What Is Surplus Lines Insurance?
Surplus lines insurance protects against a financial risk that is too great or too uncommon for a regular insurance company to take on. Surplus lines insurance can be purchased by individuals or companies.
- Surplus lines insurance protects against a financial risk that a regular insurance company will not take on.
- Surplus lines insurance policies are available in a variety of types for both individuals and businesses.
- Surplus lines insurance is generally more expensive than regular insurance because the risks are higher.
Understanding Surplus Lines Insurance
Surplus lines insurance falls into the category of property and casualty insurance. In many cases it is used to cover relatively new risks that conventional insurers shy away from because they lack historical data to properly price their policies. "After the new coverage has generated sufficient data, it may become a more standard product and become available in the admitted market," the National Association of Insurance Commissioners (NAIC) says.
Unlike most types of insurance, surplus lines insurance can be sold by insurers that are not licensed in the buyer's state. However, the surplus lines insurer must have a license in the state where it is based and the brokers who sell surplus lines insurance must be licensed in their own state.
Surplus lines insurance carries additional risk for the policyholder as there is no guaranty fund from which to obtain a claim payment if the surplus lines insurer goes bankrupt, as is the case with standard insurance policies. A policyholder's claim on a regular insurance policy is often paid out of a state guaranty fund, which is funded by other insurers in case one of them goes bankrupt. However, according to the NAIC, "the insolvency rate of surplus lines insurers has been historically low."
Who Sells Surplus Lines Insurance?
The surplus lines insurance market is heavily dominated by insurers affiliated with the United Kingdom's Lloyd's of London insurance marketplace. Data from the Insurance Information Institute shows Lloyd's insurers with 19.4% of the surplus lines market and $12.8 billion in direct premiums. Following Lloyd's, surplus lines market share drops down to the single digits for all of the top 25 surplus lines insurers.
Examples of 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 can cover many different financial hazards. It is often used to cover what conventional insurers consider nonstandard risks.
For example, according to the Texas Department of Insurance, a business "might need liability coverage for a special event or to move hazardous materials." Individuals may buy a surplus lines policy "if they can’t get homeowners insurance from a standard company," the department says. "Others buy it to cover very costly items, like an expensive art or classic car collection."
In some cases surplus lines insurance can also provide coverage limits beyond what conventional insurers are willing to provide.
States maintain "export lists," showing the kinds of insurance that may be unobtainable through regular, state-licensed insurance companies in their state, making surplus lines coverage eligible for sale and purchase there. In California, for example, the list includes (among many other things) insurance to cover kidnap and ransom, amusement parks and carnivals, sawmills, demolition contractors, fireworks displays, and hot air balloons.
Flood insurance is also on the export list for some states and in certain circumstances. In New York, for example, surplus lines insurers may sell flood insurance if the property isn't eligible for primary coverage by the federal flood insurance program or if the federal program won't provide a sufficient amount of coverage.
Surplus Lines Insurance vs. Standard Insurance
Regular insurance carriers, also called standard or admitted carriers, must follow state regulations concerning how much they can charge and what risks they can and cannot cover. Surplus lines carriers do not have to follow these regulations, which allows them to take on higher risks.
A surplus lines insurer is sometimes referred to as a non-admitted or unlicensed carrier, but this does not mean their policies aren't valid or that they aren't regulated to some extent. The designation only means that they are subject to different regulations from those that govern admitted or standard carriers.
Insurers headquartered outside the U.S., called alien insurers, make up much of the surplus lines market.
Who Licenses Insurance Companies?
Insurance companies are licensed by the states, as are insurance brokers and insurance agents.
Does the Federal Government Regulate Insurance?
Largely no. The federal McCarran-Ferguson Act of 1945 delegated that authority to the states, exempting insurance companies and the majority of their products from most kinds of federal regulation.
What Is Excess and Surplus Lines Insurance (E&S)?
Excess and Surplus Lines Insurance (E&S) is basically another name for surplus lines insurance that is used by some carriers.
The Bottom Line
Individuals and businesses buy surplus lines insurance to protect themselves against financial risks that are too large or too rare for a regular insurance company to be willing take on. Unlike most types of insurance, surplus lines insurance can be sold by insurers that are not licensed to do business in the buyer's state. They are not covered by state guaranty funds in the case of default.