2022 Stamping Meeting Minutes

Minutes of the Regular Stamping Committee Meeting

Roundhouse Conference Center, San Ramon, CA

October 4, 2022, 10:00 a.m.-12:30 p.m.

• Votes are highlighted in yellow for easy reference.
• An asterisk (*) indicates an attendee attended remotely.

Opening Business and CEO Report

Rich Gobler called the meeting to order at 10:05 a.m. He thanked participants, framed the day, and asked for a motion to approve the minutes of the 2021 regular Stamping Committee meeting and the special 2022 Stamping Committee meeting. Josh Koppel moved to accept both sets of minutes as presented, Andrea Ward seconded, and the motion passed without dissent.

Benjamin McKay reviewed the antitrust resolution and reminded participants of their obligations under the law and that resolution. He then presented his report, as follows:

• The Stamping Committee is a “supercommittee.”
  • This committee does the most important work, such as making the final recommendations to the board regarding the budget. Any question that is deemed important enough, SLA staff will bring to this committee.
  • The Stamping Committee is the primary place the Board of Directors looks for new board members. When we are talking about the inner workings of the association, it is important to talk about it with this committee, because the next step is typically board service.
  • The SLA exists to create a healthy, fair and competitive surplus lines marketplace. Markets are usually efficient, but not always.
    • This meeting is for the committee to help the SLA fulfill its duties under the Plan of Operation with the California Department of Insurance, under which the SLA undertakes certain activities on the department’s behalf—analyzing policies, for example. Various statutes dictate how the SLA operates, with a lot of masters, and this committee helps the SLA serve all those masters.
    • The SLA aspires to be a modern, credible leader, so that it can obtain the “soft power” needed to foster a healthy, fair and competitive marketplace.
• The SLA is looking at more and more partnerships with other SLAs to help enhance educational opportunities. 50% of California SLA members live in other states, including every state except Wyoming.
• The SLA is promoting the industry to the next generation, through outreach to universities and through career days, etc.
• Most of what the SLA does is laid out in its budget, which this committee reviews and recommends to the Board of Directors. This year’s proposed budget includes money to hire staff, to hire the right people so the SLA can be a modern, credible leader, as well as special projects that will help it achieve all of its duties.
  • The SLA is asking for a 10% increase in 2023—largely keeping up with inflation. The market is also growing rapidly, with an 11% increase in filings this year.
  • With the market up 11%, the SLA needs more capacity.
  • Two special board projects or activities are also included in this year’s budget:
    • A trip for the Board of Directors to Lloyd’s of London, to help foster a working partnership.
      • California is Lloyd’s largest market in the world.
      • The Excess Line Association of New York (ELANY) and the Wholesale and Specialty Insurance Association (WSIA) have also taken trips to Lloyd’s.
    • Convening the different SLA boards in a meeting to get to know each other and begin collaborating.
      • ELANY and the SLA did a continuing education course together, but there is some resistance to more joint activities because the boards don’t know each other.
      • New York has offered to host the first meeting, in October, to be called the National Excess and Surplus Lines Symposium (NESS).
        • Potentially, it would offer a continuing education component.
        • Some SLAs may not be able to send their whole boards, but could send their chair or perhaps two or three members.
    • Every project links to the SLA’s “three caribou”: 100% compliance, Member Value Program, employee health and wellness.

2022 Market Performance and Analytics

Mike Caturegli reviewed the performance of the 2022 market to date and noted that predicting the final two months of the year is fairly straightforward. The SLA is tracking to what it discussed in June, which is demonstrating that lowering the stamping fee in 2023 was the right decision. These numbers are largely based on fiscal year, which runs from December 1 to November 30. Most data models are showing $41 million in stamping fees based on $16.4 billion in submitted premium—a more than 23% increase over 2021. Transactions have gone through the roof. Historically, as far back as the SLA can track, policy counts have been between 5% and 7% a year. In 2022, it will be 11% transaction growth. Some of that is due to moratoriums on cancellations or nonrenewals, plus new risks that are emerging. Last year, the prediction was 14% premium growth in 2022 and 5% growth in transactions. The prediction was spot-on if taking inflation into account.

Comparing quarters 1-3 of this year to the same period last year, premiums are up 20%, and quarter four is always a heavy quarter, so the expectation is 23% premium growth and 11% transaction growth. About $3.6 million a month came in over the last few months. Average premium per transaction is up 9%, which tracks with inflation. The 9% growth is not as high as it had been in the past, with double-digit growth in recent years, 10-14%. The growth is starting to taper off a bit, and when you consider inflation, premium per transaction growth is essentially flat. Estimated totals for this fiscal year indicate 924,477 transactions, $16,368,345,003 in premiums and $40,920,863 in stamping fees. Compared to 2021, there were 830,700 transactions, $13,198,659,432 in premiums and $32,996,649 in stamping fees.

Trends indicate more than a million transactions can be expected in Fiscal Year 2023, with total premium also expected to keep increasing.

Andrea Ward said she is seeing a lot of accounts going into the admitted market in her book of business starting October 1, which will have an effect on rates for her book. Janet Beaver also noted that the ports are opening back up. Mr. Caturegli noted that the growth is definitely slowing, but that his estimations are an aggregate. Relative growth used to be very consistent year over year, but throw in the pandemic, new regulations, and the highest inflation in decades, and things are more shaken up than they have been in the past.

Mr. Caturegli also discussed the SLA’s coverage codes, which the SLA is redoing to get better, cleaner, more accurate codes. Under the existing coverage codes, arts and entertainment, food services, waste management, and personal lines are up (personal lines up 41%). Oil and gas extraction, utilities and public administration are significantly down. Average premium per transaction shows that quite a few coverage codes are higher than the overall market. Oil and gas extraction and utilities are bringing the average down a bit. Based on coverage codes, excess liability has grown substantially. Excess and general liability make up nearly 40% of all policies. On average premium per transaction, there are no big outliers.

David Kodama noted that the SLA is making the case to legislators and regulators that a lot of growth in personal lines is happening with high-end homes and in areas affected by climate change. SLA data gathering efforts will help quantify what is happening in this market.

Controller’s Report

Ivan Morse reviewed the budget to actuals for the year to date. Over the first nine months, $30.3 million has been earned, and the last three months are estimated at $10.7 million, for a total of $41 million. Looking at the budget, the board approved $23 million in spending, and the SLA expects to come in about 1% under budget. Travel and events were down because in-person events were still down due to the pandemic. Software support and maintenance are coming in under budget because a lot less outside vendor help has been needed. Total operating expenses show the SLA is about $400,000 under budget. Being 1% off on a $23 million budget is essentially on the money.

2022 Market, Budget and Projects

Mike Caturegli delivered the 2023 market and premium forecast as follows:

• Data models imply that the SLA will bring in $38.7 million in stamping fees by the end of Fiscal Year 2023. This is based on a submitted premium estimate of $18 billion and prorated for the effect of late filings on the new stamping fee, also known as the “stamping fee lag.”
• Transaction counts are expected to increase by 14% to 1.02 million, which indicates a market that is hardening at a slower rate than before.
  • Transactions are growing at a faster rate than premium probably has not been seen since before the 2020 recession.
  • Increased salaries and benefits will be needed to hire more analysts in response to transaction growth.
• There are three indicators of a stabilizing market in 2023:
  • The average premium is about flat, roughly a 1% decline.
  • The forecast regression curve continues to reinforce decreasing average premium in the next two years. Much of this is due to a substantial increase in transactions and inflation.
  • In mid-2022, an inversion of the curves for new business and renewals took place, usually seen during recessions.
    • In past years, 48% of transactions were new business and 46% were renewals.
    • This year, it’s 49% renewals and 45% new business.
    • This indicator is only seen every five to six years.
• Overall, the picture looks good from the SLA’s perspective.

Mr. Kodama said the outlook for the reinsurance market has changed to “stable,” due to strengthening their pricing and tightening terms and conditions. Ms. Beaver said the reinsurance realm is a fully hardened market. A lot of reinsurers are breaking away from catastrophe insurance, with tighter lines and more restrictions. Josh Koppel said in the treaty market, a lot of startups are looking for capacity and that it is very tight in that market.

Ivan Morse presented the 2023 budget and projects, as follows:

• The total budget spend proposal is $25,663,724, a 10% increase over 2022 but still well under the revenue anticipated for 2023 (approximately $38.7 million).
• The request for salaries and benefits represents a $3 million increase, but that is not 100% wages.
  • Approximately $1.1 million in wages for 11 new hires.
  • 12% increase in health benefits.
  • More Social Security, 401(k) match and PTO expenses.
• Rent savings of $300,000 after closing the San Francisco office.
• Telecom savings after the SLA cleaned up those accounts.
• Supply costs reflect that the SLA is a work-from-home first organization.
• Events are up $50,000 because of the possible London trip.
• Software support and maintenance is basically stable.
• Computing and network has $150,000 for disaster recovery.
• Salesforce licensing is about $2,500 per employee.

Vote on 2023 Premium Forecast, Revenue Forecast, and Budget

Mr. Gobler asked for a motion to accept staff’s premium forecast of $18 billion and budget of $25,663,724. Ms. Ward moved to accept staff recommendations, Mr. Koppel seconded, and the motion passed without dissent.

Adjournment

All business being concluded, Mr. Gobler adjourned the meeting at 12:13 p.m.