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.

Surplus lines insurance, unlike normal 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. Furthermore, an insurance agent procuring the policy must have a surplus lines license to sell surplus lines insurance.

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: 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 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.

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 Insurers

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 23% of the surplus lines market and $10.3 million in direct premiums. Following Lloyd’s, surplus lines market share drops of to the single digits with the top 25 surplus lines insurers accounting for 79% of the market.

23% market share

The UK’s Lloyd’s of London dominates the surplus lines insurance market with a 23% market share.

Examples of other top-25 surplus lines insurers include American International Group, 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.