Surplus lines insurance is a special type of insurance that covers unique risks. It fills a gap in the standard market by covering things that most companies can’t or won’t insure. Excess and surplus (E&S) lines insurance is a type of coverage for financial risks that are too high to insure through the standard market and is obtained from an insurer that is not licensed in your state.
Businesses in high-risk industries often need coverage that standard carriers can’t provide. Increasingly, agents turn to the excess and surplus (E&S) market to find policies for them.
The surplus lines market is a unique segment of the property & casualty industry consisting of non-admitted specialized insurers covering risks not available within the admitted market.
This market consists of U.S. domiciled insurers, Lloyd’s syndicates, and non-U.S. insurers. Surplus lines insurers primarily focus on the development of new coverages and the structuring of policies and premiums for these unique risks.
These new and innovative insurance products typically don’t have loss history and are difficult to price using common actuarial methods. It is for this reason these coverages are not available in the admitted market. After the new coverage has generated sufficient data, it may become a more standard product and become available in the admitted market.
Often called the “safety valve” of the insurance industry, surplus lines insurers fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers.
What Is E&S Insurance?
E&S insurance is provided to businesses facing risks that admitted carriers won’t adequately insure. It’s usually necessary when companies operate in industries with high liability potential or uncommon risks.
Excess and surplus lines is a form of insurance that covers businesses with high risk or an adverse loss history that can make it hard for them to obtain coverage in the traditional insurance marketplace.
Common areas of coverage include casualty insurance in high-risk areas, and professional liability insurance within high-risk industries.
While E&S insurance is sold by licensed insurance agents in your state, the insurance carrier that offers the policies themselves is not licensed within your state. This gives a surplus lines insurer greater flexibility to place risks that are more difficult to cover through the ordinary insurance market.
Simply put, Excess & Surplus lines is a specialty market that insures things standard carriers won’t cover. The difficult or high-risk exposures in which E&S carriers specialize may range from a mobile home or a day care center to a multinational oil company.
Non-admitted carriers offer E&S insurance. They’re strictly regulated in their domiciled states, but they don’t have licenses in the states where they provide coverage. As a result, their policies aren’t subject to form or rate regulations.
The lack of form restrictions lets non-admitted carriers write policies using wording that matches unusual or excessive risks. Meanwhile, the freedom from rate regulations lets them collect premiums sufficient to cover their elevated exposure.
What is the difference between standard vs. excess or surplus lines insurance?
The biggest differences between standard insurance vs. excess or surplus lines policies are the amount of regulation, the flexibility in writing policies, and your state’s involvement in guaranteeing insurance coverage.
Excess and surplus lines insurance companies, also known as non-admitted insurance, are regulated within their home states but aren’t as strictly regulated in states where they sell policies. This gives these companies the ability to design insurance products that cover a greater amount of risk.
The primary difference between standard and E&S insurance is that policies in the standard market come from carriers licensed in the state where they provide coverage.
Meanwhile, E&S policies come from non-admitted insurance carriers without those licenses.
With standard insurance companies, also known as admitted insurers, each state’s department of insurance (DOI) reviews and regulates each company’s insurance forms, rates, and financial standing. Because they’re regulated by your state’s insurance commissioners, they have less flexibility in the types of risks they cover.
Non-admitted carriers can cover a wider range of dangers and higher levels of risk. However, those policies are usually more expensive as well. Non-admitted carriers typically charge more in premium rates to compensate for their higher risks.
Admitted carriers must create insurance products that follow guidelines from their state’s department of insurance (DOI) to retain their licenses.
These regulations prevent them from creating insurance products for businesses facing atypical dangers or elevated risk levels.
Finally, standard insurance policies are guaranteed by state funds. When admitted carriers go bankrupt, their state government may pay any outstanding claims. Non-admitted carriers don’t have a license in the states where they offer coverage, so they don’t share that benefit.
There are similarities between the two markets. For example, non-admitted carriers are just as financially stable as their equivalents in the standard market.
Another key difference is that policies sold in the excess and surplus insurance market, through a licensed surplus lines broker, won’t be backed up by your state’s guaranty fund that pays claims of policyholders if an insurer is insolvent or goes out of business.
Is commercial umbrella insurance the same as excess liability?
While these terms are sometimes used interchangeably, commercial umbrella insurance is not the same as excess liability and surplus lines.
Excess liability coverage is for risks that can’t be insured through underwriting in the regular insurance market and must be obtained from surplus lines companies.
Commercial umbrella insurance provides excess liability coverage in addition to your regular liability insurance policies, such as general liability or commercial auto insurance. A commercial umbrella policy offers financial protection in case you file a claim that exceeds the coverage limits of one of these underlying policies.
How are E&S insurance companies regulated?
E&S insurance policies aren’t subject to the same rate and form regulations that restrict insurance on the standard market, but the companies involved are still highly regulated. They’re just subject to different rules than their admitted counterparts.
While non-admitted carriers don’t carry state licenses, all domestic insurance companies must have licenses in the states where they reside. So, they’re still subject to state oversight and must meet local regulatory requirements.
Alien carriers domiciled in other countries don’t have to hold a license from a state. However, they’re subject to oversight from the National Association of Insurance Commissioners (NAIC), International Insurers Department, and Surplus Lines Working Group.
In addition, agents and brokers who wish to offer E&S insurance products need licenses. To maintain them, agents must confirm that each non-admitted carrier they work with meets state criteria and sends surplus lines premium taxes to its home state.
Who needs excess and surplus lines insurance?
Small businesses may be required to pursue E&S insurance depending on their industry and how long they’ve been in business.
Businesses that need E&S insurance usually operate in industries with high risks. For instance, insurance agents frequently turn to the E&S market to get coverage for clients working in construction.
Contractors face several significant dangers that are impossible to eliminate. Much of their work involves using heavy machinery in hazardous conditions on customer property.
A few of the most common industries that need E&S insurance include:
- General contractors
- Tree service
- Roofing professionals
A consumer protection within the admitted market, but not available to surplus lines market, is protection by the state’s guaranty fund. This guaranty is funded by admitted insurers and will pay claims should an admitted insurer become insolvent. Due to the strong and effective state-based solvency monitoring framework, the insolvency rate of surplus lines insurers has been historically low.
Many insurance carriers will be hesitant to offer coverage for these types of high-risk businesses due to their regular use of dangerous equipment or employees working in hazardous settings.
In addition to these industries, standard carriers may not offer coverage for businesses with less than three years’ experience because their short track record is viewed as “high-risk”.
Regardless of the situation, many of these businesses will rely on E&S insurance as their only coverage option when admitted insurers are unable to offer protection.
Alternatively, businesses may require E&S insurance to cover risks that standard insurance policies don’t address because they’re too unique, novel, or complex.
For example, cannabis and hemp companies usually need E&S insurance. They face complicated and unprecedented regulatory risks due to shifting state and federal laws that prevent standard carriers from writing policies for them.
What’s the cost of E&S Insurance?
E&S insurance is usually more expensive for insureds than standard insurance. Because non-admitted carriers write E&S policies to cover more risk than admitted carriers are willing to accept, their premiums are generally higher.
However, the actual cost varies significantly depending on the policy type, covered risks, and business. The only way to determine how much an E&S insurance policy will cost is to request a quote.
How is insurance surplus calculated?
An insurance company’s surplus is the amount by which assets exceed liabilities. The ratio is computed by dividing net premiums written by surplus. The lower the ratio, the greater the company’s financial strength.
To begin transacting insurance, must have capital of at least $1 million and surplus of at least $1 million. Thereafter, capital must be maintained (“unimpaired”) of at least $1 million. Also, subject to Risk Based Capital Act.
What are examples of surplus lines insurance?
For instance, they might need liability coverage for a special event or to move hazardous materials. Some people buy surplus lines policies if they can’t get homeowners insurance from a standard company. Others buy it to cover very costly items, like an expensive art or classic car collection.