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Excess and surplus insurance

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Insurance helps business owners cover their risks – but what if the risk is so great or unique that traditional insurance companies don’t want to cover it? When this happens, business owners may need to look beyond the admitted market to explore non-admitted carriers and the excess and surplus insurance market.

Admitted vs. Non-Admitted Carriers

The terms “admitted” and “non-admitted” describe two types of carriers.

As Investopedia explains, admitted carriers are licensed to operate in the state where they sell insurance products. These carriers must comply with the state insurance regulatory authority for things like rate approvals and policy forms. If they don’t adhere to the official requirements, the state may step in.

You may assume that all insurance companies are admitted, but non-admitted insurance companies also exist. These companies do not need to adhere to the same requirements regarding forms and rates, although some regulations do apply to them. These differences provide non-admitted carriers with a greater degree of flexibility to underwrite unusual risks.

The non-admitted insurance market is sometimes called the excess and surplus lines market. According to the NAIC, it includes U.S. domiciled insures, Lloyd’s syndicates and non-U.S. insurers that have fulfilled the International Insurers Department Plan of Operation criteria for admittance to the NAIC’s Quarterly Listing of Alien Insurers.

The Advantages of the Surplus Lines Market

The main advantage of the excess and surplus lines market is it provides another option for accounts with a high level of risk or and accounts that are otherwise difficult to place.

To stay in business, insurance carriers need to protect their loss ratio. Basically, if they pay out more in claims than they receive in premiums, they risk insolvency. As they need to comply with state regulations for forms and rates while keeping their loss ratio under control, some accounts may simply be too risky. As a result, they may reject business owners’ insurance applications. Plus, if business owners do receive some coverage, it may be inadequate for all the risks they have.

The NAIC says that surplus lines insurers mostly focus on developing new coverages as well as structuring policies and premiums for unique risks. They offer new and innovative insurance products that would be difficult to price using the actuarial methods of the admitted market. Without the surplus market, many people might be unable to find the coverage they need.

In many cases, insureds with unusual risks might not have a choice between admitted insurers and non-admitted carriers. Either they purchase insurance through a non-admitted carrier, or they go without coverage. Non-admitted carriers fill the gaps left by admitted carriers, which makes them an important part of the overall property and casualty insurance market.

The Disadvantages of Surplus Line Insurance

The surplus line market serves a definite purpose, but it also has disadvantages that buyers should be aware of before they secure insurance coverage.

State insurance regulations protect policyholders. As non-admitted carriers do not need to adhere to the requirements for rates and forms nor to the guarantees provided by state regulators, policyholders may miss out on certain protections.

One key issue, according to Investopedia, occurs in the case of carrier insolvency. Even if the policy is active at the time of the claim, the claim might not be paid if the surplus lines company becomes insolvent.

Given these risks, it’s important to research non-admitted carriers to make sure you’re confident in their capability to cover your risks.

Carrier Ratings and Financial Strength

AM Best rates both admitted and non-admitted carriers.

These ratings can help you assess the financial health of an insurance carrier. This can be especially important for non-admitted carriers because policyholders don’t have the same guarantees as those with admitted carriers. If a non-admitted carrier becomes insolvent, you may not receive payment for your claims – a situation you absolutely want to avoid.

According to the AM Best website, credit ratings are independent opinions on the creditworthiness of an insurer based on a comprehensive quantitative and qualitative evaluation of the insurer’s balance sheet strength, operating performance, business profile and enterprise risk. The Best’s Financial Strength Rating Scale indicates the insurer’s capability to meet its ongoing insurance obligations. The highest rating is A+ (Superior) and the lowest is D (Poor).

The Risk of Overregulation

When discussing the pros and cons of admitted and non-admitted carriers, it’s also important to consider the risk of overregulation.

The Insurance Journal explains that state form and rate regulations can inhibit accurate underwriting in some cases. Overregulation can mean admitted carriers are unable to evolve to meet the needs of a changing market, meaning the risk of insolvency may increase.

This is another reason why non-admitted carriers can be important. They provide additional flexibility and competition in highly regulated markets.

Growth of the Excess and Surplus Insurance

The NAIC says that the U.S. surplus lines market experienced 15.7 percent direct premium growth in 2020 and that this is the largest year-over-year premium increase since 2003. At the end of 2020, surplus lines direct premiums accounted for 9.1 percent of the total direct premiums written in the U.S. property and casualty market.

The growth of the surplus lines market continued to accelerate in 2021. According to Property Casualty 3605, AM Best says that direct premiums written in U.S. surplus lines grew by 25 percent in 2021, reaching a record of $82 billion. As a result of this growth, excess and surplus lines now represent more than 10 percent of all U.S. property and casualty direct premiums. The 2022 midyear report from the U.S. Surplus Lines Services and Stamping Office showed continued growth.

Questions to Ask When Looking at Non-Admitted Carriers

Non-admitted carriers can be a great option for businesses that are struggling to find suitable insurance coverage. However, non-admitted policies may not be the right option for everyone. Plus, there can also be differences from one non-admitted carrier to another. When exploring your insurance options, you should ask the following two questions to guide your insurance decisions:

  1. Can you receive insurance through a standard carrier? If admitted carriers are willing to underwrite your risks, you don’t need to deal with non-admitted carriers. In fact, non-admitted carriers may not even want your business. On the other hand, if you can’t obtain coverage through an admitted carrier, the non-admitted market may be your only option.
  2. What is the carrier’s rating? When you’re comparing non-admitted carriers, check the AM Best Ratings to receive an independent opinion of the carrier’s financial strength.

Are you looking for a licensed surplus lines broker to help you find the best commercial coverage for your business? Higginbotham can help you explore your insurance options, including the surplus lines insurance market. Learn more.

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