April 5, 2023
Why You Might Need Surplus Lines Insurance — Even if You’re Not a Celebrity
You’ve heard of celebrities who buy insurance on signature body parts — Keith Richard’s middle finger ($1.6 million), Dolly Parton’s Breasts ($3.8 million), Jennifer Lopez’s butt ($27 million) and Mariah Carey’s legs ($1 billion).
These transactions take place in what’s called the surplus lines market. Lloyd’s of London (pictured here) is the most famous entity making transactions in this market. But your business may also need to access the surplus lines market at some point.
According to the Wholesale & Specialty Insurance Association (WSIA), specialty and surplus lines companies are often called the “safety valve” of the insurance industry. They fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers. With the ability to accommodate a wide variety of risks, the wholesale, specialty and surplus lines market acts as an effective supplement to the admitted market.
Surplus lines premium volume was over $24 billion with more than 2.6 million transactions through June 2021, an increase of 21.9% for premium and 7.2% for transactions year over year, according to the U.S. Surplus Lines Service and Stamping offices. These numbers represent a vast number of insureds who, without the surplus lines market, would have a difficult time obtaining insurance, if they were able to secure it at all.
The surplus lines market plays an important role in providing insurance for hard-to-place, unique or high capacity (i.e., high limit) risks. Surplus lines insurers are able to cover unique and hard-to-place risks because, as non-admitted insurers, they can react to market changes and accommodate the unique needs of insureds who are unable to obtain coverage from admitted carriers.
This results in cost-effective solutions for consumers that are not “one size fits all,” but are skillfully tailored to meet specific needs for non-standard risks. Risks typically written in the surplus lines market fall into three basic categories:
- non-standard risks, which have unusual underwriting characteristics;
- unique risks for which admitted carriers do not offer a filed policy form or rate; and
- capacity risks where an insured seeks a higher level of coverage than most insurers are willing to provide.
Although surplus lines insurers are “non-admitted,” that does not mean they lack regulation. Each surplus lines insurer must be admitted (licensed) in one of the 50 states and must meet that state’s financial solvency requirements. The state of domicile becomes that insurer’s regulator. Surplus lines companies are able to offer special coverages because they are largely free of rate and form restrictions that make it difficult for standard companies to write the risk. Their flexibility allows them to design policies that meet unique customer needs.