Surplus Lines

Last Updated: 9/22/2023
Issue: The surplus lines market is a unique segment of the property & casualty industry consisting of non-admitted specialized insurers covering risks not available within the admitted market. This market consists of U.S. domiciled insurers, Lloyd’s syndicates, and non-U.S. insurers that have been admitted to the NAIC Quarterly Listing of Alien Insurers.

Overview: In 1890 New York was the first state to implement a surplus lines law, which recognized the need for a supplemental market. The law was expanded in 1894 to allow Lloyd’s of London to write fire insurance. The law allowed 200 licensees to post a $2,000 bond and file an affidavit that verified the inability to place the insurance with an authorized insurer. Many other states did not agree that there was a need for surplus lines and they wanted to prohibit these insurers from operating in their state.

In 1895 the NAIC was concerned about unlicensed insurance transactions, so it created an Unauthorized Insurance Committee to study the issue they referred to as, “underground insurance.” The committee recommended each state pass a law prohibiting insurers from writing business in a state until they received a license. The Committee adopted its first set of guidelines for surplus line insurers in 1905. The guidelines recommended a uniform law in each state that recognized and regulated surplus lines insurers and made suggestions for paying taxes. Today, surplus lines insurers are regulated through the NAIC Non-Admitted Insurance Model Act #870.

Surplus lines insurers primarily focus on the development of new coverages and the structuring of policies and premiums for these unique risks. These new and innovative insurance products typically don’t have loss history and are difficult to price using common actuarial methods. It is for this reason these coverages are not available in the admitted market. After a surplus lines coverage has generated sufficient data, it may become a more standard product, making it available in the admitted market.

The U.S. surplus lines market experienced direct premium growth of 18.3% in 2022. As of year-end 2022, surplus lines direct premiums written totaled $99 billion, representing 11.0% of the $899 billion in direct premiums written within the U.S. property & casualty market. Of that $99 billion, $74.9 billion was written by U.S. domestic insurers, $15.6 billion was written through Lloyd’s syndicates, and $8.5 billion was written through non-U.S. insurers. Although the surplus lines premium seems small compared to the total property & casualty market, in the absence of this market, many insureds would be unable to secure insurance coverage.

U.S. domiciled surplus lines insurers are subject to regulatory requirements and are overseen by their domiciliary state. Whereas, non-U.S. domiciled insurers and Lloyd’s syndicates admitted to the NAIC Quarterly Listing of Alien Insurers are overseen by the NAIC International Insurers Department and the Surplus Lines (C) Working Group and are required to adhere to the IID Plan of Operation.

It is important to note that it is the surplus lines transaction that is regulated. The licensed surplus lines broker is responsible for ensuring the surplus lines insurer meets eligibility criteria to write policies in the state and remits payment of the surplus lines premium tax to the “home state.” Surplus lines brokers and producers must be licensed to sell surplus lines insurance. Moreover, state insurance departments may suspend, revoke, or non-renew the license of a surplus lines broker or producer for various reasons, such as:

• Failure to file required reports;
• Failure to collect or remit required surplus lines premium tax;
• Failure to remit premiums due insurers or return premiums due insureds within a reasonable time; or
• Any other cause for which action can be taken against an insurance broker or producer.

A consumer protection within the admitted market, but not available to the surplus lines market, is the protections of a state guaranty fund. This guaranty is funded by admitted insurers and will pay claims should an admitted insurer become insolvent. However, due to the unique and higher risk exposures written in the surplus lines industry, guaranty fund coverage is not available.  Due to the strong and effective state-based solvency monitoring framework, the insolvency rate of surplus lines insurers is historically low.

Issues regarding the activity and financial condition of U.S. and non-U.S. surplus lines insurers are addressed by the Surplus Lines (C) Task Force whose primary mission is to monitor the surplus lines market and its operation and regulation. The Task Force is also charged with developing or amending relevant NAIC model laws, regulations and/or guidelines. The Surplus Lines (C) Working Group provides the NAIC International Insurers Department (IID) guidance and expertise relative to regulatory policy and practices with respect to individual insurers and Lloyd's syndicates that are either listed on or seeking admission to the NAIC Quarterly Listing of Alien Insurers.  During the 2023 Summer National Meeting, the Joint Meeting of Executive (EX) Committee and Plenary adopted amendments to the NAIC Nonadmitted Insurance Model Act #870.