Lexington CEO confident in surplus lines market’s ongoing momentum

Lexington CEO confident in surplus lines market’s ongoing momentum | Insurance Business America

Lexington CEO confident in surplus lines market’s ongoing momentum

The United States surplus lines insurance market has experienced record growth in recent years. According to AM Best’s 2021 Special Report, US Surplus Lines - Segment Review, surplus lines direct written premium (DWP) jumped by 17.5% in 2020, hitting a new high of $66.1 billion, up from $56.3 billion in 2019. This is the surplus lines market’s largest explosion in growth since the years 2001 to 2003. It also marks the ninth consecutive year of sustained growth as a marketplace, which is now more than double the size it was when it saw its last retraction back in 2011.

As the excess and surplus (E&S) lines marketplace has enjoyed strong market conditions for several years – including through the global COVID-19 pandemic – the question on the minds of many E&S leaders is whether the industry will be able to sustain its positive momentum.

Lou Levinson, president and CEO of Lexington Insurance Company, an AIG company, certainly seems to think so. In fact, the industry veteran of over 30-years said he feels “absolutely fantastic” about the industry’s ability to sustain the momentum in the surplus lines market, adding that the industry “continues to provide a vital function as the world gets more complex”.  

Growth in the surplus lines market is well out-pacing growth in the overall property and casualty (P&C) marketplace – at 17.5% compared to overall P&C industry growth of around 2% in 2020. In its 2021 US Surplus Lines - Segment Review, AM Best noted that despite numerous challenges from an economic, regulatory, legislative and market standpoint, surplus lines insurers’ market share has more than doubled over the last 20 years, from 3.6% of total P&C DWP in 2000 to 9.1% at the end of 2020.

Over the same time period, surplus lines as a percentage of commercial lines DWP grew from 7.1% to 18.4% - growth that Levinson said demonstrates the “strong support and need for the market and the momentum that we’re in”.

Read next: How M&A has impacted the hard D&O insurance market

Speaking in a ‘State of the Surplus Lines’ webinar, produced by AM Best and the Wholesale and Specialty Insurance Association (WSIA), Levinson described how submissions continue to flow into the E&S space at “an unprecedented rate”. He said: “It’s fueled by continued unknowns around COVID, cyber, an increase in property CAT frequency and severity, convective storm, flooding, wildfire, I think we even had locusts in the East Coast this year - the list just goes on and on. […] This is where the surplus lines segment really shines; where we provide innovative solutions for very complex problems.”

While rates for surplus lines business have improved and become more reflective of the risks the market assumes, Levinson warned that there are more unknowns lurking on the horizon.

“We’re not done yet,” he stressed. “There’s a shift in public perception around businesses, there’s claims inflation, there’s ordinary inflation, there’s a well-funded plaintiffs’ bar coming at us, and there are improvements in third-party litigation funding. A nuclear vertical used to happen every once in a while; now, they’re just verdicts and they happen all the time. In August, the industry had a $1 billion single fatality auto loss come out of Florida.

“And so, I think the industry’s best hedge against that is fairly simple,” he said. “It’s not complicated. It’s risk selection, attachment terms, limits and price, and then execute flawlessly on those strategies throughout the market cycles.”

Read more: E&S insurance market going from strength to strength

Reflecting on market cycles, Levinson said he doesn’t believe the surplus lines industry is in the middle of a typical ‘hard’ market cycle. Rather, he described the current situation – one where carriers are offering lower limits, for more premium, and with stricter policy terms and conditions – as more of a “market correction that’s really driven by companies demonstrating discipline around capacity and capital management.” And the CEO said he doesn’t expect that trend to change any time soon.

“I really don’t view this cycle as a typical market cycle. I view it as a market correction,” he stressed. “We were out deploying twice the capacity on the casualty side just a few years ago that we deploy today. On the property side, it’s probably a tenth of what it was during that same timeframe. And I don’t see that changing anytime soon.

“What I see among my own company and peer companies is a tremendous amount of discipline in how they’re deploying capacity, and how they’re using it in a much more thoughtful way than we did just a few years ago, for all the reasons [like] nuclear jury verdicts, social inflation, or just ordinary inflation.”