Surplus lines insurance serves as a vital shield against substantial or atypical financial risks that traditional insurance companies may deem too precarious. Available for both individuals and businesses, surplus lines insurance offers customizable coverage outside the purview of standard insurance markets.
Key Takeaways
- Surplus lines insurance provides protection for financial risks that conventional insurers might reject.
- Policies cater to a wide range of needs for both private and corporate entities.
- Due to the nature of the risks involved, premiums for surplus lines insurance are generally higher.
What Is Surplus Lines Insurance?
Surplus lines insurance is a segment of property and casualty insurance tailored for risks that standard insurers prefer to avoid. Often, this reluctance is due to the lack of historical data needed to accurately price these policies. As data accrues over time, these previously unconventional risks may transition to more standard offerings, becoming accessible in the traditional market.
One distinct feature of surplus lines insurance is its flexibility regarding state licensing. Although the insurer doesn’t need to be licensed in the buyer’s state, they must hold a license in their home state, with brokers needing proper licensing in their own respective states.
However, policyholders must note that surplus lines insurance carries certain risks, prominently the absence of a state-guaranteed fund to pool resources if an insurer goes bankrupt. Nonetheless, historical data indicates that the insolvency rate among surplus lines insurers remains low.
Major Players in Surplus Lines Insurance
The surplus lines insurance domain is predominantly driven by insurers affiliated with the UK’s Lloyd’s of London marketplace, which accounts for around 16.8% of the market share. Some other significant entities in this space include:
- Berkshire Hathaway Insurance Group
- American International Group (AIG)
- Markel Corporation Group
- W.R. Berkley Insurance Group
- Nationwide Group
- Fairfax Financial (USA) Group
- Chubb INA Group
- Liberty Mutual Insurance Companies
Unique Coverage Options
Surplus lines insurance can cater to a variety of nonstandard risks. For example, a business might need liability coverage for a unique event or hazardous material transport. An individual might require coverage for a high-value asset like an art collection or a special vehicle that isn’t covered by traditional homeowners or auto insurance.
States also maintain export lists indicating types of insurance that can’t be readily obtained from conventional insurers, thereby qualifying these for surplus lines coverage. For instance, some states include flood insurance under specific scenarios, additional coverage one’s primary provider or federal programs may refuse or limit.
Surplus Lines vs. Standard Insurance
Standard insurers, also known as admitted carriers, must adhere to state-specific rules, regulating the types of risks covered and the premiums charged. In contrast, surplus lines insurers, although subject to some regulations, can bypass others, enabling them to cover riskier and more uncommon potentials.
A non-admitted or unlicensed status doesn’t imply ineffectiveness or invalidity but indicates adherence to different regulatory guidelines.
FAQs on Insurance Regulations
Who Licenses Insurance Companies?
Insurance entities, including brokers and agents, are licensed by state authorities.
Does the Federal Government Regulate Insurance?
Primarily, no. Post the McCarran-Ferguson Act of 1945, regulatory powers were delegated to the states, making extensive federal regulation rare.
What Is Excess and Surplus (E&S) Lines Insurance?
Often interchangeably used with surplus lines insurance, E&S insurance covers many of the same overarching high-risk needs.
Conclusion
For those seeking protection from financial risks that are unusually large or rare, surplus lines insurance offers a sturdy solution. Unlike regular insurance, these policies can be issued by insurers not licensed in the buyer’s state, albeit with additional considerations like the absence of state-backed guarantees for insolvencies.
Related Terms: Property Insurance, Casualty Insurance, Flood Insurance, Standard Insurance, E&S Insurance.
References
- National Association of Insurance Commissioners. “Surplus Lines”.
- Insurance Information Institute. “Surplus Lines”.
- Texas Department of Insurance. “Surplus Lines Insurance Guide”.
- State of California Department of Insurance. “Export List”.
- New York State Department of Financial Services. “Insurance Regulation 41 (11 NYCRR 27)—§27.3(g): Current Export List”.
- Insurance Information Institute. “McCarran-Ferguson Act”.
