By Angela Schroder, President of U.S. E&O Brokers / Senior VP of Insurance Agent Programs
Surplus lines insurance
Surplus lines insurance is provided by carriers that are not admitted in the state in which you are purchasing insurance. A non-admitted carrier does not pay policy taxes to the state’s guaranty fund. A surplus lines carrier is eligible to write in the state if approved by the state as a non-admitted carrier.
Surplus lines carriers in many cases provide coverage to risks where coverage may not be available.
Insurance carriers domiciled in the United States are non-admitted insurers. Alien insurers are carriers based in a foreign country. States have financial requirements for capital in order to protect policy holders. These requirements vary by state, but you should verify the financial rating of any carrier with whom you are considering placing a risk. Search ambest.com for financial ratings of insurance carriers or contact your broker.
Surplus lines carriers do not file standardized rates in each state, but each policy will outline their duties to notify policyholders of non-renewal, cancellations or upcoming premium changes. Policy forms and underwriting guidelines are not filed. This allows the non-admitted carrier to underwrite the needs of the marketplace on risks that do not meet the appetite of the admitted market.
Admitted insurers have their policy form and rates approved by the state’s Department of Insurance. Policyholders with admitted, licensed carriers paying taxes to a state’s guaranty fund would be eligible to receive payments due to insolvency if the insured had a claim and the carrier could not pay its losses. A guaranty fund is established by state law to pay claims up to a designated amount per claim.
How do I know if I have a non-admitted policy?
- You will notice surplus lines taxes and fees in addition to the premium on the policy.
- You will be informed that the insurer is not licensed by the state and not supervised by the state. Each state has designated wording providing the policy will not be covered by the state guaranty fund.
- A licensed surplus lines broker must place the coverage.
According to the National Association of Insurance Commissioners (NAIC):
Lloyd’s of London is the largest writer of surplus lines insurance. According to A.M. Best, in 2020 the Lloyd’s market represented 19.4% of the total surplus lines market share and wrote $12.8 billion in surplus lines premiums.
Whereas states monitor the eligibility of U.S. domiciled surplus lines insurers, alien insurers eligible to write surplus lines premium are listed on the NAIC Quarterly Listing of Alien Insurers and are subject to shareholders’ equity and U.S. trust account requirements. Alien insurers are also held to ethics and integrity standards. They are prohibited from establishing a U.S. branch office.
A consumer benefit available to admitted insurer policyholders but not available to surplus line insurers is protection by the state’s guaranty fund. This guaranty is funded by admitted insurers and will pay claims should an insurer become insolvent.
Due to the strong and effective state-based solvency monitoring framework, the insolvency rate of surplus lines insurers has been historically equivalent to the admitted marketplace.