What Is Surplus Lines Insurance?

Surplus lines insurance protects against a financial risk that is too high for a regular insurance company to take on. Surplus lines insurance, unlike normal insurance, can be purchased from an insurer not licensed in the insured’s state. However, the surplus lines insurer requires a license in the state where it is based. An insurance agent must have a surplus lines license to sell a surplus lines policy.

Also known as excess lines insurance, surplus lines insurance protects entities with unique risks that most insurers will not cover or those with a claim history that renders them uninsurable.

Understanding Surplus Lines Insurance: The Added Risks

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 line insurer goes bankrupt. A policyholder’s claim on a regular insurance policy is often paid out of a state guaranty fund to which all state’s regular insurance issuers contribute in case one insurer goes bankrupt.

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. The designation only means they are subject to different regulations from those that govern admitted or standard carriers.

Surplus lines insurance is often more expensive than regular insurance because it protects against unusual risks that other insurers won’t cover.

Surplus Lines Insurers

Insurers based outside the United States represent approximately 20% of the annual U.S. surplus lines market, according to the Wholesale & Specialty Insurance Association (WSIA). An example of an "alien insurer" is Lloyd’s of London. According to a 2018 report by A.M. Best, Lloyd’s dominates the U.S. surplus lines market representing 23% of the direct premiums written in 2016 while the next largest insurer accounted for less than 10% of the premiums.

Examples of leading surplus lines insurers include American International Group, Nationwide Mutual Insurance, W. R. Berkley Corp., Zurich Insurance Group, Markel Corp., Chubb, Ironshore Inc., Berkshire Hathaway Inc., Fairfax Financial Holdings, CNA Financial Corp., XL Group plc, and Lloyd's of London. Lloyd's is foreign licensed but can issue surplus lines policies in the United States.

One type of surplus lines insurance is flood insurance. Lloyd’s offers this insurance through the Natural Catastrophe Insurance Program, which offers an alternative to the Federal Emergency Management Agency’s (FEMA) flood insurance. Consumers who find FEMA’s insurance too expensive might find a more affordable policy through surplus lines insurance.

Key Takeaways

  • Surplus lines insurance protects against a financial risk that a regular insurance company cannot take on.
  • Because the risks are so high, surplus lines insurance is more expensive than regular insurance.
  • U.S. companies can purchase surplus lines insurance from non-U.S. companies, known as alien insurers, such as Lloyd's of London.

[Fast Fact: According to A.M. Best, Lloyd’s of London dominates the total surplus lines insurance market, with a 23% market share in 2016 and writing $23 billion in premiums.]