In the evolving insurance landscape, the intersection of technology and innovation continues to reshape traditional practices, particularly within the excess and surplus (E&S) insurance market. This sector has historically provided coverage for unique, high-risk or hard-to-place risks outside the scope of standard risk appetites. As emerging risks and complex underwriting challenges persist in a connected world, the E&S market is experiencing dynamic growth driven by technological advancements and shifting consumer demands.
Admitted vs. Non-Admitted Insurance
Insurance operates within two primary markets: admitted and non-admitted. Admitted insurance, backed by state regulations, ensures that if an insurer becomes insolvent, the state will cover necessary claims. Non-admitted insurance, or E&S insurance, operates under less stringent state regulations, allowing these carriers to assume greater risks. While both types of insurance cater to different consumer needs, the E&S market specifically addresses risks that are either unavailable or unaffordable in the admitted market.
E&S insurers offer coverage for high-risk scenarios such as hazardous materials removal, amusement parks and specialty business lines. This market’s flexibility in customizing coverage for new and emerging risks is one of its key strengths, providing solutions for non-standard, distressed, unique and capacity risks that standard policies do not cover.
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Market Scale and Growth
The E&S market has seen remarkable growth, with direct statutory premiums written reaching approximately $99 billion in 2022, nearly 9% of the total property/casualty (P/C) industry premium. Historically accounting for about 5% of total P/C premiums, the E&S market has expanded significantly since 2018. From 2018 to 2022, the market grew from under $30 billion to almost $100 billion in direct written premiums, marking five consecutive years of double-digit growth.
This growth is particularly evident in lines characterized by lower claim frequency and higher claim severity, such as liability, fire, earthquake, flood and ocean marine insurance. Conversely, lines with significant captive and risk retention group presence, like medical professional and workers' compensation insurance, have not experienced such substantial growth.
Value Chain and Risk Placement
Surplus lines' placement typically involves multiple intermediaries. Retail producers, unable to find an admitted insurer, refer placements to wholesale brokers who facilitate the placement with surplus lines insurers. Wholesale brokers placed 93% to 94% of E&S premiums over the past five years.
Wholesale distributors use three primary methods to place insurance risks: wholesale brokerage, wholesale brokerage with binding authority and program management by MGAs or MGUs. These intermediaries ensure compliance with surplus lines regulations, conduct diligent searches for admitted market coverage, report transactions to regulators and remit premium taxes to state authorities.
Driving Factors of E&S Market Growth
The E&S market thrives on its adaptability to economic cycles, market shifts and industry changes. When the standard market contracts or becomes overly conservative, the E&S market expands to fill the void. Key drivers of this growth include increasing catastrophe losses and climate change risks, rising jury verdicts and social inflation, the proliferation of cyber threats and the emergence of novel health risks.
For instance, the property market remains in a hard market phase, characterized by limited capacity and higher reinsurance costs. This phase has driven premium growth across all segments, despite rising loss costs due to inflation. In 2023, the U.S. experienced 28 weather and climate disaster events, each causing over $1 billion in losses, underscoring the increasing need for specialized E&S coverage.
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Regulatory Aspects and Historical Context
The origins of E&S insurance date back to 1890 when New York enacted the first surplus lines law. Over time, other states followed suit, recognizing the need for supplemental specialty coverage beyond what admitted carriers offered. The NAIC continues to oversee E&S insurance through its Non-Admitted Insurance Model Act, ensuring that surplus lines insurers maintain higher reserves and meet specific capitalization thresholds.
Despite being sold by insurers without a regular state license, surplus lines insurance is regulated and taxed by states. Brokers must complete a diligent search of the admitted markets before placing a policy in the surplus lines market. Surplus lines insurers typically have higher financial strength ratings compared with the overall P/C industry.
Digitization of E&S Insurance
The insurance industry has rapidly digitalized over the past two decades, primarily focusing on personal lines and small business commercial lines. However, the E&S sector has only recently begun to embrace digital transformation. Traditionally, securing an E&S policy involved cumbersome processes with lengthy wait times.
Exponential growth in the E&S market highlights a critical need for new industry products and technology. As new industries, technologies and business models emerge, demand surges for innovative insurance solutions. The E&S market pioneers crafting tailored products for evolving risks. Its track record shows an environment ripe for innovative risk strategies.
That requires distribution technology. One example is Annex, a company building an API methodology enabling infrastructure for risk assessment and underwriting without coding, specifically for E&S capacity partners. Annex offers a distinctive underwriting layer serving capacity providers while letting retail brokers write more risk.
Insurtech is democratizing the E&S market by making it more accessible to brokers and customers. Digital platforms enable brokers to quote and bind coverage in minutes, rather than days or weeks.
But incumbents are also investing heavily in tech. Ryan Specialty Group, among the nation's largest wholesale brokers, has an in-house RT Binding Authority platform called one of the biggest nationwide. It provides expedited, secure carrier access with delegated underwriting through binding agreements. Most business consists of high-volume, low-premium policies with defined underwriting criteria for rapid processing while retaining authority for complex risks.
Kinsale, a domestic excess and surplus lines insurer specializing in hard-to-place specialty risks, leverages its tech platform to gather data, analyze trends, mitigate administrative errors and enhance claims and broker responsiveness.
Challenges and Opportunities
While insurtech presents opportunities for the E&S market, it also introduces challenges. Data privacy and cybersecurity concerns remain critical as insurtech companies handle sensitive information. Furthermore, regulatory compliance and adapting to evolving state regulations can be complex.
Despite these challenges, the E&S market's growth trajectory and the increasing demand for specialized coverage present significant opportunities for insurtech companies to disrupt and innovate within this sector.
As the insurance landscape continues to evolve, the convergence of insurtech and the E&S market is poised to reshape traditional practices, providing innovative solutions for emerging risks and complex underwriting challenges.
