California Surplus Lines Market Update – First Half of 2024

INTRODUCTION:
Given the timing of this report, the numbers discussed for overall forecasting will be for the first half of the fiscal year 2024 (Dec’23 through May’24).  The performance charts for industry groups and coverages represent respective performance for January through June, 2024 as compared to the same period last year.

As a reminder, last fall the Stamping Committee and Board agreed that the premium would increase in 2024 to $18.0B or about +9% and transactions would hit 1,060,000 or about +10% growth over 2023.

The mid-year revised estimates are somewhat different. While total premium is expected to finish at around $18.5B (+12%) by the end of the fiscal year, transaction counts have climbed in the last few months.  Averaging nearly 110,000 transactions received per month, this represents a 22% increase in transactions over last year’s average. The forecast models indicate around 1.2M transactions to be received this year.  The revised revenue forecast for fiscal year 2024 is $33.56M.  The following sections will detail some of the industries and lines that are influencing these numbers, primarily new policies.

OVERALL MARKET PERFORMANCE – 1H’2024 to 1H’2023 Comparison (Fiscal Year):

• Actual premium is up 14%, transactions are up 26% over the first half of last fiscal year.
• A number of predictive models indicate a trajectory to receive approximately $18.5B (+12%) in premium with transactions coming in at around 1.2M (+22%).
• Actual Average Premium is down 10% from the same period last year, and is predicted to stay consistent and end the year at around -10%. Longer term forecasts on this metric indicate that it is on an upward trend. In 2025, it is expected to increase by 3% or so, but is still 7% below 2023 average premium.  This metric is always at risk of showing potentially understated results due to steep increases in transaction counts.
• In breaking down the transactions by type, we’ve observed that the number of new business policies has nearly doubled in the last 6 months over a very consistent historical average. The only other time we’ve seen new business represent higher numbers than renewals was during the recession of 2010 (+/-3 years). However, the difference between the two was moderate back then and not nearly as extreme as we are seeing this year.  In the last 6 months, there has been a 34% increase in new policies over the same period last year.

• In the monthly transaction chart above, we’ve talked about in the past about the inversion of new policies and renewals “curves”. As you can see, during the recession of 2010 (+/-3 years), new business exceeded renewals and then inverted around 2013 (growth economy).  Not until late last year, did the lines invert again, but this time with an extremely large and fast growth of new business.  Does this mean another recession is coming? Does magnitude of the difference between the curves indicate the magnitude of a near future recession?
• In reviewing average premium per policy, we see a significant decline for new policies with a nearly flat change for renewal average premium. This is most likely due to the increase in transactions, which mathematically cause the average premium to go down; however, in the deeper analyses on coverages and industry sectors, it becomes apparent that some areas are growing at a much higher rate than others.

• We ran some analytics through ChatGPT regarding possible causes for this spike in new policies over the last 6 months.
  • ChatGPT 4 Question: Why is the California surplus lines insurance market growing so rapidly in 2024? The answers…
    • Increased Risk and Natural Disasters: California has experienced a significant rise in natural disasters such as wildfires, earthquakes, and floods. These events have led to increased demand for insurance coverage, particularly in high-risk areas where traditional insurers may be reluctant to provide coverage.
    • Economic Factors and New Developments: Economic growth and new commercial and residential developments in California have created a need for more specialized and higher-risk insurance products that are typically provided by the surplus lines market.
    • Regulatory Environment: Changes in the regulatory environment may have made it more challenging for traditional insurers to operate or have increased the costs associated with providing certain types of coverage. This has driven more consumers and businesses towards surplus lines insurers, who have more flexibility in underwriting and pricing.
    • Capacity and Market Conditions: Traditional insurance markets may be facing capacity constraints or have become more selective in underwriting risks due to recent losses or increased reinsurance costs. Surplus lines insurers can fill this gap by offering coverage for risks that are harder to place in the standard market.
    • Innovation and New Insurance Products: Surplus lines insurers are often more innovative and able to quickly adapt to emerging risks and trends. This includes offering coverage for new types of risks such as cyber liability, cannabis businesses, and gig economy workers, which may not be adequately addressed by the standard insurance market.
    • Consumer Awareness and Demand: There is increasing awareness among consumers and businesses about the availability and benefits of surplus lines insurance. As more people seek out these products for their unique needs, the market continues to expand.
    • Financial Stability and Performance: The financial stability and strong performance of surplus lines insurers can attract more policyholders. Their ability to cover complex and high-risk exposures effectively makes them a preferred choice in a challenging insurance environment.

• These factors combined have led to a robust growth in the surplus lines insurance market in California, making it an essential segment of the state’s broader insurance landscape

MAJOR COVERAGES PERFORMANCE – 1H’2024 vs. 1H’2023:
As can be seen in the charts below, the new business volume is growing sharply across the top coverages, while premium and average premium indicate mixed results.

NAICS INDUSTRY SECTOR PERFORMANCE – 1H’2024:

• As can be seen in the charts below, the new business volume is growing sharply across the industry sectors, while premium and average premium remain flat or in a state of decline except for a small number of industries.