Arch Executive: Economy Straining Surplus Lines Sector

While rate decreases have helped drive excess and surplus lines business into the admitted market, a decline in exposures has further exacerbated the situation, according to John Edack, senior executive vice president and chief regional officer for Arch Insurance Group.

"That still has not come back and in certain areas, such as construction or specifically residential construction, they are heavily impacted by the decline in sales and exposures," Edack told BestWire. "As that comes back, the market can come back."

Edack said 2009 figures from the Surplus Lines Association of California show a 19% reduction in premium and a 9% reduction in policy count for surplus lines writers.

"And year to date, they are down 12% in premium and nearly 4% in policy count," Edack said, referring to California's surplus lines market.

Edack, who was in Boston for the Risk and Insurance Management Society's annual meeting, said irresponsible pricing continues to drive challenging market conditions. He said Arch's own industry rate analysis had shown increases in some business lines during the first quarter of 2009, but it may have been the impact of larger economic turmoil.

"Then that began to subside, and began to decline throughout 2009," he said.

Edack said this was part of the cyclical nature that causes business to drift between admitted markets and the excess/surplus markets. He said the appetite of the admitted market underwriters can grow ahead of their sector's capabilities.

"Then you wake up with results that lead to a hangover," Edack said. "That is the cyclicality of business where it drifts back to the expert underwriter in the excess/surplus field, who will play with tighter terms, a more sensible attachment, a more sensible limit and more sensible limit to mitigate the loss picture that's emerging. Who knows the future, but cycle management is what we do, just for that reason."

Industries across the board, such as energy, aviation and marine, face challenging conditions. He said each of those sectors is in need of rate, and loss frequency and severity are prevalent.

"It's truly a challenge to finesse rate increases in that challenged economic environment," he said.

That comes as the carrier is trying to bolster its presence in 16 locations within the United States. Arch Insurance is a division of Arch Capital Group Ltd. (NASDAQ: ACGL) and provides property/casualty and specialty insurance for corporations and professional firms across the United States and Canada.

The company has plans to establish a presence in Boston in May.

As chief regional officer, Edack oversees business and distribution for Arch's four U.S. regions. Growing that top line requires a balance between marketing underwriting and actuarial side of the business.

"To some degree, we're still a young company at eight or nine years out," he said.

In afternoon trading May 3, shares of Arch were selling at $75.52, down 0.08%.

Arch Insurance Co. currently has a Best's Financial Strength Rating of A (Excellent).

(By Al Slavin, senior associate editor, BestWeek)