The term “surplus lines insurance” or “excess and surplus” is industry jargon that refers to a secondary insurance market that often provides coverage other insurance carriers are unwilling to offer. To understand the surplus lines market, it is helpful to understand better how insurance is regulated by each State.
Every US state has an insurance department or insurance commissioner. They are tasked with regulating and overseeing the operations of the various insurance companies operating within the borders of that state. This regulation includes, among other things, finances, market conduct, product offerings, policy forms and rates. An “admitted” or authorized insurance carrier has been properly licensed by the state and has filed rates and forms related to the products they will be selling. The state insurance department has approved the rates, forms and financial stability of the insurance company to sell that particular product. This type of regulatory oversight protects consumers and helps ensure the insurance industry is financially healthy.
Surplus Lines Insurance Marketplace
There are, however, certain insurance customers that do not fit into the admitted insurance marketplace. The reasons for this are varied and might include:
- Severely adverse claim history,
- The particular location of a property or a generally poor condition,
- High required policy limits or unusual coverage requirements,
- High hazard operations or products,
- Unusual or short-term operations.
For customers that don’t quite fit the mold of the admitted insurance market, agents and brokers are able to access insurance carriers that operated on a “non-admitted” or surplus lines basis. These insurance carriers do not file rates and forms with the various state insurance departments and they are not regulated in the same way. They are also not covered by a state guaranty fund should they become insolvent. However, they do still pay taxes on the issued policies and are regulated by the state in which they are domiciled.
Because surplus lines carriers are less regulated regarding policy forms and rates, they are able to adapt coverage and pricing quickly to a particular risk. This is very helpful with difficult to place business insurance customers that may not find coverage in the admitted marketplace.
Financial Strength Ratings
Although insurance company insolvency is an infrequent occurrence, consumers should be aware of the financial strength of any insurance company they are working with, whether admitted or surplus lines. Because surplus lines insurers are not covered by a state guaranty fund, an insolvency could be financially disastrous for policyholders. We recommend customers always verify the AM Best rating of an insurance company, including the financial size category and outlook (listed as stable or negative).
For more information about surplus lines insurance, we recommend you visit the following websites:
- National Association of Surplus Lines Professionals,
- American Association of Managing General Agents,
- Nevada Surplus Lines Association
At Safeguard Insurance we only work with “A” rated surplus lines insurance companies, issued by wholesalers and brokers that have a well-deserved reputation for service and quality products. Please contact us today for more information or to answer any questions you might have.