Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

E&S market to come under pressure, as reinsurers hunt returns: Fitch


The U.S. excess and surplus (E&S) lines insurance market may come under increasing pressure as reinsurance firms and others with the ability to underwrite E&S risks target the sector to offset lower pricing in other areas of reinsurance, according to Fitch Ratings.

Excess and surplus insurance or reinsurance linesLarge, specialist reinsurance underwriting firms have been increasingly stepping out of their traditional markets in search of premiums with better rates, which given the excess levels of capacity in the market has only served to increase competitive pressure in these other lines.

Specialty reinsurance was one of the first lines to suffer after reinsurers looked to replace dwindling property catastrophe premiums, followed by casualty and then primary insurance lines, as reinsurers sought out improved returns to boost their RoE’s.

Excess & surplus (E&S) lines of insurance are considered a bright spot, with Fitch Ratings saying in a new report that it expects the E&S market will “outperform” the wider property & casualty industry, but this is making the sector increasingly attractive to risk capital seeking returns.

However, it’s not just rates that are attractive in some E&S lines, Fitch notes that E&S underwriters outperformed the wider P&C industry’s combined ratio by an average of 8% from 2011-2015.

That suggests that to enter the E&S market and become a meaningful player you will need the underwriting talent to emulate the combined ratios that E&S underwriters have been achieving. Something that the large, globally diversified reinsurers will no doubt believe they are more than capable of.

After growing by 4% in 2015, a fifth consecutive year of positive growth, E&S market direct premiums written (DPW) have declined slightly in the first-half of 2016, Fitch explains.

However, Gerald Glombicki a Director at Fitch Ratings, explains; “As E&S insurer premium rates began to flatten in 2015, Fitch does not expect positive rate movement due to competitive market conditions and recent industry consolidation, and profitability will likely deteriorate modestly in 2017.”

Fitch explains that the E&S market offers “An alternative for hard to place non-homogeneous risks that require substantive underwriting expertise,” which while it offers enhanced profitability will make it a target of the large global re/insurance firms.

“The E&S market is increasingly becoming an attractive alternative for reinsurers with E&S underwriting capabilities to offset reduced reinsurance premiums,” Glombicki added.

The overspill of reinsurance capital into other lines of re/insurance business has exacerbated what was at first just a soft catastrophe reinsurance market, driving competition up and prices down across many lines. E&S looks set to be the next, as it comes under target for its profitability.

Fitch notes that the reinsurance market generally “is still struggling with more severe declines [in pricing] than the E&S market, particularly in property catastrophe business, due in large part to growing competition from securitizations and alternative capital providers.”

But as reinsurers look to other avenues to generate RoE, with E&S just the latest, they are “adding to an already crowded market and further pressuring prices,” Fitch explains.

The excess & surplus lines insurance market has also been targeted by the insurance-linked securities (ILS) fund sector as a potential area of growth. Securis Investment Partners teamed up with specialist Lloyd’s insurer Novae Group to launch a special purpose syndicate focused on U.S. E&S property business a year ago.

We understand that other ILS fund managers have also been underwriting some E&S style property insurance risks in recent months and there is an expectation that this will continue, which will no doubt further pressure the sector.

Of course Warren Buffett’s Berkshire Hathaway has also been pouring capacity behind E&S risks in recent years, growing its direct premiums written by 50% for the last two years in a row, according to Fitch.

The end result will likely be that some E&S lines, particularly property related, will become as congested and competitive as other property catastrophe risks with all the resulting softening associated with them.

That will likely encourage specialist E&S underwriters to look to ILS capital as a way to enhance their own underwriting capital efficiency as well. Novae recently said that its partnership with Securis and the “ground breaking” SPS 6129 the pair launched has helped the firm to grow in E&S property risks.

That’s the kind of initiative that other E&S underwriters may look to take in years to come, if indeed the market softens as now looks to be expected. Embracing third-party or alternative reinsurance capital may be just the thing to help E&S specialists remain competitive when their market is targeted by the global re/insurance players.

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.