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. In either case, the participants have significant experience and expertise with 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, and there is the possibility that some form of federal regulation could be enacted.
Surplus lines insurers are not “licensed” in the state where 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 brokers and agents to assist consumers.
The specially trained brokers are called surplus lines brokers, and must be licensed in their state of residency to transact surplus lines business. Surplus lines brokers are generally 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. Preferred Brokerage and Preferred Advantage are Underwriting Managers.
State regulation of licensed insurers includes the approval of all policy forms 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.
To the unsophisticated insurance buyer, state review of rates and forms ensures fairness in pricing and adequacy of coverage. A difficulty experienced by insurers and consumers when these regulations exist, however, is that the approval process can be slow and stifle creativity. The nature of much of the specialty lines insurance market dictates a flexible market in order to meet the specialty lines buyer’s needs. The rate and form flexibility of the surplus lines market provides for a more creative and responsive market.
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 contacts a surplus lines broker for placement with specialty insurers operating in the surplus lines market. The exact mechanics of the process may vary in each state, but the intent in most states is that an account must be declined by the standard (licensed) market in order for it to be written in the surplus lines market.
Premiums received for risks placed in the surplus lines market are subject to a surplus lines tax in every state. In most states this surplus lines tax is approximately the same as the premium tax imposed upon licensed domestic and foreign carriers. 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.
Insureds with coverage from licensed insurers have some protection from insurer insolvency from state guarantee funds. State guarantee funds that provide claims payment protection to the insured in the event of insurer default do not apply to surplus lines coverage (except in New Jersey). Note that some state guarantee funds have low limits of recovery that apply to commercial insureds.
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 coverage and umbrella coverage.
Since 1994 the A.M Best Company has performed an annual survey of the excess and surplus lines market and has found that its solvency record is as good, if not better, than the overall industry.
Lloyd’s is the world’s leading insurance market, transacting business worth billions of pounds in premiums each year. It provides insurance coverage across the range of commercial and domestic insurance requirements. Lloyds is one of the largest providers of surplus lines and specialty lines insurance and reinsurance in the US.
Lloyd’s has also long been known as the market where anything can be insured. While this is not strictly true, Lloyd’s underwriters’ willingness to introduce new types of insurance cover amply justifies the market’s reputation for innovation. Some examples of unusual risks insured at Lloyds are: