The world of business insurance, particularly commercial lines insurance, often introduces terms that may sound perplexing to clients. One such segment that frequently raises questions is “excess and surplus lines,” sometimes simply known as surplus lines insurance. In this blog post, we aim to demystify this crucial mechanism, clarify its role, and address common client concerns.
Unraveling Excess and Surplus Lines Insurance
Contextualizing the Insurance Market
While the average consumer may not encounter surplus lines insurance in personal insurance dealings, it is a significant player in the realm of business insurance. To some, the term may evoke images of discount warehouses for damaged goods, creating apprehension about its value. However, understanding its purpose and role is key to appreciating its importance.
The Function of Insurance Companies
Insurance companies providing coverage for businesses must navigate a complex regulatory landscape. They are required to file comprehensive forms outlining the specifics of their policies. These forms, essentially the policies themselves, detail what is covered, including terms, conditions, and the insurer’s financial viability. The state reviews these filings to ensure appropriateness and proper financial backing.
When the Unusual Arises: Seeking Unconventional Coverage
Imagine a scenario where a business has unique risks, operates in a specialized niche, or possesses a risk profile that falls outside the norm. Standard insurance carriers, like Chubb Insurance or Nationwide, may not offer coverage for such uncommon risks. This is where excess and surplus lines insurance steps in as a tailored solution.
The Search for Coverage: Due Diligence and Uncharted Territories
Insurance agents diligently search for admitted carriers (those officially licensed in the state) to find suitable coverage. If standard carriers do not provide the needed coverage due to the rarity or uniqueness of the risk, the agent turns to excess and surplus lines. This involves looking for coverage from companies not officially admitted in the state, often dealing with rare and unconventional risks.
The Role of Lloyd’s of London: A Syndicate for Unique Risks
Enter Lloyd’s of London, a well-known syndicate in the insurance market. While primarily associated with reinsurance, Lloyd’s of London also offers coverages for unique and rare risks. However, it’s crucial to note that surplus lines insurance should ideally constitute a small percentage, around 10%, of the policies written. If a risk is common, standard carriers are expected to provide coverage.
Navigating Regulatory Requirements and Licensing
When a suitable company for excess and surplus lines coverage is identified, the insurance agent proceeds to write the policy. Here’s where it gets nuanced – these insurers are not licensed in the client’s state, and the policies are not subject to the same state regulations as admitted carriers. Instead, they must accept the risks, and the client, as the insurer, acknowledges that it’s a surplus lines policy.
Financial Monitoring and Extra Licensing Requirements
To maintain standards and protect consumers, there are state and federal guidelines for insurers writing surplus lines policies. Insurance agents selling surplus lines coverage often require an extra license, separate from their commercial lines license. Additionally, there may be extra fees and taxes associated with surplus lines insurance.
Ensuring Financial Soundness: A Key Consideration
Clients opting for excess and surplus lines coverage should perform due diligence on the financial soundness of the chosen insurer. Contrary to assumptions, surplus lines insurers often maintain financial stability, sometimes even surpassing regulated carriers. Their focus on unique risks demands meticulous attention to actuarial considerations.
A Tailored Solution for Unique Risks
In essence, excess and surplus lines insurance should be viewed as a bespoke solution for businesses facing unconventional risks. Rather than a compromised choice, it offers a tailored approach to meet the specific needs of businesses with unique risk profiles.
We invite you to share your thoughts and questions in the comments below. If there are specific aspects of commercial lines insurance you’d like us to explore in future discussions, let us know. Stay tuned to our channel for more insights into the intricate landscape of business insurance.