The E&S market gathered in San Diego this week for the annual WSIA Marketplace conference, in which wholesale broking consolidation, moderation in property pricing and casualty market dislocation were the topics in vogue.
Reflected in the record attendance of more than 8,200 registered people, attendees concurred that they don’t expect the “Golden Age of E&S” to end anytime soon. That said, they also agreed that it is unrealistic to expect the space to continue growing in the double-digits as it has in years past.
The Golden Age of the E&S market brought rapid growth to the space, property rates hit an all-time high, and insurers were dominant players in the space, while brokers scrambled for capacity.
One of the biggest factors in the expected growth for E&S is the anticipated hardening in many classes of casualty, offset by some rate moderation in property – barring what happens for the rest of the hurricane season.
Meanwhile, another major topic of conversation was the ever-changing landscape of the wholesale broking market – and how incumbent wholesalers can keep their business from both retailers and other wholesalers.
Property moderates
For the past several years, the prolonged hard market in property, especially cat-exposed property, has funneled policies into the E&S market – perpetuating its significant growth.
As E&S property growth slows, sources speculated that property rates could moderate to flat to single-digit increases, depending on the account. However, they added that there are months left in the hurricane season, and the surge in “secondary perils” is buoying those rates.
At the time of publication, Hurricane Helene had made landfall in the Big Bend area of Florida as a Category 4 storm and was swiftly making its way through the southeast region.
As the market contends with this and other natural catastrophes, the expectation is that some property business may fall back to admitted players, but a large percentage will stay in E&S.
“The E&S market allows all insurers, but especially property insurers, to swiftly adjust their rates and react to the losses that they’re seeing,” one source said. “The pendulum will continue to swing, but there will be a realization sooner or later where it needs to land.”
In an interview with this publication, soon-to-be RT Specialty co-president Brenda Austenfeld said that, considering the surge of less-modeled perils and the threat of a major windstorm in the peak of hurricane season, there will always be a portion of property business that needs to be in E&S.
She added that she has yet to see large outflows from E&S to the admitted markets in property, despite rate slowdown in the class.
Conference attendees concurred with her, noting that there are new entrants in the space through Lloyd’s and MGAs. There will continue to be, but there yet hasn’t been a large influx in capital coming into property.
There was a slight uptick in capital interest following the Amrisc property sidecar earlier this year, but not at the level that was expected, and interest has subsequentially waned.
One attendee noted that even if E&S property carriers give up some rate and business to admitted carriers, they’ve made "a lot of progress” on the valuation side with terms and conditions and deductibles that may be enough to offset the outflow.
One carrier added that to protect business “once it’s in our space, I don’t think that’s what we’re here to do”.
“We’re here to be consistent for our insureds,” he said. “We’re here to provide rate and form.”
Are casualty lines a casualty?
On the flip side, the dislocation seen in the casualty market is expected to lengthen the Golden Age as the industry attempts to understand the depth of the exposure to legal system abuse.
Many attendees specified that the best phrase to encapsulate the practices by the plaintiffs’ bar is really legal system abuse, as opposed to social inflation. The nuclear verdicts that they’re seeing are the result of a savvy and sophisticated plaintiffs’ bar – along with the increased cost of claims.
Sources added that litigation financing is more rampant than ever before.
Loss trend expectations range anywhere from 5% to 15%, two sources pointed out.
Attendees said there’s some concern that casualty will eventually soften quicker than intended as more entrants come into the market – through Lloyd’s and MGAs. There are also carriers re-entering the casualty market, they added.
One carrier said, “You can’t go in with your chin though. There has to be a thoughtful approach to increasing casualty exposure.”
In turn, some companies saw rate increases moderating a bit in excess casualty, sources said.
That said, sources added that the casualty business coming in will outpace business going out, and “it’s going to be golden for a while”.
At the conference, Canopius US and Bermuda CEO Lisa Davis told Insurance Insider US that the firm will capitalize on the dislocation in excess casualty and be “ready to go” to enter the class on January 1.
In auto liability, attendees noted that the space is extremely challenged right now, especially smaller fleets – since they may not have enough capital to deploy on safety, controls and other risk mitigators.
At the conference, RPS CEO Kevin Doyle told this publication January 1 reinsurance renewals will be a “telltale sign of what’s to come” for the overall casualty market.
“I think what happens on January 1 from a casualty perspective in the reinsurance space will really drive a lot of what we see [in the wider market] next year,” he said.
He added that the impact of some of the bigger challenges in casualty such as regulatory and legislative challenges, nuclear verdicts and litigation funding will drive those reinsurance discussions.
In casualty dynamics, brokers and underwriters alike reiterated the effects of limit compression – a trend first identified by this publication in July.
Attendees expressed concerns that there’s more of a willingness to tender limits and settle, rather than fight plaintiffs’ demands and take on additional defense costs.
Sources have also pointed to a growing misalignment among insurers on the same tower, where they are failing to find a consensus on their claims strategy.
“You don’t need to put up large limits to get a big piece of the pie, but if there isn’t a carrier that feels like they’re taking a risk, then they won’t stick their necks out,” one source said.
Wholesale broking landscape
Attendees debated how brokers will deliver continued earnings growth in a less congenial environment as the broking super cycle dissipates.
The question is how wholesale brokers will respond to any slowdown in the wider E&S space – and how big a part M&A will play in that strategy.
“If you’re strong, you’re going to get stronger. If you’re weak, you’re going to get weaker,” one executive said.
They noted that due to the consolidation that has already happened in the wholesale broking market, there are fewer acquisition targets available that will truly fuel value creation for the Big Three.
Several sources wondered if the need for acquisition and growth will put pressure on the super regionals and regionals to consolidate within themselves or strike a deal with mid-sized brokerages.
The likely avenue that some wholesalers have already gone down is purchasing delegated underwriting authorities.
“It’s a natural segue if interest rates go even lower, and growth is hindered. MGA M&A will look more attractive,” one executive said.
In an interview with this publication, RT Specialty chairman and CEO Tim Turner said that more consolidation is coming for the broking space, but M&A will be more strategic than in years past.
The CEO said: “I think you'll see continued M&A strategy in broking and underwriting, but much more strategic, not just buying things for volume.”
Ryan Specialty has moved early in the MGA consolidation race by using its high trading multiple and experience of dealmaking and integration to boost its acquisition strategy.
This year, the Chicagoan wholesaler acquired US Assure for nearly $1.5bn and completed the $252mn takeover of Castel. Just this week, Ryan sealed deals for Ethos’ P&C MGUs and Geo Underwriting.
Earlier this year, PE firms Stone Point and CD&R closed their $15.5bn deal to buy regional bank Truist Financial out of the 80% stake it held in Truist Insurance Holdings – which encompasses wholesaler CRC and a handful of MGAs including AmRisc and Starwind, among others.
The sale would give the PE-backed firm a robust budget to focus on the MGA consolidation play, where other wholesalers are already looking to grow and provide it with capital to quickly recycle back to investors.
Several sources pointed out that the MGA space has faced its own consolidation in recent years with large platforms on one end and one-off, two-off programs on the other.
Executives also discussed how legacy wholesalers might be able to hold on to their market share in an environment where retailers are launching or have their own wholesale arms. Some examples they noted were Marsh’s Victor and Acrisure’s Wholesure.
E&S regulation
With its flexibility of rate and form, the E&S space has been well positioned to seize the opportunity arising from complex risk and changing risk profiles – not least the challenges around more extreme weather patterns.
Executives said that there will be a “catalyst or breaking point” where there becomes a need for regulation in the E&S market; however, many argue that regulators and the individual states should take baby steps so that the market doesn’t suffer negative consequences from seeing too much regulation too quickly.
They added that a potential workaround to holistic regulatory changes will be to institute state-specific regulation. For example, an option could be to enact a law that states regardless of whether you’re an admitted carrier or an E&S carrier in California, you need to participate in the Fair Plan.
Others said regulation can be a “touchy subject”, but there needs to be solutions for emerging risks that can be addressed for clients, especially as the world becomes riskier and more challenging.
Sources pointed out that lately, Washington, California, Texas and Georgia have been difficult for the insurance industry on the regulatory front.
Meanwhile, attendees said that tort reform such as curbing litigation funding would be a better use of legislators’ time than to focus on E&S regulation.
Overall, attendees concurred that more regulation isn’t necessarily a good thing for the industry.
“Regulation doesn’t change the fact that carriers can pull out and say they won’t do it. Regulation gives consumers higher prices and fewer options,” one source said.