Apart from the egg hunt, it boasted a petting zoo, inflatable structures, and the event was capped off with a stunning fireworks display. This got me thinking about how such an elaborate set-up was insured, given the apparent risks from inflatables, animals, and fireworks!
Upon discussing this with the event organizer, I learned that they had tried to secure a special event liability coverage from an admitted carrier like in previous years but had failed and had to move to the non-admitted or surplus lines market to secure the coverage.
This example encapsulates the recent trends in the commercial insurance market, whereby admitted carriers have become selective, resulting in risks continuing to flow into surplus lines. The continued rate hardening in surplus lines has positively impacted the top-line premium numbers as well as bottom line results.
First, E&S premiums have been growing significantly for years. However, the combined ratio has also been improving recently, with the gap between admitted and E&S widening significantly. E&S premiums are up 113% since 2019.
Second, this trend is also visible at the state level, with every major E&S state showing an outperformance in loss ratio versus admitted business, despite more risk. In the top three states, the gap averages 19pts.
Third, commercial lines written in the surplus market have doubled since 2019, with commercial property tripling during the same period.
The note below explores these points in more detail.
E&S results increasingly outpace the industry
The Insurance Insider US team have spoken at length about the Golden Age of E&S and the remarkable run of double-digit growth this space has seen.
The chart below shows several major players in the US and how their book has shifted over time.
However, not all growth is good, so we decided to compare the relative performance of admitted and non-admitted business over time.
The chart below shows surplus lines have outperformed the broader industry over time. The underperformance from 2016 to 2020 is attributable to the results from AIG’s Lexington, as well as a combination of wildfire and hurricane losses.
Perhaps the most noteworthy point in the chart above is that while there have been periods of outperformance before, the gap we see in the 2023 results is bigger than anything else shown.
It also shows one of the lowest combined ratios for E&S, at 91%, meaning that these lines are seeing near-record profitability at a time when the admitted market is struggling to break even. In the past, even with a gap, both spaces were either profitable or not profitable simultaneously.
State-level trends show uniform outperformance for E&S carriers despite catastrophes
With E&S carriers shifting to fill the gaps in some of the more disaster-prone states, it makes sense to next look at the performance at the state level to see if covering these risks is impacting results.
The chart below shows the 15 states with the highest E&S premiums, along with their loss ratios for 2023. The results are clear, with the admitted loss ratios higher than non-admitted for every one of the states.
This means that despite taking on this riskier business, carriers are able to get the rate they need, while admitted carriers struggle to balance rate with loss cost inflation under stricter regulation, pushing their loss ratios to the high 70s and low 80s.
E&S carriers have also improved their ability to factor in the recent uptick from severe convective storm losses as well as wildfires.
Taking a step back, if these trends continue, we are likely to see additional demand and more E&S carriers increasing their concentration in the space, as admitted carriers are forced to exit unprofitable lines or geographies.
Note: For a better understanding of the players in this space by state, please see our Appendix which shows the top 10 carriers for the industry and five largest states.
E&S concentration is steadily increasing in the largest E&S states
The volumes shown in the previous point showed which states are the biggest by E&S business written, but another interesting point to consider is the relative concentration of E&S versus admitted in each. The chart below shows how the concentration has developed over time in the five largest E&S states.
The three biggest catastrophe-exposed states are, of course, the three largest E&S states, and it is no surprise that they have increased almost exponentially over the last several catastrophe-heavy years. New York and Illinois have also increased, but we can see a smoother transition.
It is interesting to note that California went down in 2023 after more than doubling its proportion of E&S business since 2017, as even E&S carriers are looking to redeploy in other markets and states.
Commercial lines E&S has doubled in four years
In addition to state-level interests, one of the things we have covered extensively over recent years is the exit of certain carriers from more challenging lines. Therefore, it is interesting to look at how individual lines have shifted in the E&S space during this period of movement.
The chart below shows the volume of E&S premium in all of the major lines and how that volume has changed since 2019. The first major point is that commercial E&S premiums have more than doubled between 2019 and 2023, which can be compared to a growth of 30.4% in the admitted space. Though we can see the rate of growth (gold line) has been declining since 2021, it is still growing in double digits.
While all of the individual lines have shown steady growth, we would note that fire and allied lines (commercial property) have nearly tripled. This makes sense as it coincides with the decision of certain admitted carriers to exit those lines.
Additionally, note the flattening of the “other liability” line as questions surround the loss cost and inflation environment.
Taking a step back, we would not be surprised to see additional growth in the non-liability portion as this market remains the most dislocated.
In summary, while the rapid growth of 2021 and 2022 has started to level off, E&S remains a profitable and growing sector of the P&C market. Difficult commercial property lines in disaster-prone states will undoubtedly continue to benefit E&S carriers. How carriers respond by balancing short-tail and long-tail lines will define the difference in underwriting performance as we face an uncertain direction in loss cost trends.
Appendix
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