You may have heard the term Surplus Lines or Admitted insurance, or you may have gotten an insurance proposal that says Surplus Lines or something similar. If you would like to know what these mean and why they matter, read on.
To boil it down, Surplus Lines provides the underwriter more flexibility in rating and coverage. The underwriting flexibility benefits those clients that need coverage that may not be available from traditional underwriters – those with challenging, unique, or complex exposures. And often coverage is customized for a specific organization. But like many things, the details are more complicated.
The Admitted insurance market is the place to start to understand Surplus Lines insurance. Admitted insurance companies, sometimes referred to as standard insurers or licensed insurance companies, must have their rates, coverage and underwriting guidelines approved by the insurance department in each state. The regulatory process is typically complicated and lengthy, and generally does not allow for much variability. However, the process is effective and generally results in an appropriate balance between competition, fairness, and availability for most insurance buyers. But not all.
Surplus Lines, also called Excess & Surplus Lines, E&S and Non-Admitted, can address challenging, unique, or complex exposures that the standard underwriters cannot write effectively due to regulatory constraints. (See our Surplus Lines page for more detail.) Simplifying, state regulations allow for Surplus Lines insurers to be free of rate, underwriting and coverage regulation, but impose a process that preferences Admitted insurance companies.
Why Surplus Lines?
Surplus lines might be important to your organization if you have a unique or challenging exposure, adverse loss experience, special coverage requirements or need additional limits. And Surplus Lines is the market segment where most new products are developed, such as Cyber Insurance. Examples:
- Your organization has developed a technology platform to enhance the delivery of specific financial services, and your application for both E&O and Cyber Insurance is either not robust enough or has been declined by standard underwriters.
- Your organization has significant deceptive funds theft exposure and needs limits in excess of the primary Cyber Insurance policy.
- As part of a company sale, the buyer wants a significant escrow for representations and warranties in the purchase agreement and has suggested Reps & Warranty Insurance (R&W) as the solution.
Underwriters need the flexibility in rating and coverage available only in the Surplus Lines market to provide solutions.
A placement into the Surplus Lines market does result in some differences. What might you see if you have a Surplus Lines insurance proposal?
- Taxes – States typically charge a tax, collected by the broker, in addition to the premium
- Fees – Licensed surplus lines brokers typically charge a small fee for the additional processing
- Application Forms – applications tend to be specialized and longer because underwriters need more information in order to assess exposure
- Disclosure Forms – many states require insureds to sign disclosure forms to acknowledge the placement within the surplus lines market
- No State Guarantee Fund – state guaranty funds in almost all states do not respond to the insolvency of a surplus lines insurer. Note that many states limit the amount of recovery to a commercial insured from a state guarantee fund in the event of an admitted insurer insolvency
Rating & Financial Performance
AM Best, the leading insurance company rating service, rates both Admitted and Surplus Lines insurers. AM Best also publishes an annual study on the Surplus Lines market called the AM Best’s 2021 Special Report, U.S. Surplus Lines – Segment Review which examines the surplus lines sector’s financial condition and ratings distribution, market trends, and impairment trends.
The 2021 report, including data through 2020, notes that the Surplus Lines market grew 17.5% to $66 billion in 2020. Surplus Lines as a percentage of commercial lines direct written premium grew from 7.1% in 2000 to 18.4% at the end of 2020. The Surplus Lines market continues to outperform the Admitted market:
Through midyear 2021, 100% of surplus lines companies maintained secure AM Best ratings compared to 97% for the total property/casualty industry, with surplus lines carriers having much higher proportions in the Exceptional, Superior and Excellent rating categories
If your organization has challenging, unique, or complex exposures, the Surplus Lines market may be essential in obtaining proper insurance coverage.
eSpecialty Insurance is your specialty insurance expert. We have developed a streamlined marketplace to provide multiple proposals from a range of competitive insurers, along with expertise to help you evaluate your exposures and choose the best combination of comprehensive coverage and price. Try our online Cyber Insurance Quoting Portal for immediate Cyber Insurance pricing. We look forward to working with you.