silhouette of eyeglasses placed on a screen that displays a graph indicating a steady growthIt looks like diversification and keeping your balance sheet solid has gone a long way for the surplus lines market. These practices will likely be the sector’s saving grace in the months ahead, A.M. Best said in its latest special report.

Despite the sector’s 2.5 percent growth in direct premium for 2015, the sector remains a bright spot, and should be for the foreseeable future, in large part because business practices continue to be both prudent and smart, A.M. Best argued.

“The surplus lines market is financially sound and should remain solid for the foreseeable future despite competitive market pressures and challenging economic factors,” A.M. Best said. “Future success for the market is expected to be driven by proven underwriting fundamentals and discipline, product creation and diversification, and considerable balance sheet strength, particularly true for the leading writers of surplus lines businesses.”

A.M. Best’s assessment comes even though surplus lines generated only a 2.5 percent growth in direct premium in 2015, which was the smallest expansion in five years. In 2014, 2013 and 2012, growth levels hit 6.7 percent, 8.4 percent and 11.8 percent, respectively, and those numbers were considered above average. The report notes that “competitive market conditions and sluggish growth in some industry sectors” impacted exposure bases and led to the smaller number. But the report still finds that growth to be a positive.

A.M. Best said that the zero trend of surplus lines impairments extended through 2015, about a decade long. It noted, however, that an impairment was recorded for the sector in late July 2016, for Castlepoint.

With that in mind, the ratings agency urges insurers in this space to stay the course, A.M. Best said.

“Absent any specific drivers of surplus lines impairments, persisting sluggish economic conditions and a prolonged soft market could tighten profit margins,” A.M. Best said in its report. “With interest rates remaining low, combined with the volatility experienced in U.S. and global financial markets, surplus lines companies must resist relaxing risk selection standards and lowering rates for the lure of premium growth and maintaining market share.”

According to the report, those practices include continuing to offer “a broad array of products across different states and territories, enhancing data analytics capabilities and investing in new technology to better serve both broker/agency partners and insured clients.”

The A.M. Best report said surplus lines companies must also find ways to recruit and keep younger talent, so it can address the challenges of an aging workforce.

Surplus lines carrier and broker consolidations should also continue, according to A.M. Best, but this trend could have some risks. The report said consolidations could potentially harm “existing relationships and response time.”

The full report is called “Surplus Lines Financially Sound Despite Market Pressures and Economic Challenges.”

Source: A.M. Best