Eric Bublitz, director of excess and surplus at AmTrust, discusses the latest developments in E&S, real estate, and talent shortages.
In September, on the eve of the annual WSIA conference, Risk & Insurance® spoke with Erich Bublitz, director of excess and surplus at AmTrust Financial Services.
Risk and Insurance: Great to talk to you again, Eric. What do you expect to happen in the future in terms of E&S market forecasts?
Erich Bublitz: Business is obviously flowing into the E&S market at a very good rate. It has outpaced the standard market growth in recent years. I don’t see anything to indicate this will slow down in the near future.
E&S used to be a very niche part of the insurance market. Obviously, it hasn’t been a niche for quite some time. This is becoming an important part of the market, not only because of rising premiums, but also because of the solutions the company offers. In addition, it is currently a daunting task for states to approve applications, whether for political reasons, staffing reasons, or a variety of other reasons.
Many carriers are throwing up their hands and saying, “If we have to wait until our application is approved, even if our application is approved, we won’t be able to insure it the way we want.” .
R&I: So, given the pace of movement in each state and the state of insurance offices, there has been a delay in the approval of applications accepted into the market recently.
EB: No one has ever accused the state insurance department of reviewing applications too quickly. But everything is changing rapidly now, and new risks and inflationary pressures are causing an increasing number of carriers to consider new file rates and new file formats. It’s just overburdening the Insurance Commissioner’s office right now.
There are very few applications that lower interest rates. They primarily increase rates and enhance coverage. I don’t really have a desire to become an insurance commissioner and say, “Yes.” I approve of many rate hikes. ” In other words, there are cases where we have too many people, or we are understaffed and overworked and unable to contact you.
In some cases, they don’t really want to be on the side of approving interest rate hikes. So all of this is a perfect storm for carriers, and in many cases they’re being forced to choose between not being able to launch a business or launching a business at a loss, and that’s not sustainable.
Often, they end up finding a way to move their business into the E&S field. That’s one of the reasons we’re seeing an increase in the E&S space, and we don’t expect that to change anytime soon.
We are beginning to see the effects of some states in the grip of a homeowners insurance crisis. The business is moving into E&S for exactly the same reason.
R&I: That’s another topic. If you look at reinsurance, real estate is just one example, over the last 18 months we’ve heard a lot of talk about reinsurance capabilities and premiums. But what do you think about the impact of the hard reinsurance market on E&S?
EB: Reinsurance is often driving the insurance sector. And E&S tends to push the insurance space a little more because of the nature of the business, which generally sits in the E&S space. Reinsurance companies are hurting, and so is real estate. They’re trying to get more rate, but they’re also hurting in terms of casualties.
There were many adverse developments. This space is severely underbooked. Each carrier feels it to some extent, but reinsurers, of course, feel it at a larger collective level. The recognition is that pricing in terms of casualties is not appropriate. And they are culminating years of adverse development at this point.
So capital isn’t as available as it used to be, and not just on the real estate side. Reinsurance companies aren’t necessarily exiting anything, but they are certainly rethinking where they put their capital and trying to be a little more cautious.
R&I: How do you assess the role of MGA these days and its impact on risk placement?
EB: I would like to share my thoughts on what MGA originally existed for and what its current status is. Many years ago, MGA was actually created to address a very specific area. They created products with limited needs or had special distributions that were unavailable. In general, they cornered the market somewhere.
They were there to write things that carriers couldn’t write or didn’t scale to. These days, MGAs have become more general-purpose, but in the past carriers may have left these very specific areas to MGAs.
Currently, carriers compete with these MGAs with very traditional products. So while general liability products are now created by MGAs, they weren’t really something MGAs did before. There are some good MGAs out there, and they tend to be around for a long time.
The problem I have with some MGAs is that they are building themselves up and their business plan is to sell themselves short. They worry less about the long-term performance of the book and more about the bottom line.
It doesn’t bode well for the rate environment when carriers with long-term exposure compete with MGAs that are looking at short-term horizons. Going back to what I said earlier, MGA exists primarily through reinsurance support. So the hope is that reinsurers will seriously look at it and say, “Where’s my long-term relationship?” Are you a carrier that you know will be around for 10, 20, 50 years? ”
Or maybe I’m a little less worried because I know the MGA will sell itself, so I’m deploying my reinsurance properly?
R&I: What are your thoughts on the current impact of inflation on insurance companies’ demand and adequate underwriting capacity?
EB: Inflation affects every part of the insurance business, but especially the long-tail business. There is social inflation and there is fiscal inflation. As an industry, we’re focused on social inflation, or at least we’ve talked about it quite a bit. And we should absolutely talk about it.
But fiscal inflation is starting to become a bigger problem than anyone realized. Inflation is down a bit now. However, inflation is still progressing, and it is getting worse every year. I think a lot of people are saying that inflation is necessarily higher in the services sector than in the goods sector, and a lot of what we pay for is services. But if the loss involves rebuilding something, even if it’s hard goods, the cost of materials will go up.
It’s not a question of social inflation. It’s a question of fiscal inflation. 2×4 prices are higher than they were 5 years ago than they were 2 years ago. Even if inflation slows to 2%, it’s still 2% year over year. It will take a little more time to get that down to the insurance company level, but awareness seems to be growing. But going back to the original point, the emphasis is on social inflation, which is probably more influential. Fiscal inflation cannot be ignored.
R&I: On a different note, I heard that you just started covering E&S real estate?
EB: We just started operating E&S Properties. We think it’s the perfect time to enter this space. Clearly, the market has been soft for too long. We have seen double-digit interest rate increases in recent years.
We believe interest rates are currently at a reasonable level. I don’t think there is any surplus in real estate space right now. Years ago, you may have seen certain areas where surplus rates existed. D&O rates have probably doubled above what is absolutely necessary. Unsupported access is a good example.
We entered the E&S real estate field because we believe real estate prices are now where they should be. As I said earlier, standard markets don’t allow quick adjustments. So if you need to increase your interest rate, E&S will allow you to do so.
If interest rates start to soften a bit, E&S will help you stay competitive in that space. So if you think the rates are right and you have flexibility in E&S, we think that’s a great combination to get into this space. Timing is everything, especially in real estate.
R&I: Is there anything else you were wondering about heading into WSIA?
EB: The other thing I want to mention is the talent pool. Challenges continue to exist in the talent pool.
Frankly speaking, it’s difficult to get young people into the insurance industry. I don’t think that’s what people really want to do, which is a shame because it’s a great industry and it’s not what people think. It’s a people’s business. It’s not a numbers business. It’s not a form business.
It’s a people’s business. As an industry, we need to help people understand that this is a great business. In other areas, people are starting to retire. People who have been in the industry for many years are starting to retire. That’s reducing the talent pool in that area.
So we’re having a hard time attracting people and on the other side we’re losing people. As I’ve said before, E&S is growing very rapidly at the moment. Even though there are more businesses out there, there aren’t enough people coming in, so some people quit. Whether we created it or not, we are experiencing a talent shortage. Like everyone else, we must ensure we expand our talent pool and find new ways to attract talent.
Dan Reynolds is the editor-in-chief of Risk & Insurance magazine. He can be reached at (email protected).
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