Best's News


Best’s News & Research Service - September 02, 2015 10:28 AM (EDT)

A.M. Best Special Report: U.S. Surplus Lines Profit From Underwriting Discipline and Core Competencies

  • September 02, 2015 10:28 AM (EDT)
    print icon

Oldwick //BestWire// - Underwriters of surplus lines continued to report profitable results in 2014, including profits from favorable reserve development. A new Best Special Report, titled, "Surplus Lines Profit From Underwriting Discipline and Core Competencies," states results were driven by a combination of product diversification, underwriting discipline and advantageous market conditions. As a result, surplus lines companies continue to outperform the overall U.S. property/casualty industry and recorded a second straight year of underwriting profitability following three years of underwriting losses.

A.M. Best's outlook on the surplus lines insurance market is stable. In addition, the overall macroeconomic environment has been conducive to increased merger and acquisition (M&A) activity. A.M. Best also has observed over the past five years that surplus lines, as well as specialty admitted carriers, have been targets of M&A. Targeted companies provide acquirers an opportunity either to establish a new surplus lines platform or supplement an existing one.

Surplus lines insurers also have kept pace with enterprise risk management tools and processes due to increased oversight by regulators and rating agencies. Managements at these firms have taken a closer look at their operations from an enterprise standpoint and have either better formalized existing programs or made the necessary adjustments to be more in-line with peers. Unfortunately, the persistent low interest rate environment continues and investment portfolio returns suffer as carriers struggle to replace maturing and higher yielding securities with suitable replacements without adding to credit and liquidity risks.

Through the first half of 2015, overall market conditions remained comparable with 2014, demonstrating ongoing competition, low interest rates and limited weather-related events. With persistently low interest rates providing just marginal investment returns, underwriting performance remains as the leading driver of operating performance. Total investment income from both traditional and higher yielding asset classes are needed to provide additional support to income and surplus. The core competencies of the successful surplus lines carriers remain the same, focused on effective strategic analysis, product diversification and underwriting discipline.

A.M. Best's domestic professional surplus lines (DPSL) composite, which is a consolidation of 73 U.S.-based DPSL companies committed to the surplus lines space, outpaced the underwriting results of the total P/C industry, evidenced in the composite's 99.0 and 99.3 five- and 10-year combined ratios, compared with 101.2 and 101.1, respectively, for the total P/C industry. The composite's combined ratio for 2014 was 88.8.

One of the hallmarks of the surplus lines insurance market is the development of new insurance solutions to address new or emerging risks, or to provide improved coverage for known risks. These companies typically concentrate more on bottom-line profits than top-line organic growth, utilizing the segment's freedom of rate and form, while providing coverage for the varied, nonstandard risks that they underwrite. This focus gives these insurers the best chance to withstand adverse market circumstances and succeed over the long term.

Reserve adequacy is a material component of A.M. Best's assessment of overall capital adequacy and the ongoing trend of favorable though tightening reserve development for the surplus lines market has been recognized. Surplus lines carriers that are able to maintain conservative loss reserve selections and support strong balance sheet positions will likely have the ability to benefit in forthcoming years and be able to absorb the inevitable fluctuations in loss frequency and severity.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=241004 .

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.



Mergers And Acquisitions Property Insurance Casualty Insurance United States New Jersey Press Release Insurance Surplus Lines


Latest News

More from Best’s News


Trending

To Submit News go to - https://www.ambest.com/bestweek/submitnews.html