As the longest hard market in memory refuses to fade, standard property/casualty carriers are not only continuing to raise prices but also reimagining their books by shedding risks they no longer want.

It’s affecting large and small commercial lines business and personal lines as well. One expert calls it the “niche firming phenomena” within segments. Whatever it’s called, it’s a hard market unlike any other and the surplus lines industry is playing its part and benefitting.

It’s a historical hard market in every sense, says Tim Turner, president of Ryan Specialty, chairman and CEO of Ryan Turner Specialty, Ryan Specialty’s wholesale brokerage division, and a member of Ryan Specialty’s board of directors. “It’s generating a record-breaking volume of property and casualty business into the nonadmitted channel, the E&S channel.”

It’s not just catastrophe-exposed property risks moving into the excess and surplus lines channel. “There’s multiple niche firming phenomena inside large property and casualty segments,” Turner said. But it’s not all large risks moving into E&S. Small personal lines accounts in catastrophe-exposed regions are also making their way into surplus lines.

Hard market insurance conditions are not evident in every line of the insurance business. Most of the general P/C sector remains in the standard market. “But the percentage of business that’s nonadmitted in the wholesale market today is record breaking,” Turner said.

While that shift is led by catastrophe-prone property it’s not all wind, flood and wildfire, Turner notes. “It’s convective storms, it’s hail and tornadoes at unprecedented levels” driving much of the movement— also skyrocketing loss costs and jury verdicts in other sectors, such as transportation.

According to the 2023 Midyear Report of the U.S. Surplus Lines Service and Stamping Offices, liability (non-professional) premiums in surplus lines increased 26.9 percent from 2021 to 2022, and property premiums jumped 25.9 percent during the same period.

The Midyear Report also showed substantial increases in surplus lines premium for personal lines. Residential, homeowners and other personal property grew 29.5 percent from 2021 to 2022.

While the majority of property/casualty insurance business remains in the standard market, the amount of business moving into the E&S sector continues to grow and E&S carriers and their wholesale brokers partners don’t see an end to that trend anytime soon.

“The massive growth we saw across the country in the wake of the pandemic might be behind us, but the report demonstrates that the E&S market continues a strong trajectory and will be there to meet the needs of Americans seeking unique insurance solutions,” said David Ocasek, CEO of the Surplus Line Association of Illinois, in August.

Longest Running Hard Market

This hard insurance market cycle is different than others in the past, says John Jennings, CEO and one of the founding members of Jencap Group, who added that it’s the longest hard market in his 35-plus-year career.

Ryan Specialty’s Turner has worked through three full hard market cycles throughout his 35-plus year career. Patrick Ryan, founder, chairman and CEO of Ryan Specialty, has worked through five hard market cycles, he added. “And we’ve never seen one quite like this,” Turner explained. “It’s the hardest market we’ve ever seen, and it’s the most prolonged hard market we’ve ever seen,” he said. “We’re on unchartered ground.”

The number one reason that the market continues to see rising rates and limited capacity has to do with “pure loss scenarios, underwriting results, and capacity,” says Jennings. “If you look at all that, and if you look at California and Florida specifically, those are pure underwriting results driven events,” he said. Florida’s wind and flood, and California’s wildfires, are not going away, he said.

The growth in surplus lines business in these two states alone has been dramatic, Jennings added.

“Personal lines business in those states has become surplus lines business permanently, at least as far as I can see,” Jennings said. It’s now a question of whether the E&S market can handle that influx, he added. “There’s only so much reinsurance out there,” he said.

Jennings and Turner both feel confident that the surplus lines market can respond but questioned whether that response would be at an acceptable price point to some insureds.

“You have to wonder at what point can people afford to pay the type of prices that even E&S carriers will need [in order] to participate in some of those coverages,” he said. In California, personal lines premiums for high-value homes in wildfire prone regions are running in the hundreds of thousands, even million-dollar premiums, he said.

The E&S sector is not falling short when it comes to providing the necessary capacity to fill the need, but coverage may come with a high price and restrictions. That limits some buyers.

“I don’t believe that the industry’s falling short at all in terms of capacity,” agrees Turner. “The pricing, on the other hand, there’s certainly accounts where the pricing causes the insured to either buy less insurance or seek alternative structures where they take on risk, or they go into a captive,” he said. “But I haven’t seen a single case where we couldn’t deliver a solution.”

Those solutions are more complicated today than ever before, especially for large commercial accounts.

“The E&S market is delivering solutions, but coverage may have shorter limits, tighter terms, and increased pricing,” Turner explained. “Some of these accounts that may have taken 10 or 20 carriers to deliver a hundred-million-dollar limit [before], might need 30 or 40 carriers to get that done this year. But we’re getting it done,” according to Turner.

Tough Property

Property is likely the most difficult line of coverage today.

Property insurance pricing in the U.S. increased by 19 percent in the second quarter, compared to 17 percent in the first quarter, marking the 23rd consecutive quarter in which prices rose, according to the most recent Marsh Global Insurance Market Index.

The main drivers of second-quarter property price hikes in the U.S., Marsh says, were the cost of reinsurance and capital, strong capacity demand, limited new insurers, and ongoing losses. The good news: Best-in-class risks with limited natural catastrophe exposures and stable incumbent capacity experienced more favorable results compared to those affected by losses and/or with geographic concentration of assets in natural zones, such as along the Gulf of Mexico, Atlantic coast, and California.

Sam Baig, co-president of Amwins Brokerage, describes today’s E&S market as a bit chaotic and mixed as each line of business presents its own set of challenges.

Property remains very firm, he says. “It doesn’t matter if you’re in California or Texas or Florida, it’s impacting every property broker across the country.”

Any account with a transportation component is also taking rate as well. “For example, excess casualty is relatively flat unless you’ve got a transportation component, which can be very difficult,” Baig said.

“For the most part, property everywhere is pretty firm,” added Jeff McNatt, co-president of Amwins Brokerage. “It doesn’t matter what you’re doing, there are issues everywhere from earthquakes to wildfires to flooding—all those things are driving the market.”

“I understand that the price can sometimes be shocking, but as a wholesaler our job is to go out, try to create a market, find capacity and try to find a solution for these extreme insurance situations,” Jennings said. But he admits that some of today’s market problems are hard to fix. “You know, there’s always a solution—at a price,” Jennings said “You might be able to get coverage, but can the insured afford to pay it? Things will be very difficult going into the future.”

Talent Shortage and Stress

Nir Gabay, senior vice president at Admiral Insurance Group, a Berkley Company, says there are not enough people to hire to service the new surplus lines business coming into the market. That’s a big challenge for the sector today.

Everyone in the chain is trying to figure out new ways to operate, whether by investing in IT solutions to increase efficiency, or finding new ways to hire, train and retain younger talent, he told Insurance Journal.

Jencap’s Jennings says that investing in people is likely the biggest key to success in today’s fast-paced hard market cycle. He advises others to think about where the market is going and hire for that. “What kind of expertise is needed for the future, what kind of people, what types of backgrounds … and make those investments in the business, on the people side, and on the technology side,” Jennings said. He added that Jencap is always on the hunt for new talent and has added 160 people new hires this year alone.

Finding new, young talent is a challenge for every sector in the property/casualty world.

Anthony Manna, senior vice president-financial lines, and one of Jencap’s top young wholesale brokers, says it’s important to share the story of what’s possible with a career in insurance with young people to attract new talent. “Insurance is a hidden gem, but insurance isn’t sexy,” Manna said. It’s up to the industry to tell the story of how rewarding a career can be, he suggests.

“Nobody likes insurance. Nobody wants to talk about their insurance, but everything that comes with a career in insurance has been far beyond anything I’ve wanted in a career,” he said. “You have a healthy balance of sales, networking, and analytical work,” he said. “That’s something I may not have known at 17 or 18 years old, but it has been very rewarding in terms of a career.”

The talent shortfall coupled with the rapid increase in new surplus lines business submissions has created a heavy workload for existing staff, according to Amwins’ McNatt.

“At the same time, it’s exciting for us as we are building and growing in this market,” he said. “It’s exciting because we’re getting to see opportunities on business that may have historically not been in our marketplace.” He says finding solutions for these evolving risks is what the E&S market is there for — to solve problems and address pain points for business that is leaving the standard market. But the huge volume of new business entering the surplus lines space does create stressful times. “The workloads and the stress on some of our employees is very high right now,” he said.

To help employees, Baig and McNatt say Amwins tries to make sure that they are providing workers with good workplace environments and options. “We’ve worked hard on some of the flexibility with work schedules, so people can try to get some work-life balance in there,” McNatt said. “It takes time and effort on our part, and strain on our staff, to do what was done with one policy and one phone call before; now our folks are having to call eight markets and negotiate to get a deal done,” Baig said.

Keys to Succeed

For the surplus lines market to excel in today’s hard market, Matt Dolan, president of Liberty Mutual’s North America Specialty and Ironshore, says three things come to mind.

First, E&S carriers and their wholesale broker partners must attract and retain good talent. That means retaining experienced underwriters and brokers that understand historical risk, contemporary risk and merchant risk, he said.

“That’s fundamental to succeed today,” he said, and “those that are able to attract and retain top talent will be able to navigate through this environment.”

Second, carriers and their broker partners must be able to “move across this data spectrum,” he said. That means having the right data and interpreting that data correctly so that it becomes quality information. “And then that information informs judgment. If we can harness the data and convert it into actionable information, that informs our view and judgment about risk; that is a critical component to success. Those who do that well will navigate through this environment effectively.”

Lastly, E&S markets must have an appetite for risk. “We use the term risk aware, not risk adverse,” he said.

“You must have appetite for risk. You can’t run from it. Our job is to solve emergent risk problems, so you must be thoughtful and creative and curious, and that’s the way that you enhance your relevance and design products that are responsive to this really unprecedented, incredibly complex but incredibly interesting risk environment.”

Companies that are responding to their wholesale brokers and being creative are seeing a major influx of new business, says Admiral’s Gabay. “Because there is a lack of staffing and lack of systems, especially with legacy companies, they just can’t keep up and they can’t respond,” he said. “So, anyone who’s really set up to take on the volume and be responsive is really winning right now.”

He said responsiveness and being able to connect with their wholesale partners the way that they want to connect is critical in today’s fast-paced surplus lines world. The largest wholesale brokerages have invested in their own systems. “They’re trying to optimize their own stuff. They’re experimenting right now with their economies of scale and trying to figure out how to transact business differently in different sectors,” Gabay said. “If you want to deal with the largest brokers, you need a system in place and you have to be ready to transact. If you don’t have it, you’re just left out.”

Amwins’ McNatt says that being transparent — with carriers, retail partners and the insured—is also critical when navigating through this hard market.

“We see the most successful retailers in this kind of market are the ones that are connected to their clients and they’re fully transparent,” he said. “They make sure that their customers understand that in this market, the more open they are with data and information, usually ends with better results for the client. … The more successful brokers that we see tend to be the ones that are the most transparent, and have built a solid relationship with their client.”

Baig said the same is true in the wholesale broker space. “Over communicate and communicate early and often and really manage expectations as best as you can,” he said. “The market changes daily, so those that are out in front and educating their retailers, educating their insureds, tend to do the best for the long haul.”

McNatt added, “The more heads up we can give a client, the better off we all are.”

Outlook for 2024

As surplus lines carriers and wholesale brokers look toward a new year, discussions around property capacity will continue, the experts agree.

“There are so many variables that our business faces today,” said Hank Haldeman, president of Worldwide Programs at Amwins Group. How prolonged are the property exposures facing the property/casualty industry from climate change? “Obviously climate change is affecting our loss projections, but have the past couple years been an exaggeration, or will those issues slow down?” Haldeman asked. It is hard to predict that future scenario, he said.

One thing he knows for sure—the existence of these unknown variables will mean that the role of the E&S segment will not diminish anytime soon. “I don’t know how challenging the property renewals are going to be in 2024. Some people are saying we’ve finally achieved some level rate adequacy, but capital isn’t rushing to the market at the moment,” he said. “So it’s just tough to say what’s going to happen with rates and capacity in 2024 but I don’t see any rapid softening of the market.”

There’s just a lot of unknowns, Haldeman added. But that isn’t necessarily a bad thing for surplus lines. “Uncertainty is actually beneficial for the specialty end of the business, which performs best during times of uncertainty,” he said.

This article was previously published in Insurance Journal’s magazine. Reporter Andrea Wells is Editor-in-Chief of Insurance Journal Magazine and the Vice President of Content for Wells Media.