The Surplus Lines Market (Excess & Surplus Lines)
The surplus lines insurance market exists due to a regulatory distinction and provides an alternative for unusual or higher risk insurance unavailable to purchasers from licensed insurers. The essence of the surplus lines market is the flexibility in coverage forms and rating that underwriters may utilize to match the variation in exposures insured. Coverage may be unavailable from licensed insurers due to the exposures presented by the particular account or the terms and conditions in the coverage provided. For insureds unable to secure insurance coverage from licensed companies, the surplus lines market provides an alternative market with flexibility, additional capacity and innovative underwriting.
The surplus lines market goes by a variety of names, including the following:
- Surplus Lines
The licensed market goes by a complementary set of names, including:
Insurers operating in the surplus lines market are generally small, specialty insurers or specialized divisions of larger insurance organizations, and Lloyds of London. In either case, the participants have significant experience and expertise within segments of the unusual coverages and businesses found in the surplus lines market.
The excess and surplus lines market is among the least understood and most misinterpreted segments in the property/casualty industry. An illustration of this is the common fallacy that surplus lines insurance transactions are unregulated. In fact, most states have detailed insurance laws governing the activities of their surplus lines constituents.
Surplus Lines Regulation
Each state insurance department regulates surplus lines insurers operating in their state, and has specific requirements that a licensed surplus lines broker must follow in placing business in the surplus lines market. Generally, accounts are only written in the surplus lines market if coverage has been declined by the standard market.
State regulation of licensed insurers includes the approval of all policy forms, underwriting guidelines and rates. Licensed insurers will not normally file policy forms, underwriting guidelines and rates for approval with state insurance departments for coverages or classes of business that are unusual (and therefore present small markets) or higher risk due to the complexity, time and high cost of filing. Therefore, these types of risks are better served in the surplus lines market, which is not subject to rate and form filing requirements. This alternative approach allows for customized coverages and innovative underwriting in the surplus lines market.
The intent of state review of rates and forms is to ensure fairness in pricing and adequacy of coverage for the unsophisticated insurance buyer. A difficulty experienced by insurers and consumers when these regulations exist, however, is that the approval process can be slow and stifle creativity, and can impede the function of market pricing for specialty exposures. The nature of much of the specialty lines insurance market dictates a flexible market in order to meet the buyers’ needs. The rate and form flexibility of the surplus lines market provides for a more creative and responsive market for these types of risks.
Surplus lines insurers are not "licensed" in the state where the insured or risk is located, although they must be "licensed" in their state (or country) of domicile. However, all surplus lines insurers are subject to solvency and other insurance department regulation, and must be "approved" in each state they operate in. All U.S. jurisdictions have surplus
lines laws that protect insurance consumers by controlling the eligibility standards of surplus carriers and requiring specially trained and licensed brokers to assist clients.
Polices placed with surplus lines insurers are not protected by state guarantee funds in most states. While guarantee funds provide protection from insurer insolvency for licensed insurers, the level of protection is often not adequate for most commercial buyers of insurance in many states because fund recoveries are capped at a low level.
Unlike admitted insurers, surplus lines insurers do not pay premium taxes. Therefore, premium taxes, often called "surplus lines taxes," are levied by the wholesale broker in addition to the premium and then paid to the insurance departments in each state. The tax for licensed insurers is included in the premium, while the surplus lines tax is in addition to the premium. Also, many states have fees and additional paperwork required for state tax purposes in addition to the surplus lines tax.
Some paperwork is typically required to show that the insured is aware that coverage has been placed in the surplus lines market and that the agent has made a diligent search of the admitted market without finding coverage. The diligent search is typically evidenced by the retail agent with declinations from admitted market underwriters, and is documented using our Surplus Lines Confirmation Form or the applicable state surplus lines form. Documents that may be required for a surplus lines placement are provided by Tennant Risk Services with the quotes or at time of binding. See Work With Us for forms and other surplus lines information.
Surplus Lines Brokers
The specially trained brokers are called surplus lines brokers, and must be licensed in their state of residency to transact surplus lines business. Most surplus lines brokers are wholesale brokers. Some, more specialized surplus lines brokers also have authority to underwrite on behalf of insurers. These brokers are called managing general agents (MGAs), program administrators or underwriting managers. Tennant Risk Services is both a wholesale broker and an underwriting manager.
For an account to be placed in the surplus lines market it must be declined by the standard market. If a retail insurance agent or broker cannot find coverage for a unique or higher risk account they may turn to the surplus lines market to purchase appropriate coverage. The insured's agent or broker typically contacts a wholesale insurance broker for placement with specialty insurers operating in the surplus lines market.
Most surplus lines business is commercial, although some unusual or higher risk personal lines coverage is placed in the surplus lines market. An example of personal lines coverage in the surplus lines market is catastrophe-prone homeowners insurance.
The surplus lines market is also a proving ground for new products and underwriting concepts. Recent examples of new products beginning in the surplus lines market are employment practices liability coverage and products to respond to hacker exposures. Other types of risks may be written by either the surplus lines market or in the licensed market, depending upon the exposures presented by the specific account, include directors and officers. employment practices liability and umbrella coverage.
The surplus lines market is a small but important segment of the property casualty insurance market, accounting for approximately 14% of the commercial insurance market in 2009. The surplus lines market represents a significant segment of the total insurance market in the US (2009 figures):
US Property / Casualty Insurance Premiums