What is Surplus Lines

Often called the “safety valve” of the insurance industry, surplus lines insurers fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers. With the ability to accommodate a wide variety of risks, the surplus lines market acts as an effective supplement to the admitted market. 

According to A.M. Best, 2013 surplus lines premium volume was nearly $38 billion and represents a vast number of insureds who, without the surplus lines market, would have a difficult time obtaining insurance, if they were able to secure it at all.

Risks typically written in the surplus lines market fall into three basic categories: (1) non-standard risks, which have unusual underwriting characteristics; (2) unique risks for which admitted carriers do not offer a filed policy form or rate; and (3) capacity risks where an insured seeks a higher level of coverage than most insurers are willing to provide

The surplus lines market plays an important role in providing insurance for hard-to-place, unique or high capacity (i.e., high limit) risks. Surplus lines insurers are able to cover unique and hard-to-place risks because, as nonadmitted insurers, they are able to react to market changes and accommodate the unique needs of insureds that are unable to obtain coverage from admitted carriers. This results in cost-effective solutions for consumers that are not “one size fits all,” but are instead skillfully tailored to meet specific needs for non-standard risks.

The surplus lines business is immersed in current events and trends in the development of new products, new services, and in minimizing the risks of doing business in a world where the unforeseen is inevitable. The surplus lines market is particularly important in introducing new products to the market in an efficient manner. New and innovative products, and processes and procedures for which there is no loss history are difficult, if not impossible, to price or rate for insurance purposes. Surplus lines insurers are uniquely qualified to cover these emerging risks because they have developed this expertise through decades of experience. 

Surplus Lines Primer

NAPSLO, in conjunction with other industry trade associations and the 15 state stamping offices, has developed “An Introduction to the Surplus Lines Market” to provide a general overview of the surplus lines market and how it is regulated. This was created as an educational document and is offered to NAPSLO members for their use and distribution. Please contact Keri Kish with any questions regarding this document. 

Surplus Lines Regulation

While the surplus lines market is regulated differently than the admitted market, in order to provide the flexibility necessary to cover the hard-to-place risks, it is a regulated marketplace. Each U.S. based (domestic) surplus lines company is licensed (admitted) in at least one of the 50 states or other U.S. jurisdiction and must fulfill the solvency requirements of that state or jurisdiction. Thus, as with admitted insurers, the surplus lines insurer’s state of domicile becomes the financial solvency regulator of that insurer. 

Insurers based outside the United States, known as alien insurers, represent a substantial portion of the surplus lines market writing about 20 percent of the U.S. surplus lines premium annually. Lloyd’s of London writes between 85 and 90 percent of the alien surplus lines market each year with the bulk of the remaining premium being written by insurers based in the United Kingdom. 

A.M. Best has reported the solvency record of surplus lines insurers has been historically equivalent to the admitted marketplace, with the surplus lines market recording no insolvencies over the past nine years. This is indicative of today’s strong and effective solvency and capital regulation regime by the states.

While solvency regulation is the purview of the surplus lines insurer’s domiciliary state, the actual surplus lines transaction is regulated through a licensed surplus lines broker. It is the licensed surplus lines broker that is responsible for: (1) selecting an eligible surplus lines insurer; (2) reporting the surplus lines transaction to insurance regulators; (3) remitting the premium tax due on the transaction to state tax authorities; and (4) assuring compliance with all the requirements of the surplus lines codes.

One of the most significant regulatory requirements imposed by state surplus lines laws is that a surplus lines broker must complete a diligent search of the admitted markets.  A diligent search represents the attempt to find the coverage from admitted insurers before a policy is placed in the surplus lines market. The standard to fulfill the diligent search requirement can vary from state to state, but generally, three companies licensed to write the kind and type of insurance must decline a risk before it can be placed in the surplus lines market. 

The licensed surplus lines broker in each state is also responsible for providing the insured with a written statutory notice regarding a surplus lines transaction. Every state requires a notification to the insured party in a surplus lines transaction that discloses: (1) the surplus lines policy is not covered by the state guaranty fund; and (2) the insurance is placed with a surplus lines company that is not subject to many of the state’s regulations.

As the sole regulated entity in a surplus lines placement, the surplus lines broker must hold a surplus lines license. Every state, as a part of its surplus lines law, requires the issuance of a surplus lines broker license.

Fourteen states have created surplus lines stamping offices. More than two-thirds of the national surplus lines premium flow through these stamping offices, which were formed by surplus lines brokers as a form of self-regulation to foster and facilitate compliance with the unique regulatory requirements applicable to surplus lines transactions. Stamping offices provide oversight, information and assistance to brokers conducting surplus lines transactions, which offers the public an additional level of protection.
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