Understanding the Differences Between Standard and Excess/Surplus Lines

According to industry experts, there are a number of differences that differentiate standard lines versus excess and surplus lines.

Typically excess and surplus lines coverage offers policyholders with unique risk or poor loss history an opportunity to obtain insurance that could not be procured through standard lines (also known as admitted carriers).

Admitted carriers are licensed by the states in which they write and must conform to rate and form regulations, according to the American Association of Managing General Agents.

Excess and surplus lines carriers are not licensed by the state, but allowed to do business in a state through a wholesale broker or managing general agent. Typically, a policy can be written only after it has been rejected by a standard lines carrier three times.

Arthur Flitner, senior director of Knowledge Resources at The Institutes, explained some of the main differences during a recent interview on the subject.

One notable difference is that a surplus lines carrier is admitted or licensed in only one state.

“A true surplus lines carrier is typically going to be licensed or admitted in one state, and then, they’re going to operate in any number of additional states besides that one state where they’re licensed. They can even be domiciled outside the U.S., as evidenced by the fact that Lloyds is the largest surplus lines writer in the U.S. market,” Flitner explained.

When they are domiciled outside the U.S., surplus line carriers operate as non admitted aliens, whereas companies that are domiciled in one of the U.S. states operate as non admitted foreign insurers. Flitner said that either way, these types of carriers provide an opportunity to place risk that would not otherwise get insurance.

“Insurance on risks in those states is being placed with this non admitted carrier that’s domiciled somewhere else. Because they are not technically operating in the state, they’re not subject to the laws of that state,” said Flitner. “They’re not subject to the rating and form laws, most notably. That’s what gives surplus lines insurers their real advantage is that it enables them to function in their regulatory role, which is really to provide a supplementary market to the standard market for risks that can’t be placed in the standard market.”

Flitner said that because surplus lines carriers are not subject to a particular state’s regulations regarding rates and forms, they have the freedom to increase the rates to a level that’s needed to cover the unique, sometimes unacceptable risks.

“In addition, they can make modifications in the policy forms that make the risk acceptable,” Flitner said. “For example, they [companies] can add additional exclusions or other conditions that might require the insured to do certain things. Through both of those things, changing the rate and changing the form, which they have the freedom to do they can make those risks acceptable.”

Another big difference between standard and surplus lines, Flitner explained, has to do with how and where underwriting happens.

“It’s very common in the surplus lines market… to have managing general agents, or MGAs, who are given binding authority by the insurance company. Then, that independent business that the MGA actually functions, for particular types of insurance as governed by their contract, as if they were the underwriting department for the insurance company,” said Flitner.

In addition, relationships can be of more importance in the surplus lines market than in the standard market, he said.

“The reason for that is the distribution system, which is so key to surplus lines. Surplus lines insurance can only be exported to a non admitted insurer if it’s handled by a duly licensed surplus lines broker or intermediary,” said Flitner. “Those surplus lines brokers or intermediaries become a really important link in the distribution system. Agents and brokers are important in the retail sense as well, for standard lines insurers, but there’s just a little bit more dependence, I would say, in surplus lines, that relationships really take center stage.”

Another key difference, surplus lines insurers may be subject to higher capitalization requirements than standard insurers, he added.

One of the requirements for surplus lines under the Non-Admitted and Reinsurance Reform Act (NRRA) is that each company has to have capitalization of at least $15 million or higher.

“What that means is that if a state were to have capitalization requirements lower than that $15 million threshold, a surplus lines carrier writing insurance on risks in that state would need to have the $15 million to qualify as a surplus lines carrier, even though an admitted insurer might not have to have that much,” Flitner said.

Jeff Nonhof, an executive general adjuster with Engle Martin, said there are differences between working claims for standard versus excess/surplus lines. These differences include the number of carriers involved, policy complexities and agent/broker relationships.

He noted that there may be more interested parties involved in a claim.

“In standard lines, you’ll typically have your policyholder and your retail agent,” Nonhof said.

With excess and surplus line policies there might be a retail agent, wholesale broker, managing general agent as well as additional insurers.

With a number of insurers involved in a claim, there can be a number of different policy form interpretations.

“Sometimes we run into variances in language which can complicate interpretations and decision-making,” Nonhof added.

Flitner explained some of the educational opportunities for those considering a switch from standard lines employment to excess and surplus lines.

An introductory course was introduced a few years ago through a partnership by The Institutes and the National Association of Professional Surplus Lines Offices, Ltd. (NAPSLO).

“Surplus Lines Fundamentals, which is a beginner level course that we developed a couple years ago with NAPSLO. We worked with NAPSLO’s education director and a core of people, volunteers from NAPSLO, to develop this online course,” Flitner said.

He said it is a primer for those who have never worked in surplus lines before.

“It’s a basic program that, if you really want to, you could complete it in a day. Most people would probably complete it over the course of their first week on the job, spending a couple hours a day on it. In 10 or 12 hours, just about anybody would be able to get through this course, and they would have a good understanding of what surplus lines is,” said Flitner.

The Associate in Surplus Lines Insurance (ASLI) designation is another educational component offered by The Institutes. Two courses cover the operations and products offered through surplus lines carriers.

For an adjuster transitioning from working standard lines claims to excess and surplus lines claims, Flitner said some differences in job duties include less reliance on standard forms.

“There could be all sorts of forms that you’ve never seen before. That’s true for a really experienced adjuster. Each policy can be different. You’ve got to be versatile. You’ve got to be good at policy interpretation. You need to understand more specialty lines of business.

You’re going to be seeing types of insurance that you’ve never seen before,” Flitner said.
He indicated there will likely be a need for more interaction with expert consultants on complex claims.

While challenging, Flitner said working in surplus lines can be exciting.

“Surplus lines is essentially the incubator for new coverages, such as cyber risk and before that, D&O, umbrella liability all those common coverages all started out in surplus lines,” he said.