What is surplus line insurance?
In order to understand what surplus line insurance is, it is helpful
first to understand a few things about the insurance marketplace and to understand what surplus
line insurance is not.
The first player in the marketplace we'll discuss is the insurance company,
sometimes referred to as an insurance carrier or insurer.
The insurer is the company that actually writes the policy and accepts
the risk that something will happen. They collect your premiums and those
of other insureds and invest them. If a claim is made, they pay the claim
from this pool of collected premiums.
Insurers are licensed on a state by state basis in the United States.
Generally, an insurer must get a license in any state where it wants to
write policies. Each state has a Department of Insurance (or similar
regulatory body) that regulates
these insurers. The regulation takes many forms and varies from state
to state, but it can basically be divided into two general areas. First,
the regulators monitor the finances and market conduct of
the insurers to see that they are financially sound and using fair and
honest business practices. Second, they regulate or approve the insurer's
policy forms (the actual content of the policies) or the insurer's
rates, or both. These insurers contribute to a state fund, called
a guaranty fund, that is used to pay claims if any of these licensed
insurers were to fail (go bankrupt).
The next player is the agent or broker (we'll collectively refer to
them as producers).
If you are an individual or company that needs insurance, the producer
acts as the middleman between you and the insurer. The producer
is also licensed and regulated by the state. When you tell the producer
you need insurance, the producer must try to find you a policy from one
of the insurers that is licensed to operate in your state. There are some cases,
however, (generally less than 10% of policies nationwide) where the
licensed insurers will not accept a risk because it does not meet their
internally established guidelines. The risk may be too big, too unusual
or substandard. In these cases, a specially licensed producer called a surplus
line producer gets involved. Their special surplus line license allows
them to procure a policy for you from an insurer that is not licensed in your
Since this insurer is not licensed in your state, they are not regulated by your state's
Department of Insurance in the same way licensed insurers are regulated
(they are, however, regulated in the state or country
where they are domiciled or located). Since they are not strictly regulated by your state,
they are generally free from the form or rate regulations imposed on licensed insurers.
This gives them the freedom to maintain broader internal guidelines for
accepting risks. They have more flexibility to design and price their
policies and can, therefore, accept risks that licensed insurers will
In many states, including Illinois, the licensed surplus line producer is required to ascertain that the
insurer meets certain financial standards before buying a policy from
them. In many other states the Department of Insurance, or some other
authority, monitors the financial condition of surplus line insurers and
maintains a list of insurers that surplus line producers are allowed to
use. Whether done by the surplus line producer, the state Department of Insurance, or some other entity, this financial monitoring is an important function because if
the insurer were to fail (go bankrupt), there is no guaranty
fund protection for you.
It is important to note that these insurers are
generally not unable to obtain a license in your state, rather they
to operate on an unlicensed, surplus line basis.
The materials and information contained herein are only synopses of laws,
regulations and other information and do not constitute legal advice. It is
recommended that you consult your legal advisers regarding application of
state and federal laws and regulations to any particular situation. The
Surplus Line Association does not undertake and hereby disclaims any
obligation to advise you of any change to laws and
regulations or the procedures of the Surplus Line Association.