The excess and surplus lines (E&S) insurance market has long been a source of solutions for companies with emerging and difficult-to-place risks. The steady growth in E&S premium volume over the past two decades and specialized nature of coverages make non-admitted business attractive for agencies and brokerage firms.
In 2021, the U.S. surplus lines industry hit a record high of nearly $82.7 billion in direct premiums written (DPW), according to A.M. Best. This was the largest year-over-year increase in premium volume since 2003, Best’s analysis found. What’s more, the share of E&S premiums as a percentage of total property and casualty direct premiums written more than doubled over the past 20 years, to 10.1% at year-end 2021. In 2001, surplus lines DPW accounted for 4.3% of total P&C DPW.
Source: A.M. Best
Rapidly evolving risks drive growth
The growth of the surplus lines market appears likely to continue well into the future, with rapidly developing businesses and emerging risks. For example, three evolving markets include:
Cannabis industry. Across the U.S., various forms of cannabis are legalized and regulated for non-medical or recreational use. Medical marijuana is permitted in more than three dozen states. According to DISA Global Solutions, as of October 2022, cannabis is fully illegal in only four states: Idaho, Kansas, South Carolina, and Wyoming. Cannabis is fully legalized in 19 states. In the remainder, cannabis is legal in part for medical or recreational purposes or is decriminalized.
The cannabis industry is rapidly evolving at all points in the product lifecycle, from growing operations to distribution systems to retail dispensaries for cannabis products. A “shadow economy” of businesses in the cannabis supply chain may not fully grasp their need for, or the availability of, insurance protection.
Although states have largely eased laws restricting different uses of cannabis, it remains a Schedule I drug under federal law. As a result, banks worried about regulatory uncertainty have avoided serving cannabis businesses, as have admitted insurance companies. Legislation pending in Congress would provide legal protection for banks and insurers that do business with legal cannabis entities. The outcome of that legislation could open the doors to more growth opportunities for agents, brokers, and insurers—particularly in surplus lines, which generally can introduce new coverages more quickly and easily than admitted insurers can, due to regulatory requirements.
Even if federal legalization occurs, it might prove highly disruptive to the current cannabis industry and its regulation. If so, the non-admitted insurance market will play a key role in insuring this industry for an even longer period, extending opportunities for growth.
Cyber liability. Surplus lines insurance is where cyber insurance solutions first emerged, and as demand for protection increased, admitted insurers began to underwrite cyber risks. A rise in frequency and severity of cyber event losses, particularly from cybercrime such as ransomware attacks, has hardened the market. The surge in cyber losses is due to a convergence of factors, such as the massive shift to remote work during the pandemic, increasing reliance on networked devices, and social and political unrest.
Cyber liability is a growth opportunity for the insurance industry, not only because of the rise in losses but also because of legislation raising requirements for cybersecurity and data privacy. Because more kinds of organizations either hold or process sensitive data on customers, protection is more needed than ever against liability for data breaches.
The surplus lines market is ideally suited to address coverage gaps and to introduce new products for an increasingly digital economy.
Climate change. As billion-dollar weather events and climate-related losses occur with greater frequency—including floods, windstorms, drought, and wildfires—communities and businesses in many areas are experiencing losses and need protection. The National Oceanic and Atmospheric Administration (NOAA) noted that 20 weather and climate disasters causing overall losses of more than $1 billion occurred in 2021—the second highest number recorded behind 22 such events in 2020.
Surplus lines insurance can play an important role in mitigating the impact of losses due to climate change. Government-backed programs, such as the National Flood Insurance Program, face steep financial challenges, making private-sector insurance solutions more attractive. Amid global supply chain issues and inflation, recovery efforts following disasters are happening slower and becoming more expensive. The surplus lines market offers an efficient means of developing and distributing innovative and customized products to meet the needs of commercial and personal lines customers.
Opportunities abound for agencies that are prepared to handle the specific compliance requirements of the surplus lines market—including licensing, underwriting, policy filings, and premium tax payments. For more information on how ReSource Pro provides expertise and a proven infrastructure for those looking to move into surplus lines, please visit our Compliance page.