Introduction to the Surplus Lines Market
In the world of property insurance, the majority of consumers and businesses obtain coverage from "admitted" insurers. These are companies that are licensed and regulated by a state's Department of Insurance. However, some risks are too large, too unusual, or too high-risk for standard insurance companies to accept. This is where the Surplus Lines market (also known as the Excess and Surplus, or E&S, market) becomes vital.
Surplus lines insurance fills the gap by providing coverage for hazards that standard carriers reject. For students preparing for the complete Property exam guide, understanding the distinction between admitted and non-admitted markets is essential for passing the licensing exam. The surplus lines market functions as a "safety valve" for the insurance industry, ensuring that even the most difficult risks can find some level of protection.
Admitted vs. Non-Admitted (Surplus Lines) Insurers
| Feature | Admitted Insurers | Non-Admitted (Surplus Lines) |
|---|---|---|
| Licensing | Licensed in the specific state | Not licensed in the state (but authorized) |
| Rate/Form Filing | Must file rates and forms with state | Freedom of rate and form (No filing) |
| Guaranty Fund | Protected by State Guaranty Fund | NOT protected by Guaranty Fund |
| Regulation | Strict oversight by state DOI | Regulated via Surplus Lines Brokers |
The Diligent Effort Requirement
A risk cannot be placed in the surplus lines market simply because the premium is cheaper. State laws require that a diligent effort be made to place the insurance with an admitted carrier first. This process ensures that the surplus lines market does not unfairly compete with regulated standard insurers.
The diligent effort requirement typically involves:
- Attempting to secure coverage from a specific number of admitted insurers (often three) and receiving formal rejections.
- Verification by a licensed surplus lines broker that the risk is not eligible for the standard market.
- Documentation of these attempts, which must be kept on file for state audits.
There are some exceptions to this rule, such as the "Export List." The Export List contains types of risks that the state insurance commissioner has already determined have no admitted market availability, allowing them to bypass the individual diligent search requirement.
Common Types of Surplus Lines Risks
Regulation and the Role of the Surplus Lines Broker
While surplus lines insurers are not regulated in the same way as admitted carriers regarding their rates and policy forms, they are still subject to oversight. Most states maintain a "White List" of approved non-admitted insurers that have met financial stability requirements.
The Surplus Lines Broker is the central figure in these transactions. Because the insurer is not licensed in the state, the broker is responsible for:
- Ensuring the insurer is financially sound.
- Collecting and remitting Surplus Lines Taxes to the state.
- Providing mandatory disclosures to the policyholder, specifically stating that the policy is not protected by the State Guaranty Fund.
The lack of Guaranty Fund protection is a critical exam concept. If a surplus lines insurer becomes insolvent, the state will not step in to pay the claims of the policyholders. This is the trade-off for the flexibility and high-risk coverage the market provides.
Exam Tip: Guaranty Funds
Summary and Exam Preparation
Mastering the concepts of surplus lines is vital for any aspiring insurance professional. You must be able to distinguish between the freedom of rate and form found in the E&S market and the strict regulations of the admitted market. Understanding the role of the broker and the necessity of the diligent search will help you navigate complex scenarios on your licensing test.
For more practice on these concepts and other property-related topics, visit our practice Property questions page to test your knowledge.