Today’s excess casualty market: elevating to meet the challenge

We hear frequently that today’s surplus lines casualty market is remarkably tough.

Of course, the reality is that the E&S excess casualty market is always challenging. It’s the very nature of what we do: specialty insurers like Axis write complex, difficult and challenging risks that the standard markets choose not to pursue.

Despite that, I would argue that we are in the midst of one of the most interesting periods in the long history of this market. Risks are changing because we live in a different world, creating more uncertainty than we have ever seen or experienced. By elevating our approach, surplus lines brokers and carriers can tailor specialty risk solutions that help insurance buyers overcome uncertainty and protect their balance sheets.

Market forces driving uncertainty

I’ve been underwriting challenging excess casualty business at Axis for more than two decades and in my career for nearly four decades. Today we see a perfect storm of forces driving uncertainty, unlike any market environment I’ve ever seen.

First, some standard carriers, MGAs, binding authorities and programs are exiting classes of business or reducing limits within excess casualty because of worsening loss severity, rising claims costs and lacklustre financial performance.

Compounding that, reinsurers are taking a tougher stance on supporting excess casualty business. Many reinsurers are concerned about loss trends, loss severity, adverse prior-year reserve development and unfavourable litigation trends, according to reports from major reinsurance brokers like Aon and Howden.

That means we are seeing an increasing flow of risks into the excess and surplus lines market.

For example, last year’s AM Best surplus lines report showed premiums grew 19 percent to $98.5bn in 2022. Anecdotal evidence and our experience at Axis suggest that tremendous shift is continuing as more risks enter the surplus lines market. In our team at Axis, we saw a significant increase in excess casualty submissions as compared to the prior year.

Claims are also becoming more challenging. Nuclear verdicts – jury verdicts of $10mn or more – are on the rise. For example, one report shows that juries awarded 20 verdicts of more than $100mn in 2022, including four of $1bn or more.

This is a long-term trend that fuels social inflation – the rising cost of litigation that causes insurance costs to rise faster than general inflation. The court systems in some areas are particularly challenging, including Florida, California, New York, Texas, Pennsylvania and Illinois, according to the Institute for Legal Reform at the US Chamber of Commerce. Widespread attorney advertising and promotion of massive lawsuit victories are driving increases in verdicts, settlements, claims and overall insurance costs. The use of third-party funding for plaintiffs’ cases is another concerning trend making the claims environment even more unsettled.

Industries with unique issues

Some specific industries face unique issues with the pullback of capacity in recent months.

  • Crane and rigging – This is always a high-risk class, but in particular we are seeing substantial reductions of limits offered for crane and rigging operators as some underwriters have withdrawn.
  • Agribusiness – For some carriers, regional agriculture co-ops and other providers had been an attractive market sector. But rising exposures in commercial auto liability and other areas have caused a market shift.
  • Public entity – Public entities have long enjoyed very broad terms and attractive pricing, but the dynamics have changed in recent years.

Commercial auto liability – especially for heavy and extra heavy fleets – is significantly exposed to large severity losses and nuclear verdicts, leading to rigorous underwriting standards. A 2023 report from the Insurance Information Institute notes that “inflationary factors continue to plague this line of business”. Inflation – including social inflation – increased commercial auto losses from 2013-2022 by between $35bn and $44bn. Those increases in losses are reflected in rising premiums in commercial auto.

We also see potential risks on the horizon that we need to understand more fully, such as autonomous vehicles, misuse of biometric information, human trafficking and AI. It is vital that we monitor and track the potential for these issues to become real loss drivers.

Finding Solutions

Risk managers and insurance buyers come to the surplus lines market when they have limited options. It’s our role to provide them with options.

This is a vibrant and creative marketplace. We seek out solutions and deliver alternatives in very challenging times, even for those organisations that have had significant claims. We bring realistic and viable solutions to challenged buyers routinely, quickly and efficiently.

Our wholesale broker partners are vital to guiding buyers through the process of finding the best options. The most effective brokers we work with share similar traits:

  • Market savvy – They understand the market in depth. They connect customers to carriers with strong, consistent, predictable insurance capacity, not just a quick fix or a temporary, “pop up” insurance facility.
  • Realistic – They establish realistic expectations for their customers about pricing and terms and conditions in advance of negotiations.
  • Flexible – They look beyond the binary “Deal or No Deal” mentality to consider alternative structures, attachment points, co-insurance and other approaches.

The best brokers and underwriters know that the most effective outcomes typically flow from open conversations and collaboration, especially in a market like this. This is why I believe it is so interesting and exciting to work in this market today.

Facing reality

These dynamic market conditions in excess casualty are expected to continue for the foreseeable future. Until losses diminish, we will continue to see a vibrant – and challenging – excess casualty market.

It would be helpful if state legislatures could agree on reasonable tort reforms that balance the needs of consumers, insureds, injured people and damaged parties, and thus reduce litigation inflation. But that is a complex process that would take years to impact the market. So, for the short and intermediate term, we expect today’s market conditions to persist.

At Axis, we have been in this vibrant and complex market since our inception in 2002. We see our role to be a steady, consistent, disciplined underwriter with a broad appetite in this highly specialised line of business.

One of the most satisfying parts of underwriting is delivering elevated specialty risk solutions that helps customers meet their needs, so they can take risks and prosper.

By Mike Flaherty, head of excess casualty, Axis