The property and casualty (P&C) marketplace currently does not have the capacity to satiate demand from clients, which is driving more and more policyholders to the excess and surplus (E&S) industry, according to one expert. This increased interest may not be sustainable in the long term and could cause some major issues within that sector.
"The E&S market is on the path to becoming overwhelmed,” said Martha Bane (pictured), property practice leader at Gallagher.
In a conversation with Insurance Business, Bane spoke about why the E&S market has been able to absorb this heightened demand so far, what the impact of a major hurricane or natural catastrophe might look like later this year and the importance of finding suitable alternatives in traditional markets for clients.
Since standard markets have pulled back this year in providing P&C coverage and reduced the amount of capacity being offered, clients had nowhere to go but to E&S providers.
“And they have probably written more business this year than they have in the past 20 years,” said Bane.
While these carriers may have filled large gaps in coverage, they have generally done so at a more expensive rate than what would be offered in the standard market..
Bane also noted how working with E&S carriers sacrifices some of the necessary interpersonal connection involved in insurance dealings.
However, the market has been able to meet the demands of clients that need this vital coverage, which is most important during times of increased vulnerability to loss.
“London carriers have been stepping up to the plate when domestic carriers have been shying away from business,” Bane said.
“Their pricing may be very challenging to work with, but they are creating necessary capacity.”
An increase in catastrophic losses due to hurricane or other weather events has resulted in reinsurers not making any profit in five out of the last six years.
“It’s really telling to see what the impact will be since it is projected to be a normal hurricane season this year,” Bane said.
While rates are not projected to come down soon, the market will most likely be able to absorb an event in line with the forecasted severity of natural catastrophe losses at the current pricing method.
What is more concerning, however. is the scarcity of capital that is available in the current marketplace.
“There’s a lack of capital available to the industry,” Bane said. “This will be a determining factor in maintaining this push for a rate increase. As supply remains constrained and the need to expand catastrophic limits for clients becomes important, valuation will also increase.”
With an increase in exposure as climate change-related incidents increase in severity and spread geographically, a broker must find alternative solutions in a traditional market.
“We’ve seen an uptick of interest in parametric coverage,” Bane said.
“I think it’s a very valuable product, especially when coverage has been carved back and deductibles are increasing. These products respond pretty immediately, usually within 30 days when the client needs that capital infusion the most.”
While parametric solutions may not work for everyone, especially since lenders prefer traditional, indemnity-based coverage, they do offer a solution when more standardized products are not available.
Other clients are pursuing insurance linked securities (ILS) as an option to safeguard themselves against potential losses.
This is helpful for policyholders who are not able to purchase the limits that cat models are recommending.
Finally, for larger clients with enough capital and resources, Bane has noticed an uptick in cat bonds.