What is surplus lines insurance?
Surplus Lines insurance is coverage provided to an insured with a unique set of risks and requirements. Surplus Lines insurance is underwritten in the non-admitted market, also known as the Excess & Surplus lines market.
According to the Wholesale & Specialty Insurance Association, there are three main reasons why an insured must request coverage in the Surplus Lines (or non-admitted) market:
(1) non-standard risks, which have unusual underwriting characteristics;
(2) unique risks for which admitted carriers do not offer a filed policy form or rate; and
(3) capacity risks where an insured seeks a higher level of coverage than most insurers are willing to provide
With this understanding, let’s take a look at the different entities involved in the surplus lines insurance industry and their roles.
An Insured refers to the individual or business seeking coverage in the Excess and Surplus Lines market. They will be the party responsible for paying the premiums on the surplus lines policy in order to maintain coverage.
Many states require an Insured (or the Producing Agent, acting on the Insured’s behalf) to first request coverage in the admitted market and receive three declinations before being permitted to request coverage in the non-admitted market. This process is referred to as the Diligent Effort. While there are a handful of states that no longer require Diligent Effort, most states do.
To streamline this process, some states provide a State Export List, which is a list of coverages that have been determined to be too difficult to obtain in the admitted market. Coverages on the state export list will vary from state to state (and some states do not have a State Export List). Coverages on these lists can be placed directly in the Surplus Lines market, bypassing the Diligent Effort requirement.
Producing Agents/Retail Agent
Also known as Retail Agents, Producing Agents work on behalf of the insured to obtain coverage in the marketplace. The Producing Agent obtains the information necessary for underwriting the risk in either the admitted or non-admitted market. Once the market is determined to be the best fit for the risk, the Producing Agent may be responsible for tasks such as collecting premiums. Associated surplus lines stamping and related surplus lines taxes and stamping fees will be remitted to the home state.
Managing General Agents (MGAs)
Managing General Agents (MGAs) are sometimes referred to as Managing General Underwriters (MGUs) and are a type of Wholesale Broker. According to the International Risk Management Institute, Inc. (IRMI), Managing General Agents are “a specialized type of insurance agent/broker, that, unlike traditional agents/brokers, is vested with underwriting authority from an insurer.”
Managing General Agents can perform the following functions:
Appointing Retail Agents
Managing General Agents (MGAs) are not authorized to sell insurance directly to an insured but act as the middleman between the insurer and the independent agent or agency.
Surplus Lines Brokers/Wholesale Brokers
A Surplus Lines Broker/Wholesale Broker is the responsible party that ensures all aspects of the surplus lines placement are compliant with specific state regulations. This individual or agency is also responsible for reporting the placement to the applicable state as required by that state’s statutes. The Surplus Lines Broker must be familiar with each state’s varied compliance requirements concerning due diligence (Diligent Effort), affidavit filings, and tax reporting.
Lloyd’s of London Syndicates
Lloyd’s of London is an insurance marketplace bringing together clients and brokers requiring unique coverage and risks with underwriters and syndicates willing to price and provide coverage for the risk. Members operate as syndicates who collaborate to underwrite large or unusual risks and programs. Potential losses are covered by funds invested by the members in conjunction with the premiums collected for the coverages written.
The 2021 A.M Best Report relates that more than 19% of the surplus lines market annual premiums are generated by the 82 syndicates operating as part of the Lloyd’s of London marketplace.
The surplus lines insurance industry is regulated at the state level and governed by state statutes and regulations. These regulatory requirements vary from state to state.
There are several different organizations involved in the regulation of the non-admitted market:
Surplus Lines Associations - About 30 states have a Surplus Lines Association (SLA). Each Surplus Lines Association is comprised of surplus lines insurance professionals who provide support and resources for other professionals working in the surplus lines insurance space. From offering continuing education opportunities, hosting networking events, curating educational webinars, and providing credentialing options--Surplus Lines Organizations are essential within the surplus lines insurance industry. Depending on the state, some Surplus Lines Associations may also collect the surplus lines tax payments and fees associated with surplus lines tax filings.
Stamping Offices - Surplus lines stamping offices facilitate compliance with state laws and regulations regarding surplus lines transactions. State stamping offices may collect premium taxes and state fees depending on the state but will pass these payments on to the correct state government agency. These offices are not government entities but are formed by surplus lines insurers to serve as a checks-and-balance system to help regulate the industry. Currently, 15 states operate state stamping offices.
Department of Insurance - In addition to resolving consumer complaints and providing regulatory oversight for state insurance practices, the Department of Insurance is also responsible for processing tax filings and payments in many states. In some states, this responsibility may be shared with the state Department of Revenue as well.
Non-Admitted Carrier/Excess & Surplus Lines (E&S) Carrier
An E&S carrier is not required to be licensed by the state but is allowed to do business in that state. Sometimes, E&S carriers are also referred to as non-admitted carriers; however, E&S carriers are financially stable companies that must meet a series of stipulations before being approved by the state regulator as an approved carrier in the state.
Because Excess and Surplus lines carriers are not bound by many of the rate and form regulations imposed on admitted-market carriers, they have some flexibility to change the coverage offered and the rate charged without time constraints and financial inhibitors often associated with the filing process. This flexibility is beneficial for both the company and the policyholder.
Surplus Lines Organizations
There are several key surplus lines organizations and insurance groups you should be familiar with in the surplus lines insurance industry:
Wholesale & Specialty Insurance Association (WSIA)
Securities and Insurance Licensing Association (SILA)
The Council of Insurance Agents and Brokers (CIAB)
The National Council of Insurance Legislators (NCOIL)
Check out our blog article, 4 Surplus Lines Organizations You Should Join, to learn more about each organization.
Third-Party Surplus Lines Filers
As you can imagine, there are many moving pieces when it comes to managing surplus lines compliance! It’s important to know that options exist to simplify this process.
From surplus lines management software to third-party surplus lines filers, there are tools and resources available to increase your efficiency or completely eliminate the headache of tracking each state’s surplus lines tax filing requirements, state stamping fees, surplus lines reporting deadlines, and tax payments by outsourcing your surplus lines to a reliable third-party filer.
InsCipher is an insurtech company providing software and services that are revolutionizing inefficient insurance processes. Save your agency time and money by automating surplus lines compliance, filing, and reporting. Want to learn more? Request a free demo today!