Mastering the Language of Excess and Surplus Lines
Success on the Excess and Surplus (E&S) Lines exam begins with a fundamental command of its vocabulary. Unlike the standard property and casualty exam, which focuses on admitted market regulations, the E&S exam tests your knowledge of how insurance is placed when the standard market cannot or will not accept a risk. This article serves as a focused glossary to help you navigate these complex concepts.
Understanding these terms is not just about memorization; it is about understanding the flow of a transaction from a retail agent to a surplus lines broker, and eventually to a non-admitted carrier. For a broader overview of the testing process, you should consult our complete E&S Lines exam guide and test your knowledge with practice E&S Lines questions.
Insurer Classifications: Admitted vs. Non-Admitted
The core of the surplus lines market revolves around how an insurance company is licensed and regulated within a specific jurisdiction. On the exam, you must distinguish between these classifications quickly:
- Admitted Insurer: An insurance company that is licensed by the State Department of Insurance (DOI) to do business within that state. They must follow state regulations regarding rate and form filings and are backed by the State Guaranty Fund.
- Non-Admitted Insurer: An insurer not licensed by the state DOI but permitted to write business through a licensed surplus lines broker. They are not backed by the State Guaranty Fund and have more flexibility in rates and forms.
- Domestic Insurer: An insurance company incorporated or formed under the laws of the state in which it is writing the policy.
- Foreign Insurer: An insurer incorporated under the laws of a different U.S. state (e.g., a company formed in Delaware writing a policy in Texas).
- Alien Insurer: An insurer incorporated under the laws of a country outside of the United States (e.g., Lloyd's of London).
Market Comparison: Admitted vs. Surplus Lines
| Feature | Admitted Market | Surplus Lines Market |
|---|---|---|
| Regulation | Strict rate and form filing | Freedom of rate and form |
| Guaranty Fund | Protected | Not Protected |
| Licensing | Certificate of Authority | Eligible/Authorized Status |
| Taxes | Included in premium | Separate Surplus Lines Tax |
The Procurement Process and Diligent Search
The law generally requires that insurance be placed with an admitted carrier if possible. To protect the admitted market, brokers must follow specific steps before moving a risk to the surplus lines market.
- Diligent Search: The process of attempting to place a risk with admitted insurers before seeking coverage in the surplus lines market. In most states, this requires receiving a certain number of declinations (typically three) from admitted carriers.
- Declination: A formal rejection of a risk by an admitted insurer. This must be documented by the broker to satisfy the diligent search requirement.
- Exportable List: A list maintained by some state insurance departments containing types of risks or classes of insurance for which the diligent search requirement is waived. These are risks that the state has determined have no available admitted market (e.g., amusement parks or toxic waste hauling).
- Ineligible Risk: A risk that does not meet the criteria for surplus lines placement, often because it is readily available in the admitted market.
Exam Tip: The 'Three Declinations' Rule
While the NRRA has simplified many aspects of surplus lines, most state exams still emphasize the Three Declinations Rule. Always check if a question specifies a 'Diligent Search' requirement, as the answer often hinges on whether the broker documented three rejections from admitted carriers.
Regulatory Framework: NRRA and Stamping Offices
Federal and state laws work together to govern the E&S market. Understanding the Nonadmitted and Reinsurance Reform Act (NRRA) is critical for any surplus lines candidate.
- NRRA (Nonadmitted and Reinsurance Reform Act): A federal law that streamlined the collection of surplus lines taxes. It established that only the Home State of the insured can collect premium taxes and regulate the transaction.
- Home State: Under the NRRA, the state in which an insured maintains its principal place of business or, in the case of an individual, their principal residence.
- Stamping Office: A non-governmental or quasi-governmental organization in some states that reviews surplus lines policies to ensure compliance with state laws and collects data/taxes on behalf of the state.
- White List: A list of non-admitted insurers that have been approved by the state insurance department or the NAIC's International Insurers Department (IID) as meeting financial and character standards for surplus lines eligibility.