Introduction to the Surplus Lines Exam
Securing a Surplus Lines license is a significant milestone for insurance professionals looking to handle complex, high-capacity, or unique risks that the standard admitted market cannot accommodate. The Excess and Surplus (E&S) Lines exam is notoriously technical, focusing heavily on regulatory compliance, tax collection, and the legal distinctions between admitted and non-admitted carriers.
To help you navigate this challenging curriculum, we have compiled the top ten study tips designed to streamline your preparation. For a more comprehensive overview of the licensing process, be sure to visit our complete E&S Lines exam guide and test your knowledge with practice E&S Lines questions.
1. Master the NRRA and the Home State Rule
The Nonadmitted and Reinsurance Reform Act (NRRA) revolutionized the E&S industry by simplifying how surplus lines taxes are paid and which state has regulatory authority. You must understand that the "Home State" of the insured is generally the only state that can require premium tax payments or regulate the placement of a surplus lines policy.
- Tip: Memorize the definition of a "Home State" for multi-state risks. If 100% of the risk is outside the headquarters state, the home state is the state with the greatest allocated premium.
- Exam focus: Expect several questions on who collects the tax when a risk spans multiple borders.
2. Differentiate Admitted vs. Non-Admitted Markets
| Feature | Admitted Carriers | Non-Admitted (Surplus Lines) |
|---|---|---|
| Rate & Form Filing | Strictly regulated by State DOI | Freedom of Rate and Form |
| Guaranty Fund | Protected by State Guaranty Fund | No Guaranty Fund protection |
| Licensing | Licensed in the state of risk | Not licensed (authorized/eligible) |
| Market Choice | First resort for standard risks | Market of last resort |
3. Internalize the Diligent Search Requirement
Before a risk can be "exported" to the surplus lines market, a diligent search of the admitted market must typically be performed. This is a cornerstone of E&S regulation.
- Most states require declinations from at least three admitted insurers.
- Some states maintain an Export List of risks that are pre-approved for the surplus lines market, exempting them from the individual diligent search requirement.
- Understand the role of the Exempt Commercial Purchaser (ECP), who may waive the diligent search requirement if they meet specific financial and employee thresholds.
4. Typical Exam Content Distribution
5. Focus on Tax and Stamping Fee Calculations
Unlike standard lines where the insurer handles most tax filings, in surplus lines, the surplus lines broker is usually responsible for collecting and remitting premium taxes. You need to be comfortable with the following:
- Gross Premium: Taxes are calculated based on the gross premium charged by the insurer.
- Stamping Fees: Many states have a Surplus Lines Association (SLA) that charges a "stamping fee" for reviewing the policy for compliance.
- Math Strategy: Practice calculating the total cost to the insured, including the premium, the state tax (e.g., 4%), and the stamping fee (e.g., 0.2%).
Mnemonic for Surplus Lines Eligibility
To remember why a risk goes to E&S, use H.U.G.:
- H - High Risk (e.g., hazardous materials transport)
- U - Unusual Risk (e.g., hole-in-one insurance)
- G - Great Capacity (e.g., massive skyscrapers exceeding admitted limits)
6. Learn the Disclosure and Notice Requirements
Because surplus lines policies are not backed by the state guaranty fund, regulators require very specific disclosure notices. These are often required to be in bold, large font (e.g., 10-point or 12-point) and stamped on the declarations page of the policy.
You must know the exact verbiage or the intent of these notices, which essentially warn the insured: "This policy is issued by a non-admitted insurer. In the event of insolvency, you are not protected by the State Guaranty Fund."
7. Understand the Role of the Surplus Lines Association (SLA)
The SLA acts as a bridge between the State Department of Insurance and the surplus lines brokers. While they do not have direct enforcement power like the Commissioner, they perform essential functions that appear on the exam:
- Reviewing policies to ensure they meet state eligibility requirements.
- Assisting in the collection of data and taxes.
- Maintaining the "White List" or "Eligible List" of non-admitted insurers authorized to do business in the state.
Frequently Asked Questions
While it varies by state, most jurisdictions require a scaled score of 70% to pass. Because the exam is highly technical, it is recommended to aim for 85% or higher on practice tests before sitting for the actual exam.
In almost every state, you must hold a valid Property and Casualty (P&C) producer license as a prerequisite to obtaining a Surplus Lines broker license. The E&S license is considered an add-on or a limited line in some jurisdictions, but the underlying knowledge of P&C is essential.
An eligible insurer is a non-admitted company that has met the financial requirements of a specific state to write business there. For domestic surplus lines insurers, this usually involves a minimum capital and surplus (often $15 million). For alien (foreign) insurers, they must be listed on the IID (International Insurers Department) Quarterly Listing maintained by the NAIC.
This is state-specific, but common intervals are monthly, quarterly, or annually. On the exam, focus on the Home State Rule, which dictates that taxes are filed only with the insured's home state regardless of where the risks are located.