Don't Let These 4 Common Myths About Excess and Surplus Lines Stop You From Selling a Policy

In 2021, surplus lines direct premiums written in the US hit a record $82+ billion, according to AM Best's September 2022 Best Market Segment report.¹ The E&S market, in fact, has more than doubled from 2001 to the end of 2021, according to the report — from 4.3% to 10.1%.of total P&C direct premiums written.

We spoke with Al Geraci, RPS area president, to debunk some of the common misconceptions about the E&S industry and to help brokers and their clients better understand the viability and benefits of this alternative risk transfer market solution.

1. Excess and Surplus Carriers Aren't Regulated

False. The greatest misconception about the E&S market is that it's unregulated.

"We use terms like non-admitted, surplus lines and 'alien' insurers to describe carriers in the E&S market," says Geraci, "which leads people to believe they're not regulated and it's the wild, wild West of insurance. This is absolutely not true. E&S carriers are regulated but differently from their admitted, standard counterparts."

Admitted carriers are required to submit their forms, appetite and rating in each state for approval to conduct business. In exchange, the state guarantees claims if an admitted carrier becomes insolvent.

While E&S insurers aren't required to file rates and forms with each state and there's no guaranty fund if an E&S carrier become insolvent, the surplus lines transaction is regulated. A 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. Due to strong state-based regulation, the insolvency rate of surplus lines carriers is historically low and much more infrequent than the admitted market.

The surplus lines market is regulated differently from the admitted market to provide the flexibility needed to cover hard-to-place risks.

"The purpose of the E&S market is to be nimble, with the ability to react quickly to marketplace needs," explains Geraci. "They succeed in addressing emerging trends and exposures, as they're unencumbered by the lengthy process of state filings."

Freedom from rate and form regulation allows the non-admitted marketplace to design and create programs and policies to respond to and meet the changing needs of insureds.

2. Non-Admitted Carriers Aren't Financially Stable

False. Non-admitted carriers often are seen as less financially stable than admitted carriers. However, non-admitted carriers typically are required to meet higher financial standards than admitted carriers to qualify to provide coverage.

"States require E&S carriers to be better funded than the standard market," says Geraci.

"In addition, it's important to note that most E&S carriers today are owned by very large national and international conglomerates. For example, eight of the top 10 non-admitted carriers in Florida last year were part of a much larger organizations that write on admitted paper as well."

According to the Best Market Segment report, as of midyear 2022, 97% of surplus lines insurers had AM Best long-term issuer credit ratings of A- or higher, compared with 83% of the total P&C industry.¹

Also, according to the National Association of Insurance Commissioners (NAIC), the insolvency rate of surplus lines insurance has been historically low.² "Most insurers that go out of business are thinly funded admitted carriers," says Geraci.

3. Non-Admitted Carriers Offer Coverage Only for High-Risk Industries

False. While non-admitted carriers provide coverage for high-risk industries, they also provide solutions for risks that fall outside of the admitted market's appetite and create products for emerging risks and industries.

"The E&S market is on the cutting edge of insurance," explains Geraci. "Non-admitted carriers are typically leading the way. They're the early adopters and able to address new risks as they arise. Coverage for cyber, terrorism, active shooter/assailant and autonomous vehicles; parametric insurance; and insuring emerging industries such as the sharing/gig economy and cannabis are all examples of how E&S insurers have stepped in with solutions."

The admitted insurers need more time to gather data and file rates and forms before they can develop and launch a new product or industry solution. Once the E&S market has generated enough data and experience with its solutions, the admitted market often creates standard products for the same risks and industries.

4. Non-Admitted Carriers Aren't a Reliable Option for Insurance Coverage

False. Non-admitted carriers often are used when standard carriers are unable or unwilling to provide coverage. The E&S market is considered a "safety valve" and a reliable solution for coverage when no other options are available.

"Brokers are required by individual state laws to go to the admitted market first for coverage," explains Geraci. "If coverage is unavailable with a standard carrier, the E&S market is an excellent solution."

Wholesalers and the E&S Market

Wholesalers such as RPS not only provide agents and brokers with market access to E&S insurers but, most importantly, offer unparalleled expertise, resources and support to effectively serve your clients and grow your business. By offering specialized insurance solutions supported by data analysis, advanced technology and streamlined processes, we help you differentiate yourself in the market and provide greater value to your clients.