The Excess & Surplus (E&S) market has always operated as the industry’s safety valve. It is where non-standard risks meet flexible, high-conviction capital, and where pricing is built case by case rather than forced into rigid actuarial templates. That flexibility is the point.
This market follows a rhythmic, supply-driven cycle, but it is important to note that the E&S market is not monolithic. It’s a complex portfolio of micro-niches, each of which experience its own cycles: a "hard" market might persist in catastrophe-exposed property or specific cyber niches, even as a "soft" phase takes hold in the casualty segment.
In the U.S. today, we are witnessing a synchronized descent into a soft market across many core E&S lines. However, this is not a traditional softening. It is being hyper-accelerated by a volatile cocktail of trapped liquidity, inflation, and the unprecedented velocity of AI enhanced data driven underwriting, creating a cycle that is moving faster, and perhaps more dangerously, than any we have seen before.
The Anatomy of the Soft Cycle
Soft markets in E&S are not driven by weak demand. The underlying risks are increasing, not declining. Climate volatility, litigation trends, and cyber threats all point in the same direction; demand is strong. The pressure instead comes from the supply side. Capital enters after a period of strong returns, and competition to deploy that capital pushes pricing down. Margins compress, and loss ratios expand.
Here’s a short clip from an interview with Michael Kehoe, CEO and Chairman of the only listed pure-play E&S insurer in the U.S. He explains how excess capital is driving mispricing across the market. That mispricing sets up future losses and, ultimately, capital destruction. Disciplined operators respond by stepping back. Firms like Kinsale avoid chasing inadequately priced risk and allow weaker behaviour to run its course. As a result, growth slows during the soft phase of the cycle. That is a feature of underwriting discipline, not a weakness. (Source: Full Interview with Michael Kehoe)
The 2026 ‘Soft Market’ Drivers
The current phase traces back to the profitability seen between 2022 and 2025. That performance attracted new forms of capital, and with them, new incentives.
⁜ The MGA Explosion
Managing General Agents (MGAs) have proliferated and changed how risk is distributed. They act as agile intermediaries that deploy institutional capital. An MGA has delegated authority to underwrite, price, and bind risks on behalf of an insurer, along with handling claims. Most of their earnings are generated in commissions and service fees, with only a small element being based on the underwriting profitability of the risk being placed. As such, the focus tilts towards volume rather than margins.
⁜ Alternative Capital Inflows
Alternative capital has scaled. Insurance-Linked Securities (ILS) and catastrophe bonds have broadened the investor base. This capital is not always anchored to long-term underwriting returns. It is often seeking risk diversification, which makes it more sensitive to relative returns elsewhere. When it enters, supply expands quickly.
⁜ The Reinsurance Effect
Reinsurance has reinforced the dynamic. Lower reinsurance costs increase capacity at the primary level. Carriers can offload risk more cheaply, which encourages additional underwriting. Competition then pushes pricing lower, often beyond what underlying loss trends justify.
The Complex Macro Environment
The current economic landscape adds a layer of complexity to this narrative.
※ Gated Funds
Private Equity (PE) firms have been “gating” their credit funds, which ought to signal tightening capital. In practice, it can have the opposite short-term effect. Insurers under pressure to maintain liquidity may write more business to generate premium inflows. That response supports softer pricing, even as the broader system is becoming more constrained. It is a temporary release valve, not a solution.
※ Interest Rates
Elevated interest rates are distorting underwriting discipline. Higher yields increase the returns earned onfloat (the money held between receiving premiums and paying claims). This investment income acts as a subsidy, allowing them to tolerate poor underwriting results and keep premiums artificially low. The subsidy is real, but it isn’t permanent.
※ Inflation
The Iranian war and consequential energy crisis has revived the specter of inflation. While the market feels abundant today, these forces are creating a “coiled spring” effect. By competing on price during an inflationary spike, insurers are writing policies today that will be settled at tomorrow’s inflated prices. Balance sheets can appear healthy while embedded liabilities are understated. This is most acute in casualty, where the time between underwriting and settlement can span years. The industry may currently be in a phase of Reserve Inadequacy1.
The Catalysts
These conditions rarely unwind gradually. The adjustment tends to be abrupt.
A large shock can remove excess capital in a single step. A $100 billion catastrophe is enough to deplete the surplus that has been supporting aggressive pricing.
The more structural risk sits in pricing itself. If the premiums written in 2025 and 2026 prove inadequate relative to future claims, capacity contracts quickly. Balance sheets come under pressure, and pricing resets.
Reserve weakness can accelerate the process. Once it becomes clear that prior-year underwriting does not support expected liabilities, carriers are forced to reprice entire books, often at once.
At the same time, the marginal capital in the system is not permanent. When alternative asset classes offer better risk-adjusted returns, capital from private equity and insurance-linked securities can exit just as quickly as it entered. That withdrawal leaves a gap in capacity that the remaining market cannot immediately fill.
When capital tightens, the market hardens.
The Speed of the Modern Cycle
What is changing is the speed of this process. The traditional cycle stretched over a decade, with long feedback loops between loss experience and pricing. That lag has shortened materially.
In previous decades, insurers relied on quarterly actuarial “look-backs.” It could take years for deteriorating loss trends to show up in pricing. Today, data moves faster. Underwriters have access to near real-time signals, and pricing decisions adjust accordingly. Platforms such as Tractable and Cytora are part of this shift, enabling rapid changes in risk selection and pricing at a granular level.
The effect is a more reactive market. Carriers no longer blindly drift into unprofitability over extended periods. They adjust quickly, sometimes abruptly. Entire segments can reprice or shut down within weeks.
The current environment reflects the early, more comfortable phase of the cycle. Capital is available and pricing is competitive. But the same forces supporting this phase are also increasing the likelihood of a sharper correction.
The cycle has not disappeared. It has accelerated.
The “Reserve Hole” is currently appearing in the financial statements of major carriers. According to Marathon Strategies, the total sum of nuclear verdicts (awards over $10M) increased by 275% between 2010 and 2023. In 2024 and 2025, the median award in corporate liability cases rose from roughly $20M to over $35M.
can you expand from kinsale inteview...referring to alt managers using ins float?
specifically which companies, and is there a single source where public insurance running ratios be verified?
~38min mark
"...They're destroying their own capital. And if you doubt me, pull the Schedule P exhibit for a few of the larger fronting companies and look at their gross loss ratios. Most of them, they're booking the current year at a 60. But if you look back four, five, six, seven, eight years, they're in the 90s.
Well, if you're running a 90 with a 40% expense ratio, that's 130 combined. You think you're going to make that up with [float] investments? No way. But the fronting company seeds most of that risk off to someone else, a reinsurer of some sort. And so there's a lag. Does the risk bearer understand what's happening to his capital?..."