AM Best reported the double-digit increase for the second year in a row, and expects the surplus lines insurance market to continue to grow throughout 2020

The surplus lines insurance market has grown by the same amount two years running (Credit: Unsplash/Micheile Henderson)

Global ratings agency AM Best has reported that the surplus lines insurance market grew by 11.2% in 2019, owing to the hardening of prices and policy terms in the commercial admitted market.

The hardening was driven by “heavy natural catastrophe losses” as well as “worsening loss trends in casualty lines”, according to a report from the company.

Several experts in the alternative risk transfer industry recently explained to NS Insurance that the current hard market is prompting more businesses to consider setting up a captive to retain a degree of their risk, but the continuing growth in the surplus lines market indicates that insurers still have a way of growing their books.

“The hardening market conditions had a distinct impact on unique, higher-risk profile accounts generally requiring specialised or surplus lines treatment,” the report said.

“Rate increases for most commercial lines, which constitute the majority of surplus lines business, rose from low single digits (2%-3%) in early 2019 to low double digits (10%-11%) from the second quarter of 2019 through the end of the year, and maintained that momentum into 2020.”

According to AM Best’s report, the surplus lines market saw the same 11.2% growth last year, and increases in written premium for the sector are part of the cyclical nature of the insurance market, just as soft markets generally lead to admitted insurers taking on risk usually written by surplus lines insurers.

“The shift from admitted to non-admitted insurers is typical of hardening markets, when admitted insurers make more conservative underwriting and pricing decisions on the riskier parts of their portfolios,” the rating agency’s report said.

“As a result, business more appropriately suited for surplus lines insurance products seeps back into the market, underscoring the counter-cyclical nature of the surplus lines market.”

Referencing its composite of surplus lines insurers, AM Best reported that “domestic professionals” – those writing more than 50% of their total direct business on a surplus lines basis – represented 70.4% of the market and grew by 14.7% on a year-on-year basis in 2019.

The market share for the Lloyd’s market – an aggregated total of its 88 syndicates – was 22.5%.


Surplus lines insurance growth to continue in 2020, despite Covid-19

In April 2020, AM Best revised its market segment outlook on the US excess and surplus lines market segment to “negative” from “stable”.

According to the report, the change in outlook was due directly to the Covid-19 outbreak and the resulting economic contraction and instability it caused, as well as the prospect that further deterioration would lead to a decline in the need for specialised surplus lines insurance products.

The ratings agency still sees the pandemic as having a potential negative impact on the surplus lines market, as certain industries, like manufacturing and construction, could experience significant declines in demand.

The report said sudden disruptions, delays, or even the abandonment of ongoing construction projects, as well as worker shortages and supply chain issues, may well lead to increased environmental exposures and by extension, the potential for heightened liability losses.

But AM Best said it still saw “optimistic signs” for surplus lines insurers, some of whom told its analysts that opportunities they saw for growth heading into 2020 “remain elevated”.

“Surplus lines companies have been able to continue growing premium through the second quarter into the second half of the year,” the report added.

AM Best expects this growth to continue alongside the hardening of the market, a trend that experts believe could last another three years at least.

“Setting aside the impact of the pandemic, we expect surplus lines companies to continue adding to their portfolios throughout the second half of 2020, in conjunction with incumbent standard market insurers increasingly modifying their underwriting practices and pricing of renewal risks,” said its report.

“Overall, AM Best expects the business that falls into this category to move from standard market companies to surplus lines companies at more adequate prices.”