In an era where ‘unprecedented’ has become such an overused word, the excess and surplus (E&S) insurance market is demonstrating remarkable resilience and adaptability – precisely because these agile firms are best placed to deal with emerging threats.
Fuelled by innovations in risk modelling, and the rise of modern catastrophes such as cyberattacks and those caused by climate change, specialty insurers are stepping into the void left by mainstream carriers. E&S premiums now account for 9.2 per cent of the total US insurance market, up from 5.2 per cent in 2018, indicating the growing significance of the E&S segment. It is not just the weather driving growth in the surplus market: in property, rising construction costs (leading to buildings going without updates) and recovering valuations have added to the increased catastrophe risk, leading to standard insurers shying away.
Yet the proliferation of technology-driven E&S firms has led to a more fragmented market. This diversity means that insureds can find solutions that closely align with their specific risk profiles. However, it also introduces new challenges for insurers. While niche insurers excel in assessing specialist risk areas, they often lack the robust support functions found in larger, generalist competitors. This can make it difficult for smaller firms to sustain operations, drive growth, and retain talent.
Technology is playing a role here, helping to streamline operations, allowing specialist insurers to focus on their core underwriting competencies. Automation and AI can manage administrative tasks, and help assess claims more efficiently, reducing the operational burden on human resources. This is particularly beneficial for smaller firms that might otherwise struggle to maintain the same level of operational efficiency as their larger counterparts.
Part of the answer to this may lie in the fact that many large tech companies have been conducting layoffs, with nearly half a million jobs eliminated since 2022. Insurers can capitalise on this by attracting individuals with strong technical skills and innovative mindsets. This is especially important as the insurance market adopts more sophisticated technological solutions. For example, blockchain is being considered for improving transparency and efficiency, while AI is being explored for personalised insurance solutions. This shift is likely increasing demand for tech-savvy professionals.
However, integrating this influx of talent requires a shift in traditional hiring practices. This niche sector still heavily relies on relationships and the art of negotiation to win deals, meaning companies need to find a balance between leveraging technology and bringing specialised underwriting expertise to each deal. Insurers considering candidates with less industry knowledge will need to proceed with caution. For example, lawyers at McDermott Will & Emery have noted that there has been a regulatory “sea change” in the US E&S market since the last wave of new entrant firms. This implies that companies entering or operating in this space need to ensure they have talent well-versed in the latest regulatory requirements. In the UK, there is massive regulatory focus on operational resilience, especially concerning the use of AI and other technologies, with insurers expected to adopt robust systems to manage operational risks and ensure continuity. So, while a more diverse workforce brings much-needed skills, the challenge for smaller specialty insurers will be to integrate these new hires effectively, ensuring that they can adapt to the specific demands of the sector.
Meanwhile, though merger and acquisition (M&A) activity in the insurance sector has slowed overall, there is still substantial appetite for businesses in specialist or niche lines, including within the Lloyd’s market. Specialty MGAs are likely to continue being highly attractive targets for insurance carriers, private equity funds, and retail brokerages. This also impacts talent, given that strategic rethinks often accompany M&A, with firms reconsidering their core and non-core functions. This could lead to an increase in outsourcing of essential but non-core activities such as accounting, know-your-customer (KYC) processes, due diligence, and corporate transaction services. Specialised firms with dedicated expertise in these areas can provide more efficient and cost-effective solutions, allowing E&S insurers to concentrate on their primary functions of specialist risk assessment. In many cases, firms may opt for a ‘lift-out’ approach, where entire teams are absorbed by partner providers. This allows insurers to retain access to their talent while providing employees with better career opportunities within a specialised environment.
In summary, these smaller, agile specialty insurers are filling gaps left by mainstream carriers, providing tailored solutions to meet diverse risk profiles. However, they must address operational challenges and talent acquisition to sustain growth. By simultaneously leveraging technology but always balancing this with specialised sector knowledge, these firms can enhance their capabilities and continue to thrive in an increasingly uncertain world.
This article was originally published by Insurance Post. You can read it here.
About the author
Shaun is IQ-EQ’s Global Head of Insurance. Shaun has 20 years of experience in the financial services sector across multiple product segments, including insurance, funds, corporate and private wealth. He’s a member of the South African Institute of Chartered Accountants and has worked in South Africa, Cayman Islands, Mauritius, UK and U.S.
