Frequently Asked Questions
What is surplus lines?
The excess and surplus lines, or non-admitted, market is comprised of property and casualty companies that provide insurance that is unavailable to businesses in the standard or admitted, market due to the unique characteristics and needs of the consumers. Much of the business generally accepted by surplus lines insurers includes difficult and high capacity risks. For consumers unable to secure insurance from standard companies, the E&S market provides additional capacity and innovative underwriting. Without the surplus lines market, businesses would have to seek coverage coverage outside the U.S. market, self-insure their exposures, or go without coverage.
Surplus lines writers are known as non-admitted writers because they are not licensed in the state where the insured or risk is located, although they accept business from licensed surplus lines brokers, which are located in the states. All surplus lines writers are required to be licensed in their state or country of domicile. All U.S. jurisdictions have surplus lines laws which serve to protect insurance consumers by controlling the eligibility standards of surplus carriers and requiring specially trained brokers and agents to assist consumers.
State regulation of licensed insurers includes the oversight of policy rates and forms. The purpose of this regulatory activity id to ensure adequacy and fairness in pricing and coverage. Surplus lines insurance necessitates an open, flexible market in order to adjust to the needs of the insured. As non-admitted carriers, surplus lines writers are free to develop their own unique policy form and premium rates. The rate and policy flexibility of the surplus lines market allows its carriers to be more responsive to the consumer’s needs and in addition react to changes and opportunities in the marketplace.
Generally, when retail insurance agents or brokers cannot find coverage for a unique or high capacity risk insured with a company in the standard market, they turn to surplus lines market to purchase suitable insurance coverage. The agent or broker contacts specially licensed surplus lines brokers who are usually wholesalers, who in turn submit the risk to surplus lines companies for consideration. Due to the higher uncertainties and hazards associated with surplus lines risks, the coverage provided can be more tailored, or restrictive, and the premiums may be different, than the admitted market. Furthermore, state guaranty funds which provide claims payment protection to the insured in the event of insurer default is not available to surplus lines policyholders, except in New Jersey.
Most excess and surplus lines business is commercial, with some personal lines coverage written, particularly for risks that are challenging from an underwriting perspective, such as homeowners’ insurance for catastrophe-prone areas (coastal risks and tornado belt). Surplus lines is known for its development of new products, such as coverage’s to respond to virus and hacker exposures created by the Internet and tough lines of business such as director’s and officer’s liability for high technology companies launching initial public offerings. The types of risks generally written by surplus lines insurers include directors and officers, errors and omissions, special events coverage, products liability coverage, environmental damage, employment practices liability, catastrophe property risks, and excess and umbrella coverage.
Beginning in the late 1980’s, the surplus lines segment became a more established market, despite soft market conditions and the excess availability of capital. Leading factors that contributed to the greater importance of the E & S market included:
- underwriting actions by large standard carriers to shed non-core books of business;
- increased frequency and severity of weather related claims, which resulted in a reduction in capacity for property coverage in cat-prone areas;
- continuing legal and regulatory issues that have resulted in difficult underwriting environment for standard carriers operating in certain locations; and
- expanding expertise and market position of many surplus lines companies in difficult niche markets.
Meanwhile, the surplus lines market has had to adapt to intense competitive market pressures such as:
- aggressive pricing and coverage expenses offered by standard carriers to preserve the market share.
- market encroachment by standard carriers that write more surplus lines risks on an admitted basis.
- greater appeal of the alternative market as self-insured entities attract and retain potential surplus lines business.
- widening commercial lines deregulation as more states exempt “sophisticated” commercial insurance buyers from burdensome rate and/or form filing requirements.
Today, there is growing evidence that suggests that the market has begun to firm up. A number of insurance companies are eliminating non-core books of business, strengthening underwriting guidelines and raising rates. As comments materialize into consistent actions at the field level, expect to see the continued migration of specialty risks back to the surplus lines market.
Information compiled by Stamping Offices supports the view that business underwritten by the standard market in recent years is being re-underwritten and is selectively moving back to the Surplus lines market. This migration of business is largely attributed to a reduction in capacity from the standard market combined with increasing pressure from reinsures.
In recent years, casualty loss costs have increased, due primarily to rising legal and medical costs. However as business moves into the surplus lines market, the increased loss costs are expected to be offset by more favorable rate activity.
A.M. Best’s annual studies have validated that the surplus lines market maintains financial performance and solvency rates that are on par with the admitted market. Despite lingering negative perceptions from the past, surplus lines carriers have proven to be a viable and successful market segment.
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