Surplus lines insurance, often referred to as excess and surplus (E&S) lines insurance, is a specialized type of coverage designed to protect against financial risks that are either too considerable or too unconventional for traditional insurance companies to underwrite. This category of insurance is essential for individuals and businesses that face unique risks that may not fall within the purview of standard insurance policies.
Key Takeaways
- Coverage for Unique Risks: Surplus lines insurance is intended for financial risks that regular insurance providers are unwilling to accept.
- Variety of Policies: Numerous types of surplus lines insurance are available to accommodate the diverse needs of both individuals and businesses.
- Higher Premiums: Generally, because of the elevated risks involved, surplus lines insurance tends to be more expensive than standard insurance offerings.
Understanding Surplus Lines Insurance
Surplus lines insurance is classified under property and casualty insurance. It predominantly addresses emerging risks, which traditional insurers may shy away from due to insufficient historical data for accurate pricing. The National Association of Insurance Commissioners (NAIC) notes that once these emerging risk coverages have amassed enough data, they may transition into standard products available to the admitted market.
Selling and Regulation
Unlike standard insurance policies, surplus lines insurance can be sold by insurers that are not licensed in the policyholder's state. However, these surplus lines insurers must be licensed in the state where they are headquartered. Additionally, brokers selling surplus lines insurance are required to be licensed in their respective states.
A noteworthy aspect of surplus lines insurance is that it lacks the safety net provided by state guaranty funds. In the event of a surplus lines insurer's bankruptcy, policyholders do not have guaranteed financial recourse like they would with standard insurance policies. Despite this risk, it’s important to highlight that the historical insolvency rate of surplus lines insurers has been low.
Who Sells Surplus Lines Insurance?
The majority of the surplus lines insurance market is dominated by insurers associated with Lloyd’s of London. As of the latest data, Lloyd's accounts for 16.8% of the surplus lines market, equating to approximately $13.9 billion in direct premiums. After Lloyd's, the market share for the next contenders falls below 10%. Other prominent surplus lines insurers include:
- Berkshire Hathaway Insurance Group
- American International Group (AIG)
- Markel Corporation
- W.R. Berkley Insurance Group
- Nationwide Group
- Fairfax Financial (USA) Group
- Chubb INA Group
- Liberty Mutual Insurance Companies
Types of Surplus Lines Insurance
Surplus lines insurance is versatile and can cover a wide array of financial risks. Here are some scenarios where surplus lines coverage may be necessary:
- Special Event Coverage: Businesses often require liability insurance for non-standard activities, such as hosting large public events or festivals.
- Hazardous Materials Transport: Companies that engage in transporting hazardous materials may have difficulty obtaining standard coverage.
- High-Value Personal Items: Individuals looking to insure high-value items—such as classic car collections, rare art pieces, or collectible memorabilia—might turn to surplus lines if standard insurers are unable to provide adequate coverage.
Additionally, many states maintain export lists, outlining types of insurance that cannot be easily obtained from state-licensed carriers. For example, in California, this includes insurance for amusement parks, kidnap and ransom coverage, and coverage for unique industries such as fireworks displays.
Comparison: Surplus Lines vs. Standard Insurance
Standard insurance companies, referred to as admitted carriers, must adhere to state regulations that dictate pricing structures and risk management. Conversely, surplus lines carriers are not bound by these same regulations, which allows them to assume greater risks and provide coverage that traditional insurers will not.
Surplus lines insurers are sometimes labeled as non-admitted or unlicensed carriers. However, it is crucial to understand that this does not imply that their products are invalid. Instead, it designates a different regulatory framework compared to admitted carriers.
Furthermore, many surplus lines insurers are foreign companies (referred to as "alien insurers") that operate under different state regulations in the U.S.
Who Regulates Insurance?
Insurance companies are licensed and regulated at the state level. The federal government, on most occasions, does not regulate insurance due to the historical implications of the McCarran-Ferguson Act of 1945, which delegated authority over insurance to the states.
The Bottom Line
Surplus lines insurance is vital for individuals and businesses that face unique or significant financial risks that conventional insurance providers are unwilling to underwrite. While this coverage provides critical risk protection, it carries inherent risks, including the absence of safety nets such as state guaranty funds. Individuals and businesses venturing into surplus lines insurance should carefully evaluate potential insurers' reputations and financial stability before purchasing coverage.