotes, it’s easy for their brokers to come and see what we have to offer.”
Thompson added, “Year on year E&S is going to get bigger. It really does depend on the underlying market as well—we’re in a fairly soft market. Many of those E&S and casualty lines face a fairly challenging pricing environment at the moment, but it wouldn’t take much to get people interested.”
Risk before reward
E&S lines are complex by nature, and writing them presents unique challenges for those re/insurers taking them on. According to Thompson, Bermuda could have issues of access for the simple reason that the Island isn’t an established base for E&S coverage—business has to be lured from more traditional locales. As Thompson explained: “Attracting business is always going to be a challenge. Many of these lines have long histories and will inevitably end up in London or New York. I think we have to create a new market and that’s never an easy thing.”
"Writing the line successfully requires careful cycle management, where more policies are written in good times and fewer policies in more difficult markets."
Additionally, E&S can be volatile. In contrast to an admitted market, E&S lines are subject to peaks and valleys. Writing the line successfully requires careful cycle management, where more policies are written in good times and fewer policies in more difficult markets to mitigate any instability. As Bresnahan explained, “Being able to time that right and execute during the cycle is vitally important and a challenge that all the carriers face.”
According to Bresnahan, simple customer service can smooth the overall process considerably. “If you can elongate your customer relationship in volatility business—whether it’s property or casualty— that’s the key to long-term success. I don’t think anyone is savvy enough to know exactly what year and precisely what exposure will be leading to a volatile result, which is why you have to strive for a long-term relationship. We’ve got a strong track record of not leaving our customers after an event.”
Pricing—always difficult where longer-term risks are concerned— can encourage firms to spread themselves thinly in the E&S space. As Thompson indicated, “The danger in any specialty book is that you do a little bit of this, a little bit of that, and you never become an expert at anything. At Hiscox we definitely see ourselves as speciality players, people who like to excel at what we do, so it goes against the business model if we are dabbling.”
A related element is the inconsistency of modelled data. While some risks have accumulated sufficient loss information over the years— professional liability being one—certain unusual classes will lack necessary data. According to Thompson, “Pricing really does depend on the class, but it is definitely a challenge for the more analytical and reinsurance-driven Bermuda players, which are now having to go on a wing and a prayer with some of these classes. It does take them out of their comfort zone.”
But that’s not necessarily a bad thing. “When we talk about modelled data we’re really talking about lots of losses,” said Thompson. “Classes that don’t have losses can obviously be a good thing. We’re open to those classes. We try to put as much science in it as possible—Hiscox is an analytical company—but we’re not frightened of pricing a deal if it feels right.”
Furthermore, data shortfalls aren’t a struggle E&S players are facing across the board. With a strategy disinclined towards intuition, Lexington maintains that there is no shortfall in their data. As Bresnahan made clear, “We have data as good as anyone in the market. We require it.”
A surplus of success
The key to cracking the E&S market seems to be innovation. And as such there will always be room in the market for Bermuda players—particularly with their reputation for thinking outside of the box—unafraid of trying something new to better serve their clients. “Innovation is critically important,” Bresnahan said. “That’s the main advantage we have as an E&S carrier—our ability to bring product to the market quickly. We don’t have to file in the 50 states when a customer has expressed to us the need for a new product that we need to respond with.”
Lexington typically rolls out 10 to 12 new products a year and recently won an innovation award for Parity, a product that protects hospitals from the potential negligence of their IT vendors. Addressing the rolling out of Parity, Bresnahan said, “it was the direct outcome of conversations with clients who were worried about an exposure they had and didn’t think the current insurance products available to them were addressing it”.
Talking about the unthinkable is a key tool in the development of the most successful E&S products, and it is often the case that the development teams behind products such as Parity and Solo Strike owe more than a little to their policyholders. Lexington works closely with advisory boards, while Thompson at Hiscox can’t stress enough the importance of a client-based approach. “We listen to our clients,” he said. “They tell us what they are concerned about; what keeps them awake at night. Really it’s all about listening hard to what people want.”