Surplus Lines Insurance: Everything you Need to Know

We’ve helped a lot of clients become surplus lines brokers and helped even more file policies and surplus lines premium tax reports in their relevant jurisdictions.

In the course of our conversations with veterans and up-and-coming executives at agencies of all sizes, we answer a lot of questions and clear up a lot of misconceptions.

So, we decided it was time to consolidate the key information, questions, and answers into a blog post. We feel certain this blog will help demystify surplus lines insurance – so we hope you find the following, in a Q&A format, enlightening.

What is surplus lines insurance?

Surplus lines insurance, also known as excess lines or non-admitted insurance, refers to coverage for risks deemed too complex, specialized, or high-risk for traditional insurance carriers to underwrite.

Such risks, which are underwritten by surplus lines insurance carriers, fall outside regulatory oversight inasmuch as the rates and forms associated with these risks are not approved by the state insurance department where the risk is located.

Who are surplus lines carriers and how do they differ from regular insurance carriers?

Surplus lines carriers are specialized insurers authorized to underwrite and issue policies for non-admitted risks. This includes risks that, for one reason or another, fall outside what a state allows regular, admitted carriers to underwrite, or risks that admitted carriers choose not to underwrite.

Unlike regular insurance carriers, surplus lines carriers are not subject to a state’s regulatory requirements pertaining to policy forms and rates. This affords surplus lines carriers a degree of flexibility in underwriting and pricing unconventional risks.

By contrast, admitted carriers are insurers licensed and regulated by state insurance departments to underwrite insurance within the state. They comply with strict regulatory requirements regarding solvency, policy forms, and rates. And, importantly, they are covered by a state’s insurance fund, meaning that if the carrier fails, the state’s insurance fund will help make claims payments, to the extent the carrier cannot.

This is not to say surplus lines carriers are unregulated. To underwrite risks in any given state, the surplus lines carrier must be on the state’s Whitelist, which, among other things, requires the carrier to satisfy state solvency standards.

Are surplus lines carriers riskier than admitted carriers?

No, historically surplus lines insurers’ insolvency rates have been similar to admitted carriers’ insolvency rates. This is due to a combination of states’ solvency regulations and oversight, and the impact of real-time market forces.

Absent the regulations on rates and forms found in the admitted marketplace, the surplus lines marketplace provides a better marriage between the insured’s risk and the coverages and rates offered by the surplus lines carrier.

 As a result, individual risks being underwritten are priced based upon their own unique characteristics.

What risks can surplus lines carriers underwrite?

Surplus lines carriers can underwrite a wide array of insurance coverages, including property, casualty, professional liability, excess and umbrella, marine, and specialty lines such as directors and officers (D&O) liability or errors and omissions (E&O) insurance.

Examples of risks non-admitted carriers may underwrite include high-value real estate and homes, amusement parks, hazardous waste processing facilities, rare artworks, sports facilities and events, and businesses with high-loss histories.

Some risks cannot be underwritten legally at all, even in the surplus lines marketplace, such as losses, penalties or fines associated with criminal activities. Other risks can be written in some states but not others, depending on state specific law.

Why don't regular carriers offer surplus lines coverage?

Traditional insurance carriers operate within strict regulatory frameworks imposed by state insurance departments.

 Surplus lines, however, involves risks that fall outside these regulatory bounds, necessitating a more flexible approach to underwriting and pricing. Additionally, surplus lines often involve elevated levels of risk and uncertainty, which may not align with the risk appetite of standard carriers.

Once a surplus lines coverage has a demonstrated loss history, one or more carriers may choose to make it a more standard product and make it accessible in the admitted market.

Why do states require premium taxes on surplus lines policies?

Short answer: because they can! States derive billions of dollars in revenue from surplus lines taxes.

These taxes contribute to state revenue and help fund insurance regulatory activities, ensuring an orderly insurance marketplace and providing protection to consumers.

What is the Non-admitted and Reinsurance Reform Act (NRRA)?

The federal government enacted the NRRA as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, in 2010.

The NRRA aims to address regulatory shortcomings by establishing uniform standards for the taxation and regulation of surplus lines insurance and reinsurance transactions across state lines. It also aims to enhance consumer protection and promote stability and competitiveness in the insurance marketplace.

How big is the Surplus Lines Marketplace in the US?

In 2023, surplus lines premiums in the US reached a record high of approximately $73B, an increase of approximately 15% over 2022.

Growth in 2022 increased approximately 24% over 2021. The majority of coverages were in commercial liability and commercial property.

Who are the largest players in the surplus lines market?

The surplus lines market is populated by a diverse array of insurers, including both large multinational corporations and niche surplus lines carriers.

In the US, some of the largest players in the surplus lines market in 2022 included Lloyd's of London ($15.5B/15.7%), Berkshire Hathaway Specialty Insurance ($6.9B/7%) and AIG ($4.5B/4.5%).

What is a surplus lines broker?

A surplus lines broker is a licensed intermediary who specializes in placing insurance coverage with surplus lines carriers for hard-to-place risks.

These brokers possess in-depth knowledge of the surplus lines marketplace and help insureds navigate the complexities of non-admitted insurance by finding appropriate coverage solutions.

What is the diligent search requirement?

The diligent search requirement mandates surplus lines brokers to make a diligent effort to obtain coverage from admitted carriers before placing coverage with surplus lines insurers. This ensures that surplus lines coverage is utilized only when traditional insurance options are unavailable or inadequate.

What are the responsibilities of the surplus lines broker?

In addition to the diligent search mandate, surplus lines brokers must:

• Be licensed to transact surplus lines insurance in every state in which they are involved with the placement of surplus lines coverage
• Ensure surplus lines insurers meet state eligibility requirements to write policies in the state (i.e. on the state’s Whitelist)
• Remit surplus lines premium tax payment to the state in which the coverage is placed
• File periodic reports and policy placements with state Departments of Insurance pursuant to each state’s requirements

Also note:

In the non-admitted market, the surplus lines broker is the regulated entity and subject to state audits, and the non-admitted carrier is regulated in its own state or country of domicile.

This contrasts with the admitted market where most of the regulatory burden falls on the admitted carriers.

What are state insurance license requirements for selling surplus lines?

State insurance license requirements for selling surplus lines vary by jurisdiction but typically involve obtaining a surplus lines broker license.

Some states may also require the surplus lines broker hold a corresponding insurance producer license. These licenses require passing examinations in resident states, meeting educational requirements, and maintaining ongoing continuing education credits to ensure competence and compliance with state regulations.

Conclusion

By demystifying surplus lines through this Q&A exploration, we hope we provided clarity and insight into this essential segment of the insurance marketplace.

Whether it's insuring high-risk ventures or protecting against specialized liabilities, surplus lines insurance serves as a crucial safety net in a rapidly-evolving risk landscape.

Surplus lines insurance also presents insurance agency executives with a strong opportunity to diversify and grow their business.

If you are interested in exploring surplus lines insurance, ready to get started, or need assistance with licensing or filings, the team would be delighted to assist you. Please get in touch!