Surplus Lines Market
The surplus lines market exists to provide insurance to consumers whose needs are not met by insurers regulated by the state as admitted carriers, and it functions as a supplement or complement to the admitted market.
As a supplemental market, the surplus lines market does not compete with the admitted market; rather, it provides coverage options when the admitted market cannot or will not underwrite the level of coverage needed for certain risks. These risks may be unique or high-risk and may require specialized coverage that is not available through traditional insurance policies.
All states and the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”) authorize the placement of property and casualty insurance on a surplus-lines basis.
Surplus Lines Carriers
A surplus lines carrier is licensed only in its state of domicile, but it can write business in other states. Although not licensed in states where it is not domiciled, a surplus lines carrier must meet certain eligibility requirements in any state where it conducts its business.
Surplus lines carriers are not bound by most rate and form regulations, allowing them the flexibility to change rates and coverage offered without time constraints and financial costs associated with the filing process. Such flexibility is necessary for surplus lines carries as it allows them to customize solutions for unique risks that are not offered on the admitted market.
Most states will not allow a risk to be placed in the surplus lines market if the desired coverage exists in the admitted market.
Surplus Lines Brokers
To obtain a surplus lines insurance policy, the consumer must work with a surplus lines broker licensed in the applicable state. The responsibilities of a surplus lines broker generally include:
- Ensuring that the surplus lines carrier meets a state’s eligibility requirements;
- Reporting the surplus lines transaction to the insurance regulators;
- Remitting the premium tax due on the transaction to state tax authorities; and
- For lines not included on a state’s export list, a diligent search of the admitted market to see if coverage is available and submission of any required declinations.
Marketing Surplus Lines
Rules on marketing surplus lines products vary by jurisdiction. Surplus lines carriers are generally prohibited from marketing directly to insureds. While marketing in trade publications and marketing directed at licensed surplus lines brokers is typically permissible, some states restrict mentioning specific products in the same advertisements that mention the name of a specific surplus lines carrier. Further, some states permit only the surplus lines brokers to advertise and solicit in print, electronic media and direct-mail advertisements. Such advertising by a surplus lines broker must meet state requirements.
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Surplus lines offer a great amount of flexibility for both the carrier and consumer and, as a result, can provide solutions to certain risks for which coverage cannot be found in the admitted market.
