Excess and Surplus Lines Insurance

Excess and surplus lines insurance (E&S) is notably different than regular insurance.

Most of us don’t need an insurance policy from an E&S carrier, so if you’re reading this post, you may not fall into the standard category like most people. You may actually have a requirement in place. Let’s shed some light on E&S insurance.

What are the basics of insurance?

Insurance companies like predictability. In fact, the ‘standard’ insurance market is entirely based on predictability.

Insurers build models of risk categories or patterns from past insurance claims experience and come up with a pricing model to generate an insurance premium for you or your company. That way if you do have some sort of requirement that needs to be met, either from your state or business, you’ll have affordable options.

The goal of any insurance company is to offer the cheapest possible policy to as many people as possible to make enough money to pay for the claims, the necessary administration (running the company) and hopefully turn a profit (often through investing our premiums).

(How do insurance companies make money?)

In short, the more information insurers have about past experience, the better they can predict future claims and generate a profit. If you’ve ever wondered about how a service gets its price, this is it!

Where does E&S fit in?

Based on the above, the less predictable or inherently dangerous your policy is, the more likely standard market insurers will tell you to take a hike. With more exposures to risk, you’re going to end up costing the company a lot more money.

In fact, you have to be denied coverage in the standard market to qualify for a surplus lines policy.

This is where excess and surplus lines insurers come into play.

Below are the types of risk these licensed insurers specialize in:

Distressed Risk – Requesting a certain type of coverage when you have had multiple previous claims for the same coverage with other carriers

Complex Risk – Coverage for a nuclear power plant.

Unique Risk – A motorcycle rally event.

Capacity – You or your company require HUGE liability limits.

New Risks – Not new in business (although that may be the case for some new businesses). If your line of work deals with a type of risk insurers don’t have a claims history to model pricing for

Naturally these are risks that aren’t covered by just any authorized insurers. An auto policy absolutely will not cover a nuclear power plant! You will certainly be dealing with an E&S insurer if you fit any of the above characteristics.

How is E&S different than standard market insurers?

Standard carriers are “admitted” in each state in which they do business. Admitted means they have a license from the State Department of Insurance (or similar governing body) to operate in the state and are regulated by that governing body.

Regulation is the idea here. Standard carriers must have their rates approved. Those rates are then financially regulated, are subject to oversight for their ‘behavior’ in the state, and must have all of their policy forms approved before release to the public. That way, no company can hide behind a curtain – their financial statements are made public so you know what you’re getting into as a potential consumer.

E&S carriers, on the other hand, are non-admitted, do not need a license, and are not subject to state regulation for their finances or policy forms. This doesn’t mean that they’re unauthorized insurers

They offer insurance in the manner they choose…often by choice rather than because any particular state won’t approve them.

Are there any potential downsides?

Well, it’s not like you have a choice if you have been denied coverage by the standard markets, but there is a downside risk to procuring coverage via the E&S market.

Since there is no state financial regulation, E&S policies are not financially backed by the state they operate in.

If they become insolvent (fancy term for not enough money to pay claims), you are not guaranteed any coverage by state run ‘pool’ funds, which typically cover claims for you when your insurer can’t pay them.

You see, any standard (admitted) carrier has to pitch in a certain percentage of their yearly premiums to a pool in order to obtain the right to sell insurance in a particular state.

If any insurance company becomes insolvent, the pool is tapped by the state fund and claims are paid.

You will likely be dealing with a licensed E&S broker in the event your risk exposures require this type of coverage (say hello to a possible insurance broker fees).

So your best bet is to find a local independent insurance agent to point you in the right direction. Often, such agents are also licensed as E&S brokers. They’ll be able to help you look at what your regulatory requirements are, and what you should be aiming towards in terms of coverage.