[00:00] You know, someone has to draw the line in the sand and decide to, you know, like when's enough enough.

[00:06] Guest: It's one of the biggest burdens that's out there.

[00:11] Paul Lucas: Hello everyone and welcome to our first ever E&S focused leaders network as we gather some of the biggest names across the insurance market for their perspectives on the latest developments. E&S of course has been growing fast on the back of an admitted market retreat, but the segment increasingly depends on talent, delegated authority, and regulatory plumbing that don't get discussed as often as pricing and capacity.

[00:34] Let's shift the lens onto who's actually running the business and under what condition it flows back to admitted markets. Let's meet our panel. They are Andrew Kelly, executive vice president at AJ Wayne and Associates, and Dennis Fox, principal senior vice president healthcare practice leader at Brown and Riding. To get us started, gents, is there a meaningful talent shortage in E&S underwriting and wholesale broking right now? And if there is, what does that mean for how business gets placed and serviced over the next few years? Dennis, I'll start with you.

[01:07] Guest: Thanks for having me today. I think it really depends on how you define talent. If you're looking for entry-level person, there is ample capacity for talent right now, and I think there's been great strides in what the industry has done over a number of years with building out risk management and insurance programs at colleges.

[01:32] It's not just a "I fell into this industry because I had a family friend that did it." People are studying it and are coming more prepared than they ever have been. I think the gap right now is where there is deep expertise in placements, complex placements, and the gap of senior brokers right now able to do that versus the next tier of individuals.

[02:02] I think that there's going to be a lot of time and commitment to get those individuals up to speed, and it'll be interesting to see how that comes about.

[02:15] Paul Lucas: Okay, looks like you're nodding along there, Andrew. Do you feel as though the industry has a little bit of a head count issue or not?

[02:23] Guest: I don't think it's head count so much. It is judgment. In today's day and age, the transition to the service center and having a more experienced producer, especially with COVID and the lack of knowledge transfer with everyone working at home, has become more and more pronounced.

[02:49] Designations like the RPLU, the CPCU, the ARM aren't being as encouraged as they should be. What you're seeing is really experienced good folks are becoming less and less common in the industry, and the tools that you need to give the next generation, whether it be expertise or knowledge, are not getting transferred.

[03:21] It's very common for the insured on that first year to get the best service and the more seasoned professional. Then once they become a renewal, they get transferred to that service center and get turned into a commodity.

[03:43] You're losing context on the changes that might happen on that account. You're losing intricacies to how that renewal should evolve. If you really want to point the industry to where it needs to be in the next five to ten years, I'd really like to see organizations get back to focusing on knowledge.

[04:10] Encouraging and reimbursing programs like the CPCU and the RPLU, and allowing young professionals not to see price as a barrier to getting educated. Even though a good majority of us are still work from home, having that collaboration, getting in the office, and having mentorships where producers are speaking one-on-one with more experienced folks is key.

[04:45] To me, if you want to benefit the industry and you want to benefit the insurer, that transfer of knowledge and transfer of expertise is going to be key.

[04:55] Paul Lucas: A little bit more into your knowledge as well if we can, Andrew. On the claims space, social inflation and aggressive litigation funding have certainly pushed up claim severity across many lines. How is that specifically playing out in E&S, and is pricing keeping pace in your opinion?

[05:14] Guest: There's so much capacity in the industry right now that what's responsible and what's happening are two totally different things. You have a new player coming in it seems like every other day. I hear a new form of capacity on professional lines, architects and engineers, lawyers, title agents, healthcare. There's somebody new every other day.

[05:47] Because of that, you have a culture of needing to keep up. I think you have two very different discussions inside every carrier right now. You have actuarial looking at the actual loss data and what you should do, and then you have all of this competing capacity that pushes budgets in the other direction.

[06:19] Social inflation and claims are all real things. The new capacity coming in certainly has to play a role, but the correct role is balancing that and coming up with something where you don't have this carousel of carriers endlessly perpetuating itself until a market correction that never really had to happen in the first place.

[06:42] Someone has to draw the line in the sand and decide when enough is enough.

[06:48] Paul Lucas: From your perspective, Dennis, do you think that this extra capacity is having an impact on rates or not?

[06:55] Guest: One hundred percent it's having an impact on rates. A couple years ago with COVID, we were having a massive increase in rate that carriers were able to get due to the fear of what they thought was going to happen on claims.

[07:20] I think there has been a correction in rate because more competition has come into the marketplace, and that's put rates more stable to maybe where they should have been. At the same time, claims frequency has been steady to plus 5%, but severity continues to go up.

[07:45] No venue is safe in the US at this time. All the carriers are very scared of most venues, and when a bad claim hits them, they are prepared to deal with a large settlement from a severity standpoint.

[08:05] Every single year we're being told they're going to take 3% to 5% rate on a clean account, but with the capacity that's out there, they are rarely achieving that. They also want to stay on accounts. It's very important for incumbent carriers to retain accounts.

[08:33] As brokers, we're focused on giving incumbents last look and giving them the best chance they can to retain the account because we want to be that partner with them. At the same time, when there is really competitive rate structure out there and comparable terms, there is a very big fight right now.

[08:58] It's benefiting the insured because they are going to get a better rate than what they had in the past. It's really our job as brokers to focus on terms, conditions, and making sure pricing is aligned with what it should be.

[09:22] We've had accounts that have policy-limited, and the carrier can't take it anymore and they're pulling the plug and doing a non-renewal. When those accounts come up, that's resetting the marketplace again. There are two games being played right now: clean accounts versus loss-driven accounts and how aggressive carriers can be.

[09:57] It's a very fluid situation and a moving target throughout the industry right now for difficult healthcare accounts.

[10:06] Paul Lucas: I wanted to know as well, Dennis, are there any conditions where business actually flows back from E&S to the admitted market? And are we seeing any early signs of that reversal starting?

[10:24] Guest: Right now it's more of an outlier than a standard process. If an account has a favorable loss history, say three to five years within E&S, there's definitely a chance of it coming back into the market.

[10:44] It really depends on the classification that's being insured. There are hard stances the standard market has taken where they have exited out of that program and aren't going to come back in. Other times it might have just been a shock loss that happened and has been rehabbed within E&S.

[11:07] If the classification is still favorable for the standard market and that standard market wasn't on the original claim, there's a good chance of them coming in and grabbing that business again. If you have aggressive premium goals because everyone wants to continue to grow, then that's where you have a chance of it going back into the standard market.

[11:33] Paul Lucas: I think this is very product specific, would you say, Andrew?

[11:37] Guest: Very product specific. Every line of professional business has its own standard market. With lawyers professional, you have the state bar program. With healthcare, you have carriers that constitute what a standard market is.

[12:01] With insurance agents, you have heavy hitters like Swiss Re and Westport inside of the Agents and Brokers plan of the Big I. All of these different standard markets have different philosophies about what is actuarially sound.

[12:25] The thing that makes the standard market standard is the filed rate structure and the fact that it can't continue to be standard if they throw underwriting discipline out the window. There will always be a segment of the market that's inside what should be standard and outside of that.

[12:55] The whole purpose of the non-standard market is flexibility and acting as the rehab partner for the risk. Across the industry you're going to continue to see that natural flow of business back and forth. As wholesalers, our job is to decide which is which and how to get them rehabbed and placed back where they belong.

[13:59] Paul Lucas: There's been a major drive of E&S growth overall, and MGAs and delegated authority arrangements have been at the center of that. What governance concerns come with that expansion, and who's keeping a close eye on underwriting discipline at arm's length?

[14:22] Guest: You look at MGAs and it depends on what the whole point of the MGA is. It feels like there's a life cycle with some of these things. Private equity has come in and decided there is a specific timeline that they want the MGA to mature over.

[14:47] If the whole point of the MGA is eventually to be the subject of another acquisition, there's not a whole lot of underwriting discipline that gets involved if the timeline is six years to get out.

[15:03] When we try to do business with an MGA, what we try to figure out is what are we playing at here? Are we putting everything possible on the books so that in five years we have to figure out how to move the whole book of business because the whole thing blew up?

[15:29] Or are we responsibly developing a philosophy about what goes inside the MGA so that by the time you build a book with them, it's stable and insureds aren't getting non-renewal notices or major premium increases because we didn't do what we said we were going to do at the outset?

[15:58] There are a bunch of really good MGAs in the industry, and there are MGAs whose whole point is to be the next chip in the acquisition cycle. In my mind, there are more good ones than bad ones. The key is identifying which is which and how to responsibly place business.

[16:14] Paul Lucas: Dennis, I guess the key is determining what's happening with anything that's perhaps outside that traditional box.

[16:23] Guest: Yeah, for sure. There's definitely a divide right now in how we're utilizing MGAs and delegated authority. When we're onboarding a new MGA, we're really trying to understand how they are set up, who's backing them, who's within the leadership group, and whether we have prior relationships with them.

[16:58] Similar to what Andrew was saying, we want to understand the goal of their operation and what they're trying to achieve. I'm always asking what's your budget structure, what are you trying to do, tell me more about your appetite, where are you wanting to go with this?

[17:24] We get concerned when we see MGAs that are too aggressive starting out, where we know they don't have the premium already on the books to absorb a loss right away. Anyone that's really aggressive on appetite or larger accounts gets our attention.

[17:49] We always need capacity, but we're cognizant of how that's going to play within the MGA's longevity, loss ratios, and performance. We don't want to place something with a carrier and then have to move it the next year because they go under or completely rewrite their appetite sheet.

[18:17] We definitely focus on qualifying our partners that we're placing business with and making sure we have a clear view of what they're trying to achieve.

[18:36] Paul Lucas: Speaking of headaches, I have one final question and that's on the regulatory front. Surplus lines compliance is significantly state by state. How much of a burden is that regulatory complexity placing on brokers and carriers, particularly those trying to scale in E&S?

[18:57] Guest: It's one of the biggest burdens that's out there. The brokerage is the listed party on all the policies, so the focus is really on them to make sure they are complying with whatever state compliance is out there.

[19:14] We have a very big compliance team here, and they get on us anytime we're late with any filing because there are states that have fines attached to it. It comes out of the broker's revenue if we're getting fined for not being compliant.

[19:39] The burden is huge. When I talk to our leadership about new entrants coming into the marketplace, the first thing they tell me is that it is the most difficult and complex part of brokering. Every single state is different, and staying on top of it is a huge challenge.

[20:00] It's going to be interesting how others scale and how others do it, but it's definitely a priority of ours here.

[20:10] Paul Lucas: What about your experience in this area?

[20:13] Guest: Historically, what has happened in this area is you have a bunch of different domiciles that have their heart in the right place, but because they all come at it from extremely different vantage points, what you get is this convoluted maze of regulations.

[20:41] The philosophical underpinnings are ethics that should benefit the insured, but navigating each one becomes very difficult unless you have the proper procedures in place to understand the differences between stamping offices in New York, California, and Rhode Island.

[21:04] They are all totally different and they all have their own challenges. I think if you ask any broker what they would like to see, it's some sort of uniformity on the federal level that brings states into a unified surplus lines regulation structure.

[21:30] Understanding that is probably not going to happen in the next twenty years, the best thing brokers can do is have good policies and procedures in place and an underlying philosophy of doing what's best for the insured.

[21:53] If you ask any regulator why they come to work every day, they want to make sure that the standard market does what it's supposed to do and that when business is in the non-admitted market, it's there because due diligence was conducted responsibly.

[22:19] It's there for the correct reason, for flexibility, for tailored rates, tailored forms, and with the overall goal of rehabbing that account and putting it back into the standard market when time dictates that it should be placed there.

[22:45] Paul Lucas: Great insights indeed. Fantastic to have you both with us. Remember that this leaders network will be meeting regularly. There'll be a host of other top names across the E&S space joining us as well. Of course, you can tune in to all of their conversations right here on Insurance Business TV.