The surplus lines market, a group of highly specialized insurers that includes Lloyd’s of London, exists to assume risks that licensed companies decline to insure or will only insure at a very high price, with many exclusions or with a very high deductible. To be eligible to seek coverage in the surplus lines market, a diligent effort must have been made to place insurance with an admitted company, usually defined by a certain number of declinations, or rejections, by licensed insurers, typically three to five. Many states provide an export list of risks that can be insured in the surplus lines market. This obviates the diligent search requirement.
The terms applied to the surplus lines market—nonadmitted, unlicensed and unauthorized—do not mean that surplus lines companies are barred from selling insurance in a state or are unregulated. They are just less regulated. Each state has surplus lines regulations, and each surplus lines company is overseen for solvency by its home state. More than half of all states maintain a list of eligible surplus lines companies, and some maintain a list of those that are not eligible to do business in that state.
During hard markets and when uncertainty and disruption are present, the surplus lines market generally thrives. According to AM Best, the surplus lines market, which is dominated by commercial lines, has been affected by higher losses from catastrophes, social inflation and COVID-19. These factors resulted in higher pricing for standard writers while allowing surplus writers to develop coverage solutions. AM Best’s 2021 report, Best’s Market Segment Report: With Expanding Opportunities, U.S. Surplus Lines Industry Posts Largest Annual Premium Growth, shows that the surplus market, including domestic and regulated alien companies and Lloyd’s, had $66.1 billion in direct premiums written in 2020, up 17.5 percent from 2019. AM Best expects market conditions to remain uncertain due to COVID-19 pressures, providing favorable conditions for the surplus lines market.