What is a Surplus Lines Insurer?

Standard Property & Casualty carriers tend to fall into two categories, those who are Admitted Companies and those who operate as Surplus Lines Companies.  For purposes of this discussion, we’ll leave out any mention of Risk Retention Groups, Captives, and other alternative insurance company structures.

Common Attributes

  1. Both type of companies can provide property insurance as well as casualty insurance.

  2. Rating agencies such as Moody’s and AM Best assess the financial strength of both type of companies.  This should provide assurance to the policyholder that both can be financially sound insurers.

  3. Policy structure foundation does not differ much, and could be born out of the ISO (Insurance Services Office) language, as many policies tend to be.

  4. A single parent insurance company could have a variety of Surplus Lines companies and Admitted companies.

Advantage of an Admitted Company

  1. In the event of admitted company insolvency, the insureds’ claims are protected by the respective State Guaranty Fund.  In PA, for example, the limit per claim is set at $300,000.  This Guaranty Fund is somewhat like an FDIC to a banking customer.

  2. All rates are filed with the state’s Department of Insurance.  This isn’t necessarily a positive or negative.  However, the state DOI does determine and set criteria for when a carrier needs to notify an insured in the event of anticipated changes to their policy in the form of coverage and/or rate.  This makes budgeting and planning a bit easier.

  3. There are no taxes/fees on the policy, Surplus Lines taxes range anywhere from 2%-4% of the annual premium and these are avoided.

Advantage of a Surplus Lines Company

  1. The company has freedom of rate.  There are several determining factors in calculating the premium, these include venue, account experience, insurer’s experience in a particular industry, type of operation being at hand, insured’s safety procedures and risk management, size of the operation, etc.  At the end of the day, the underwriter can determine how competitive they want to be in writing an account, and this pricing could be lower or higher than an admitted company’s price.

  2. Flexibility in policy language.  The more unique a risk might be, the greater the chance that a surplus lines company would be the best suitor to write an account.  An insured may have unique needs and the surplus lines policy could sometimes be tailored to meet those unique requirements.  Tailoring a policy around the insured’s needs is much easier done when dealing with a Surplus Lines company.

The notion that one type of insurer is more favorable to another should be expelled.  The insurance broker and the insured should discuss the needs of the business to determine what type of carriers are available to best serve the needs of the particular industry and of the needs of a particular insured.

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