By David Bull

Feb 28 - (The Insurer) - The E&S market is expected to continue to grow its share of the overall U.S. P&C market due to an elongated period of “moderately hard to firm” rates in which pricing has remained out of equilibrium for longer than expected, according to MarshBerry managing director and specialty practice co-head Gerard Vecchio.

Speaking at the M&A advisory firm’s Peak Performance Summit earlier this month, Vecchio said: “If you had said to me nine years ago that we’d be in the longest hard market that we’ve ever seen in modern insurance times, that MGAs would be worth more than retail brokers and that we’d have gone from E&S premiums being less than 14% of total commercial premiums to verging on 25% I would have said to you, ‘No way, history doesn’t work that way.’ And yet, here we are.”

He added he had expected the E&S sector to reach pricing equilibrium by early 2025.

“Well, I think today, looking out to the beginning of 2026 we are less likely to be in an equilibrium environment than we were a year ago. We are in a market in flux.

“Why? Because the industry in so many different areas is still not pricing risks adequately. We’ve already seen reserve deficiencies amongst [some of] the largest carriers … and I think we’re going to see more of that,” Vecchio continued.

In his presentation he contrasted the stabilising property market with the casualty sector, where scrutiny on underwriting is at its most intense in several decades.

He noted that that rates continue to firm and the exposure base is increasing due to the growing economy, while there is also negative reserve development and more complex risks that are harder to price.

Meanwhile, despite more prevalent and available reinsurance capacity than two years ago, attachment points have not come down, so primary carriers are retaining more risk.

“That’s why you’re seeing a bunch of companies in the admitted market non-renewing unprofitable business, because they know that they’re just going to run the risk of adverse reserve development,” said Vecchio.

He added that those factors are coming to drive the E&S market’s share of the overall commercial P&C lines industry even higher.

“In 2017, E&S business as a percentage of total commercial P&C lines was about 14%, and it’s over 22% today. Our regression analysis suggests that by the end of this year, or certainly by the end of 2026, 25 cents in every premium dollar will flow into the E&S marketplace,” he continued.

Vecchio said that it is largely the domestic professional surplus lines carriers driving the marketplace.

He pointed to factors leading to greater frequency and severity of claims, including the impact of class action lawsuits and multiple plaintiffs on liability claims that have increased by 57% in the last decade.

“Of the top 10 states suffering nuclear verdicts … the top four states equate to the four largest E&S markets in the United States: California, Texas, Florida and New York. I don’t think that’s coincidental,” Vecchio observed.

He also commented on greater severity in relation to weather events, citing Verisk data which gave a 90% probability that the $151 billion of cat losses in 2024 will increase by 5 percent a year over the next decade, yielding a $240 billion annual loss total.

“I would argue that insurance carriers are looking at this and saying claim costs are going up even without other natural disasters, man-made disasters and shocks to the system. So we’re clearly not in equilibrium,” he commented.

E&S OUTPERFORMS ADMITTED

MarshBerry’s Vecchio also discussed the divergence of performance between admitted and non-admitted carriers measured by loss and loss adjustment expenses (LAE) ratios as a driver of MGAs and other distributors to seek out E&S carrier partners.

He said the firm had done its own statistical analysis that showed E&S carriers produced underwriting profits for 2022, 2023 and 2024 of 7%, 8.7% and 11% respectively.

“That is not true for the P&C industry. The P&C industry lost 3.5 cents for every dollar it took in in 2022, they lost 2.4 cents of every dollar in 2023, and as best as we can estimate right now, we think there’s about a breakeven result in 2024,” he said.

The executive added that loss and LAE ratios viewed across the P&C industry and at E&S carriers specifically reveals a 15 percentage points differential.

AM Best data showed that for 2023 the P&C industry delivered a loss and LAE ratio of around 76%, compared to 62% for E&S domestic carriers.

“We think that at the end of 2024 that spread has widened by about 200 basis points. We think the P&C industry as a whole will continue to be in that 75-77% range, and we think the professional surplus lines writers will be closer to 60%,” he continued.

MarshBerry further analysed the probability that those loss and LAEs might converge between the P&C industry and E&S market, finding less than a 1% chance.

The performance gap is impacting where MGAs choose to seek capacity, Vecchio suggested, because contingent profit commissions typically kick in at around a 60% loss ratio.

“We think focusing on the specialty E&S market capacity in 2025, and probably 2026 and maybe even 2027, is probably not a bad idea if you want to generate contingent profit commissions.

“Why have the surplus lines carriers been that much more profitable? I think you all know the answer: freedom of form, freedom of pricing, and the ability to exclude risks from their policies,” he concluded.