Surplus Lines Insurance: Definition, Application, and Real-World Examples
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Summary:
Surplus lines insurance offers protection for financial risks that traditional insurance companies may avoid due to their unique or high nature. It can be purchased by both individuals and businesses, providing coverage for various non-standard risks. This type of insurance, often offered by non-admitted insurers, allows policyholders to safeguard against uncommon and sizable risks, even though it may come at a higher cost. Understanding surplus lines insurance, its key players, and how it differs from standard insurance is crucial for those seeking alternative coverage options.
What is surplus lines insurance?
Surplus lines insurance is a specialized form of property and casualty insurance that addresses financial risks that conventional insurers may hesitate to underwrite. It is often employed to cover emerging or nonstandard risks for which historical data is limited, making pricing challenging for standard insurers. This insurance acts as a safety net, filling the gap when traditional carriers cannot or will not provide coverage.
Understanding surplus lines insurance
Surplus lines insurance is categorized under property and casualty insurance and primarily serves to cover risks that are relatively new, unique, or considered too high for traditional insurers. The hesitance of regular insurers to provide coverage is often due to a lack of historical data that would allow them to accurately assess and price these risks.
The National Association of Insurance Commissioners (NAIC) explains that after a new type of coverage has gathered enough data, it may transition into a more standard product and become available in the admitted market, which is the traditional insurance market.
What sets surplus lines insurance apart from regular insurance is that it can be sold by insurers that are not licensed in the buyer’s state. However, it’s crucial that the surplus lines insurer holds a license in the state where it is based, and the brokers selling surplus lines insurance must also be licensed in their respective states.
It’s important to note that surplus lines insurance carries an additional risk for the policyholder compared to standard insurance. Unlike traditional insurance policies, surplus lines insurance does not have access to a guaranty fund for claim payments in the event of the insurer’s bankruptcy. Despite this, the NAIC highlights that the insolvency rate of surplus lines insurers has historically been low.
Who sells surplus lines insurance?
The surplus lines insurance market is primarily dominated by insurers affiliated with the United Kingdom’s Lloyd’s of London insurance marketplace. According to data from the Insurance Information Institute, Lloyd’s insurers hold a significant share of the surplus lines market, accounting for 16.8% of the market with $13.9 billion in direct premiums. Other top 25 surplus lines insurers include Berkshire Hathaway Insurance Group, American International Group (AIG), Markel Corporation Group, W.R. Berkley Insurance Group, Nationwide Group, Fairfax Financial (USA) Group, Chubb INA Group, and Liberty Mutual Insurance Companies.
Types of surplus lines insurance
Surplus lines insurance is versatile and can provide coverage for a wide range of financial hazards. It is often used to cover what conventional insurers consider nonstandard risks. For instance, a business may require surplus lines liability coverage for a special event or for transporting hazardous materials. Individuals may opt for a surplus lines policy if they cannot secure homeowners insurance from a standard company or if they need coverage for valuable items like an art collection or classic cars.
In some cases, surplus lines insurance offers coverage limits beyond what traditional insurers are willing to provide. States maintain export lists, detailing the types of insurance that may be unavailable through regular, state-licensed insurance companies. This makes surplus lines coverage eligible for sale and purchase in specific scenarios.
For example, in California, the export list includes insurance for kidnap and ransom, amusement parks and carnivals, sawmills, demolition contractors, fireworks displays, and hot air balloons. Additionally, flood insurance may be available through surplus lines in certain situations. In New York, surplus lines insurers can offer flood insurance if the property is ineligible for primary coverage through the federal flood insurance program or if the federal program does not offer sufficient coverage.
Surplus lines insurance vs. standard insurance
Regular insurance carriers, often referred to as standard or admitted carriers, must adhere to state regulations governing pricing and risk coverage. In contrast, surplus lines carriers do not have to comply with these regulations, allowing them to take on higher-risk scenarios.
A surplus lines insurer may also be termed a non-admitted or unlicensed carrier. However, this designation does not invalidate their policies or mean they operate without regulation. It simply signifies that they are subject to different regulations compared to admitted or standard carriers.
Notably, many surplus lines insurers are headquartered outside the United States, referred to as alien insurers, and they play a significant role in the surplus lines market.
Who licenses insurance companies?
Insurance companies, as well as insurance brokers and agents, are licensed by the states. State regulation plays a vital role in overseeing insurance operations and ensuring compliance with legal standards.
Does the federal government regulate insurance?
Generally, the federal government has limited involvement in insurance regulation. The McCarran-Ferguson Act of 1945 delegates authority over insurance regulation to the states, exempting insurance companies and the majority of their products from federal oversight. This act underscores the state’s primary role in regulating insurance practices.
What is excess and surplus (E&S) lines insurance?
Excess and surplus (E&S) lines insurance is essentially another term for surplus lines insurance, used interchangeably by some insurance carriers. It serves the same purpose of providing coverage for unique, high, or nonstandard risks that traditional insurers may avoid.
The bottom line
Surplus lines insurance is a valuable option for individuals and businesses looking to protect themselves against financial risks that traditional insurance companies may be unwilling to underwrite. It offers a flexible approach to coverage, allowing policies to be sold by insurers not licensed in the buyer’s state. However, policyholders should be aware of the lack of a guaranty fund in the event of an insurer’s insolvency.
Frequently asked questions
Is surplus lines insurance suitable for all types of risks?
No, surplus lines insurance is typically used for nonstandard and higher-risk scenarios that conventional insurers may avoid. It may not be the best choice for common insurance needs.
Are surplus lines insurers subject to any regulations?
Yes, surplus lines insurers are regulated, but they follow different regulations than standard insurers. They may be termed non-admitted or unlicensed carriers.
Can surplus lines insurance be sold by insurers not licensed in the buyer’s state?
Yes, surplus lines insurance can be sold by insurers not licensed in the buyer’s state, but the surplus lines insurer must hold a license in the state where it is based.
How does surplus lines insurance differ from standard insurance?
Surplus lines insurance offers coverage for risks that traditional insurers may avoid, while standard insurance carriers adhere to state regulations and cover more typical risks.
Is surplus lines insurance the same as excess and surplus (E&S) lines insurance?
Yes, excess and surplus (E&S) lines insurance is essentially another term for surplus lines insurance, often used interchangeably.
Key takeaways
- Surplus lines insurance addresses financial risks avoided by traditional insurers.
- It falls under the category of property and casualty insurance.
- Surplus lines insurers are not required to be licensed in the buyer’s state.
- Policyholders should be aware of the lack of a guaranty fund in case of insurer bankruptcy.
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