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 line insurance can be used by companies or purchased individually. Unlike normal insurance, this insurance can be bought 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.

Key Takeaways

  • 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 classifications 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 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 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 to which all regular state companies contribute to in case one insurer goes bankrupt.

Special Considerations

The surplus lines insurance market is heavily dominated by the United Kingdom’s Lloyd’s of London. Data from the Insurance Information Institute shows Lloyd’s with 24% of the surplus lines market and $11.8 billion in direct premiums. Following Lloyd’s, surplus lines market share drops of to the single digits with the top 25 surplus lines insurers.

Examples of other top-25 surplus lines insurers include American International Group (AIG), Markel Corporation Group, Nationwide Group, W. R. Berkley Insurance Group, Berkshire Hathaway Insurance Group, Chubb INA Group, Fairfax Financial (USA) Group, and Liberty Mutual.

Types of Surplus Lines Insurance

One example of a common surplus lines insurance classification 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.

Surplus lines cover high limit and hard-to-place risks. Surplus lines work alongside wholesale and specialty insurances to help cover non-standard risks and those with unusual underwriting characteristics.

Surplus Lines Insurance vs. Normal 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. The designation only means they are subject to different regulations from those that govern admitted or standard carriers.

Insurers outside the U.S., called alien insurers, make up much of the surplus lines market. As mentioned, Lloyd’s of London writes most of the insurance for alien surplus lines, while other insurers in the U.K. make up the bulk of the rest of the surplus lines market.