IB Talk

Narrator: [00:00:06] Welcome to IB Talk, the leading podcast for the insurance industry across the United States, brought to you by insurance business. 

Narrator 2: [00:00:14] This episode is presented in partnership with WSIA. Emerging and complex risks are often not well covered with standard risk management solutions, making them good opportunities for the wholesale specialty and surplus lines industry. For the latest episode of IBA Talk, a panel of professionals will address how the market is well suited to current conditions and what kind of growth they're seeing. 

Bethan: [00:00:49] Hi, everyone, and welcome back to IBA Talk with Insurance Business America podcast. I'm Bethan Moorcraft, senior editor at Insurance Business, and we've got a great episode lined up for you today, all about growth in the wholesale specialty and surplus science industry, which is without a doubt a very exciting and innovative part of the marketplace. To tackle this, I'm joined by three leaders in science insurance. It's my pleasure to welcome Brady Kelley, executive director of the Wholesale and Specialty Insurance Association. We've got Bryan Clark, president of Gorst & Compass Insurance and president of the WSIA, and Dave Obenauer, CEO of CRC Group and President elect of WSIA. Everybody, welcome to IBA Talk. 

Brady: [00:01:34] Thanks for having us. 

Bethan: [00:01:35] So, Brady, I'm going to turn to you first. You're my go to guy for macro commentary on the market trends in E&S so how would you describe the current state of the E&S marketplace? 

Brady: [00:01:48] Well, I appreciate that, number one. But number two is certainly the market is growing at a really strong pace right now. We just saw the invest publish their report, I think, yesterday. There are 2022 report on the segment and that data was really reporting on the 2021 calendar year. But even 21, they reported growth of 25% and surplus lines, premium domestic company growth north of 30% in 2021, which is probably the largest year of increase we've seen since 2003. Most recent data is 2022 data that we have from the 15 states with stamping offices. They report surplus lines premium on a on a biannual basis and they've reported 22 premium. Again, halfway through the year of 32.4% over 2021. So, you know, premium is certainly on the rise, but so are transactions. The volume of transactions filed through those 15 states near 10% through midyear, 2022. So those 15 states, they represent about 65% of the market. Really representative than of the entire country and show dramatic growth in this segment for the last several years. So we're certainly seeing that continuing through the balance of 2022. I'm certainly not hearing from any members that would suggest otherwise at this point. But that's that's a couple of notes on growth in terms of current state of the market. And best report is also really focused on the safety and soundness, the financial security of the segment. And that's a really strong report card this year as well. No financial impairments in our sector surplus lines. Insurance company ratings are very strong. All of them in the good to to superior excellent rating categories. So things are looking really good. If if there's another measure of the market's growth and optimism right now, I would say it's our annual marketplace, which kicks off this weekend in San Diego. We currently have 6340 people registered to be there. That's a quarter more, 25% more than we had at our high back in 2019. So I think that's another really strong signal of growth and optimism in our segment. 

Bethan: [00:04:18] Wow. That's a big number for the annual marketplace. That's certainly going to be very exciting, I'm sure. So, I mean, the market, as you said, Brady, it's in a very positive place right now. Bryan, I'm going to come to you next. Where are you seeing the most growth in the marketplace and your business? 

Bryan: [00:04:38] Yeah, thank you. I can speak for California and the Western region specifically. We are seeing substantial growth in property, specifically wildfire areas and the surrounding areas as emitted markets continue to withdraw from the state and other carriers tighten their underwriting guidelines. More and more business continues to flow into the surplus lines market and we are seeing rates go up for the fourth year in a row. Our biggest challenge is capacity, though we there's a lack of capacity in the market, which is driving up rate and making solutions really hard to find. And that's really what we're seeing here on the West Coast and, and in California. 

Dave: [00:05:27] Yeah, the building that, this is Dave, from Bryan's comments on property, we're seeing pressure across the country in other geographic areas property wise also because of capacity constraints. And that's also being fed into by pressures around inflation affecting insured value. So there's certainly a high demand in property and constrained supply which makes our jobs, the wholesalers, even more important to help our clients solve their needs. I'd say more broadly, getting back to Brady's point around growth of the business, the wholesale E&S marketplace is now about 20% of the overall US property casualty commercial market. That's over twice the share it had roughly ten years ago. And that just is an indication and this year is no exception, that the growth is very broad based. It's across really all lines of business that we participate in. And we have obviously across the industry expertise in many areas that is supporting that growth and helping our clients again achieve their needs. 

Bethan: [00:06:24] That's great. Thank you. Now, you know, emerging and complex risks are often not particularly well covered. Within standard risk management solutions, and this makes them good opportunities for the wholesale specialty and service lines industry. Brady, Why is this industry so well positioned and equipped to handle emerging and complex risks? 

Brady: [00:06:48] Well, I'll steal what they've just said about expertise. I mean, this segment is all about expertise and innovation and the kinds of problems that they solve. Our members are creative. They really thrive in solving emerging risks. Many times our segment is developing solutions where there's no loss history for a new risk, where policy terms need to be flexible to meet the policyholder needs. There are all kinds of reasons why a risk might flow into our segment, but there are times when we're the innovator of that solution that will develop a loss history over time, and they might flow back into the standard market at some point. But for the most part, I think the the emerging the complex risks are starting here because of the expertise and flexibility this market has to to customize the insurance solution for the insured. 

Bethan: [00:07:42] That's that's great. Thanks Brady. And that expertise and flexibility is arguably more important than ever right now. We're chatting in the middle of, I think, a very unique global risk landscape. We've got challenges around COVID 19 still lingering here. We have economic inflation, the ongoing supply chain disruptions, the war in Ukraine, climate change, the list goes on. And how is the marketplace responding to these challenges? Dave, I'll come to you first. 

Dave: [00:08:12] Yeah, thanks. Obviously, that's a great example of that list, an example of how much risk the world is in right now. And that risk is reflected in the insurance buyers minds as to how they think about protecting themselves. As Brady alluded to earlier, I think our E&S industry in particular is very well positioned to help respond to those emerging and newer risks, in particular because we are flexible from a regulatory standpoint, but also because we're nimble and I think very entrepreneurial in how we think about the business and how we try to solve problems. So I think that's kind of the overarching theme that each of our businesses applies. I would also say that as a as an industry, we've had to scale up, quite frankly, in meeting the demand, just quite frankly, a lot more work to do to meet the needs of clients. And we've done so in an environment where for a while we were working from home, now returning to offices and back to travel, which is great and have personal interactions again. But all of that speaks to an environment and industry that is able here and for the long term, proven its ability to solve for the challenging risk world that we're all in. 

Bethan: [00:09:18] That's great. Thanks, Dave. And Bryan, what are your thoughts on why the E&S market is sort of why and how actually the market is responding to these challenges? 

Bryan: [00:09:28] Yeah, just to add to what Dave said, you know, the E&S market continues to step up during these uncertain times. You know, one of the things that allows us to better function in a hard market in these times is the technology solutions that we have access to, helps us process business and do it more efficiently. In looking at the marketplace. It really is the entrepreneurial arm of the entire insurance industry. You know, we move quick, we react quick, and we provide solutions to our business partners. 

Bethan: [00:10:01] Well, Bryan, that segues perfectly into my next question. So the Surface line segment is kind of designed for innovation, as you just described. You know, how would you say new technologies are impacting this space? Can you share a few examples? 

Bryan: [00:10:17] Absolutely. Yeah, I mean, two parts to that, really. One, you talk about new technologies definitely impacting the space. You know, it allows us to be faster, quicker, more efficient. It's very important. But let's not forget that our business is results driven and carriers are they must make an underwriting profit to stay in the game. So new technologies, at the end of the day, it can't replace the art of underwriting. And I firmly believe that technology and underwriting together is ultimately the winning formula for underwriting profitability. And we have seen several insured tech firms exit the business recently because the underwriting results haven't been there. And number two. Cyber for cyber business. You know, there's multi carrier competitive raiders for quicker access. Talking about technology. So we're able to use these technology tools to get our solutions much quicker. And in talking about wildfire also and using technology, you know, we have access to real time cap modeling for managing risk risk qualification. And this allows us to manage a high volume of submissions to have a higher output of quotes, which leads to more business and more premium for our carriers. 

Dave: [00:11:56] Yeah. Bryan, I think you're spot on the notion that technology enabling better use of data to drive insights is a really critical part. I think of how this industry has evolved in a very healthy way. Also, the data is now being used more and more to drive product development and those products help deliver unique solutions, in particular for often industry specific or product specific needs that again, the marketplace often is in the lead in delivering those. So that technology we've talked about, you have talked about one of the great byproducts is in fact the ability to capture and harness data like we never have, quite frankly, ever before. 

Bethan: [00:12:35] Yeah, that's really interesting. And Bryan, I like your comment there on the sort of the winning formula for underwriting profitability. You heard it here, folks. But yeah, I mean, so kind of moving forwards, a lot of our listeners at IBA talk are retail agents and wholesale brokers. So kind of keen to look at that partnership in this next question. So Brady, why should retail agents work with wholesale brokers and what would you say is your value proposition and kind of what makes that good partnership? Can you shed a bit of light on that? 

Brady: [00:13:15] Absolutely. First, I would say a retail agent is going to want, I think, needs a wholesale partner because of we'll use that term again, the expertise that they bring to the table. I think the surplus lines, insurance markets, that they can have access to that that the retail agent might not be able to access themselves. The customization that wholesaler is going to bring to the table. In my opinion, the wholesaler is really helping that retailer find the solution. They can't find in the standard market, and that's obviously helping them solve their clients problem, the policyholders problem. And it's solving the retailers problem to some degree. It's helping them retain that client, which is critical for them. The second thing I would say a laundry list of things within that value proposition I could talk about, But I would say a priority issue for us is the cost effective way in which our wholesaler members deliver those solutions. We engaged corning for the first time back in 2015 to really study the cost structures of insurance companies focused on retail distribution compared to companies focused on wholesale distribution. And I could I know Dave could go back being on the board at that time and talk about the the debate that we had at the board level as to what that analysis might look like. But what Corning found was when studying the non cost structures of a retail composite, compared to a wholesale composite, the wholesale composite was actually lower in terms of the non cost ratio than the retail composite back in 2016. Again, studying data, I think that was 2010 to 2015 data, that ratio was about 100 basis points lower for the wholesale composite. And in 2021, Corning's latest report, studying data from 2016 to 2020, the wholesale composite was lower than retail by about 180 basis points, 1.8%. So I think that's key to the value proposition. And and part of what makes a great partnership for the retailer point of all that would be there's never a cost to seek a wholesale quote that's never going to cost anybody anything. But there can certainly be a great return when the insurer needs that tailored solution. And the wholesale partner is the one that can find find that solution. 

Dave: [00:15:41] Yeah, I do. I do recall that discussion many years ago in the first round of the Corning study, and it's great to see that study refreshed and reaffirm the same conclusions we had several years ago. And to your point around why, why a wholesaler and what is the value, quite frankly, since there isn't a cost difference, it's all about then delivering a better solution to the insured and choosing the right wholesale partner for the right need at the right time can very much make a difference in how that retail broker delivers a solution to that ultimate client. That's really what we're here for. 

Bethan: [00:16:13] And can I just ask one follow up on that? Did that study kind of dispel a myth that working with a wholesaler was perhaps more expensive? Was that kind of like a widespread belief amongst retail agents? 

Brady: [00:16:26] I certainly think so. That was probably why the boards debate was so hot at the time. To be frank, you know, I think the board in general felt absolutely there's cost effectiveness in what we do. There's no doubt about that. I should I should clarify. The mission of that analysis was never to point out that wholesale distribution is less expensive. That was never the mission. It was always to demonstrate that wholesale distribution did not increase the cost of the deal to the insured. And there was some some debate around, well, maybe it does in certain cases or maybe it does in certain lines. The only way to dispel that myth to your question was to have somebody study that independently. Hence the reason Corning was engaged. And so no doubt, I think the result of that report absolutely dispelled that myth that using a wholesaler increases the cost of the deal. It does not. 

Bethan: [00:17:26] Mm hmm. Well, certainly a very interesting study. I remember having a look at it myself. And and it's interesting when you put that in line with what we've discussed so far in this conversation around, you know, the growth in the marketplace and the need for some of these innovative solutions coming out of E&S carriers and wholesale brokers, etc.. So really interesting stuff there. So now I'm going to ask you to close this conversation and ask you to pull out your hypothetical crystal balls. Dave, I'm going to come to you first. What do you think lies ahead for the marketplace? What lies ahead from here? 

Dave: [00:18:02] Yeah, I think we'll see much of the continued, continuation of the trend around the growth in the segment, driven by again, that the world being risky and E&S in particular being able to respond to that more quickly and more effectively. It's obviously a great time to be in the segment today. I think, as I said, it will be that will be the case going forward and it will be a continuation of what we've seen in the past. I do think, however, it's important that as distributors, as brokers, as well as ultimately the carriers in the marketplace, we have to earn the right to deliver that value. So we have to continue to innovate and challenge ourselves to drive value to our clients each and every day. And I know knowing many in the industry that we're up to the task and very excited about the future for sure. 

Bryan: [00:18:43] Great. Thank you, Dave. And just to just to add to that, you agree. All indications are that more good times are ahead, more growth for the marketplace. This segment of the industry is on pace to exceed $100 billion in written premium in 2022, which would obviously be a record. I believe that this is the best time ever to be in the science industry and feel very fortunate to be a part of it. 

Bethan: [00:19:14] Well, that's fantastic to hear. I feel like I've been reporting on this marketplace for the past few years and it's been the same story. More growth, more good times, more excitement and more innovation. It's certainly a very exciting marketplace. Thank you all very much, Dave, Bryan and Brady for sharing your insights with us today. Best of luck to you all at the annual marketplace coming up in the next week or so. Sounds like you're going to have a very busy few days, but that'll be great. So thank you all again for joining us on the show. 

Bryan: [00:19:49] Thank you. 

Brady: [00:19:50] Thank you. Appreciate the time. 

Bethan: [00:19:51] Thanks also to our listeners for tuning in. I'm Bethan Moorcraft, senior editor at Insurance Business, and this was IBA Talk. 

Narrator 2: [00:20:00] Thank you for listening to this episode of IBA Talk. For more from the team at WSIA, visit them at wsia.org. Thank you for listening to IB talk for the latest episodes. Be sure to follow us on PodBean. You can also tune in on your favorite listening channel. Find us on Spotify, Stitcher and Apple Podcasts.