Author: Nancy Germond
What Is the Surplus Lines Market? The surplus lines market provides insurance in both personal and commercial lines when consumers are unable to obtain coverage in the standard insurance market. Risks that standard lines carriers may avoid today has changed dramatically in the past few years given extreme weather events, high jury verdicts and recent supply chain and inflation issues, mainly brought about by the COVID pandemic and societal changes. While many agents referred to the surplus lines market as the “market of last resort,” in today’s challenging insurance market, more business that agents would have traditionally placed with standard carriers they now place with surplus lines carriers. You may also hear the surplus lines market referred to as “excess/surplus lines (E&S),” as well. A Brief Overview of the Surplus Lines Market Unique or high-risk exposures, such as crane insurance (not the birds, folks, the tipping-over kind) or soccer star David Beckham, who allegedly insured both his feet for 100 million pounds, traditionally entered the surplus lines arena. Today, insurance experts estimate that more business will continue to flow into surplus lines. According to S&P Global, “Surplus lines premiums increased for the fourth straight year in 2022, rising 20% to $75.51 billion from $62.90 billion in 2021. Premiums have more than doubled from the 2018 total of $34.65 billion.” Given today’s hard market, those numbers will undoubtedly only increase. Surplus lines policies were traditionally used for areas prone to disaster, hard-to-place, unique risks, and for those insureds with poor loss histories, such as contractors with a lot of losses. Today, more business goes to surplus lines carriers due to standard carriers reducing their footprints in disaster-prone areas or in areas such as commercial trucking where social inflationary verdicts have hit multi-millions. Surplus lines carriers are also instrumental in developing and pricing new coverage for emerging risks. Think back to even ten years ago, and the industry would not have offered a policy for an active assailant exposure except a terrorism policy for more widespread terrorism events. They also step to the plate when one specific line of coverage hits problems, for example when nursing homes hit a very hard liability market in the late 1990s due to an increasing influx of negligence and abuse claims. Some of the top surplus lines insurers include the following. - Berkshire Hathaway, Inc.
- AIG (American International Group)
- Markel
- Fairfax Financial
- W.R. Berkley Corp.
- Chubb
- Nationwide
- Liberty Mutual
Some of the coverages often available in the E&S market include the following. - Property coverage in wind/hail/tornado prone areas
- Directors & Officers coverage
- Environmental policies
- Terrorism and active assailant coverage
- Excess liability coverage
- Cyber liability coverage
These policies usually cost more than policies in the traditional market, and the surplus lines carriers may not use ISO forms. Therefore, coverage is usually more expensive, and coverage is often more limited. Surplus lines carriers can often craft specialized coverage and endorsements to meet unique needs of the marketplace. This is one of the advantages of the surplus lines carriers. Another advantage is the underwriting flexibility found in the excess/surplus market. However, as with any upside, there is a downside, and we will discuss a few of the pitfalls of working in the surplus lines market next. Surplus Lines Cautionary Thoughts Except in New Jersey, state guaranty funds do not apply to surplus lines carriers. No guaranty fund access means if a carrier becomes insolvent, there is no state backstop to help make your insured solvent after a loss. Instead, a bankruptcy court would oversee the remaining claims in many cases. Therefore, it is essential that any time you place coverage in surplus lines, you alert your insureds about the risk of that placement. Additionally, forms are not generally subject to state regulatory oversight. However, each state writes its own rules and regulations guiding surplus lines carriers. Each U.S.-based surplus lines carrier domicile (where they base themselves) in at least one state or U.S. jurisdiction. They must keep adequate surplus funds to pay claims and run-off expenses. However, most surplus lines insurers do not write in their state of domicile, according to “An Introduction to the Surplus Lines Market.” This is a solid primer on the surplus lines industry for agents and brokers alike. States regulate both the surplus lines broker and the surplus lines insurer. States of domicile regulate the surplus lines insurer as a domestic insurer in at least one state. Forms will vary significantly among carriers and are often not ISO forms. Surplus lines carriers have unique requirements for underwriting, more customized applications, and different underwriting standards. Most agencies place their surplus lines business through wholesale brokerages, which are usually solid informational resources for accessing coverage, allowing your clients some choices in the coverage they choose. That wholesale broker usually has a great deal of knowledge about the specific market and can help guide agents to find coverage that may be unavailable in the current standard market. Additionally, the financial rating of the carrier can be a concern in any market today whether excess or standard lines. Remember that a B+ rating can head downhill quickly, especially in today’s market. What Else Should You Know About Surplus Lines Placements? Most states still require that agents show proof of declination by standard markets prior to obtaining surplus lines coverage. You may hear this referred to as doing your “due diligence.” Some states do not require the due diligence search for all producers. They may keep an “export list” that outlines coverages that state allows to go into surplus lines without the due diligence search. Some Errors & Omissions Cautions While more today, agents rely on surplus lines to place business, here are errors & omissions (E&O) challenges that may arise when offering surplus lines policies to your insureds. Many surplus lines carriers rely on proprietary forms they craft that may not offer coverage as robust as ISO forms. Especially when switching your insured from a standard market to a surplus lines market, it’s a best practice to warn your insureds in writing of form changes, conditions, warranties (such as an Ansul system near a commercial oven), exclusions and other form limitations when you bind coverage.
E&S brokers generally owe no duty to provide the retail agent (you!) with the precise coverages you request. In one case on a dog trainer account, the surplus lines insurer rolled out a professional liability exclusion at renewal without warning the agent of that exclusion. This exclusion would have rendered coverage ineffective if an injured party alleged the trainer’s training tactics contributed to an injury. That is an E&O bite no agent wants to endure.
Many surplus lines carriers are not sufficiently automated, so human error is more prevalent, according to an article by Brent Winans on the IRMI site. Check new policies and renewals carefully against the application to ensure the insurer furnished the requested coverages and added no surprise exclusions or endorsements.
Read any contract you enter with surplus lines carriers or wholesale brokers. Broker contracts’ hold harmless language are very often one-sided, leaving the agent solely responsible for the correct coverage placements. According to Winans’ article, strive for 100% reciprocity between the agent and the E&S broker.
A best practice – develop a detailed checklist that outlines the steps needed in placement, from the due diligence search to warning the insured of any coverage limitations. The E&S market is robust, innovative, resourceful, and still willing to take on risk – for the right price and with appropriate coverage restrictions. A wholesale broker who understands a complex marketplace can be a big asset to your business. Build relationships with these brokers, and you can then move deeper into that coverage niche and write more business with that strategic partnership. In this distressed marketplace, taking advantage of those relationships can help your organic growth. Learning the ins and outs of the E&S market, and utilizing surplus lines providers with care, will help you weather the storm of this current insurance environment. Originally Published: July 12, 2024 _____________________________________________________________________________________________________________________________________ Copyright © 2024, Big “I" Virtual University. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big “I" Virtual University. For further information, contact jamie.behymer@iiaba.net.
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