Surplus Lines 101: What is Excess and Surplus Lines Insurance?

Often called the “safety valve” of the insurance industry, excess and surplus (E&S) lines insurers fill the need for coverage in the marketplace by insuring risks that admitted insurance carriers won’t underwrite and price.

If you’ve heard of excess insurance, surplus insurance, or excess and surplus insurance, it might bring to mind a Costco or Sam’s Club setup – the bulk-buy option of insurance. In some ways, that’s not wrong. Surplus insurance policies often cover large or outside-the-norm risks. But there’s so much more to the nuance and mystery that is E&S coverage. Here, we’ve rounded up some of the frequently asked questions:

What is surplus lines insurance?

Surplus lines insurance is any policy that offers coverage to an insured outside of a state’s admitted market. In New York, it’s more likely to hear industry wonks and regulators term this coverage as “excess lines,” and many states refer to it as E&S insurance, but these terms are interchangeable.

To unpack the nonadmitted and admitted markets further, the admitted market comprises insurance carriers that have a certificate of authority from the state and operate under that state’s solvency and rate-setting requirements. Nonadmitted carriers, or surplus carriers, still need some degree of state approval to sell policies in the admitted market, but have more latitude to offer policies at rates, or for risks, outside of the state’s standard market. Surplus lines insurance is also subject to tax on the premium.

So, the meaning of “surplus” in insurance is essentially coverage that isn’t available in the standard insurance market; it’s coverage that goes beyond typical limits or typical risks.

What categories of risk are written into surplus lines insurance policies?

Some examples of surplus lines insurance are directors’ and officers’ coverage, errors and omissions insurance, catastrophic risk coverage, environmental policies, and many other specialized business coverages (employment liability, etc.)

These risks generally fall into three basic categories that form the basis of the surplus lines marketplace:

1. nonstandard risks, or risks that have unusual underwriting characteristics;
2. unique risks for which admitted carriers don’t offer a filed policy form or rate; and
3. capacity risks where an insured seeks a higher level of coverage than most insurers are willing to provide

So, specifically, a golf course may require a policy for their vehicles that’s nonstandard – a basic auto policy won’t adequately address the underwriting needs of golf carts. A business that operates in a fire-prone area may have trouble obtaining coverage if there have been multiple fires and it has a particular history. Or a business that decides it needs a billion-dollar E&O policy will likely not find that in the wider market.

Companies and individuals alike can purchase surplus lines insurance, although nonadmitted coverage is generally not out there for middle America to purchase – by definition, if a coverage was something everyone wanted or needed, it would end up on the admitted market. Surplus lines insurance is generally more expensive than regular insurance because the risks are higher and the market for a particular coverage is limited.

Unlike normal insurance, you buy this insurance from an insurer that isn’t licensed in your state. However, the surplus lines insurer still requires a certificate of authority in its domicile state.

Why don’t regular insurance carriers offer surplus lines coverage?

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 can’t cover. Surplus lines carriers don’t have to follow these regulations, which allows them to take on higher risks.

The disadvantages of surplus lines insurance are that they typically cost more, are subject to state taxes, and aren’t covered by state guaranty associations.

What lines of insurance can surplus lines insurers write?

It depends on the state. The Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) authorizes insurers to place property and casualty (P&C) insurance coverage on a surplus lines basis. However, a number of states, such as New York, expressly prohibit insurers from offering surplus coverage for certain “traditional” lines of P&C insurance, such as financial guaranty insurance. Other states allow a wider use of the surplus lines market, permitting nonadmitted coverage even for disability and workers’ compensation insurance.

There’s been an increased push by the National Association of Insurance Commissioners (NAIC) in recent years to enact model legislation allowing for limited forms of health insurance (including short-term medical, international medical and excess disability) to be written on a surplus lines basis, which has been adopted by some states as well.

Why do states require premium taxes on surplus lines policies?

When an agent or broker places a policy with a surplus lines carrier, that carrier’s “nonadmitted” status in that state forces it to charge for the premium tax separately, where it’s easier for insureds and regulators to see. Typically, the state requires the insurance agents and brokers involved in these types of transactions to collect and pay that tax on behalf of the insured. 

States require E&S insurers to report all of the collected premium taxes to the state, sometimes even when the premiums in a given state were $0. However, premium tax reporting has become somewhat less arduous than it was a few decades ago thanks to the standardization required by the Nonadmitted and Reinsurance Reform Act.

What is the Nonadmitted and Reinsurance Reform Act (“NRRA”)?

The Nonadmitted and Reinsurance Reform Act (“NRRA”) went into effect on July 21, 2011, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the NRRA was to create a more simplified and efficient surplus lines tax payment and regulatory system by limiting regulatory authority of surplus lines transactions to the home state of the insured. It also established federal standards for state collection of surplus lines premium taxes, insurer eligibility, and commercial purchaser exemptions. 

Who are the prominent carriers in the surplus lines insurance market?

The United Kingdom’s Lloyd’s of London heavily dominates the surplus lines insurance market. Data from the Insurance Information Institute shows Lloyd’s writes 24 percent of the surplus lines market, representing $11.8 billion in direct premiums. Following Lloyd’s, surplus lines market share drops off to the single digits among the other 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.

Alien (non-U.S.) insurance companies can write surplus lines business across the United States if they are listed on the Quarterly Listing of Alien Insurers (Quarterly List) as maintained by the NAIC, which requires several steps. Among other things, the alien insurer has to submit an application to the NAIC and establish a trust fund as security for U.S. policyholders. 

What is a surplus lines broker?

A surplus lines broker is a broker who’s licensed to place coverage with nonadmitted insurers. Surplus lines insurers can write coverage through a surplus lines broker if the broker is licensed in the state where coverage is being written. This can be an individual person, or it can be an agency.

Often, a single surplus lines broker specializes in a set of E&S coverages, such as risks for insureds with adverse loss experience, unusual risks, or risks that the admitted market currently has a short capacity for. This ability to solicit coverage from multiple nonadmitted insurers and obtain specialized coverage makes E&S brokers valuable in such a niche market.

What is the diligent search requirement?

Most states require that brokers search for coverage on the admitted market before placing coverage with nonadmitted insurance companies. The most common requirement is that a broker or the insured document three declinations (i.e., coverage denials) from admitted insurance companies before they seek surplus and excess coverage, but this isn’t uniform throughout the country. For example, in Maine, under Bulletin 439 (November 26, 2019) “doing a specific number of inquiries does not mean that the producer has fulfilled this requirement.” By contrast, a few states (e.g., Louisiana) have eliminated the diligent search requirement altogether, or have numerous exemptions to their rules.

Some states require that documented declinations simply be maintained in the offices of the surplus lines broker; whereas, others require that affidavits be filed with the applicable insurance department or surplus lines stamping office. A number of states expressly require the diligent search to be repeated each time a particular policy is renewed.

What are state insurance license requirements for selling surplus lines?

In most states, a broker who hopes to sell surplus lines insurance must first have a producer license with a property and casualty (P&C) license class before selling surplus lines. As in other types of insurance licensing, a surplus lines broker (whether an agent or agency) needs to hold non-resident surplus lines licenses in all states they’ll write business in. 

In some states, surplus lines is a license class unto itself, while other states include it as a line of authority available on a P&C producer license.

Granted, selling surplus lines coverage is about more than just getting a license; you also have to keep it. A state’s insurance department may suspend, revoke, or non-renew the license of a surplus lines broker or producer for various reasons, such as:

• Failure to file required reports.
• Failure to collect or remit required tax on surplus lines premiums.
• Failure to remit premiums due insurers or return premiums due insureds within reasonable time limits.
• For any other cause for which action can be taken against an insurance broker or producer.

Check out additional reasons why and how insurance producers of all stripes might lose their insurance license. For more information on how to lessen your own systemic risk by maintaining a tight ship and extraordinarily effective compliance, schedule a demo with AgentSync.