Surplus Lines Market
The non-admitted insurance market where unlicensed carriers write risks that the standard market cannot or will not insure.
What It Is
The surplus lines market, also called the excess and surplus (E&S) market, consists of insurance carriers that are not licensed (non-admitted) in the state where the risk is located but are permitted to write business there through surplus lines licensing. Surplus lines carriers operate with greater freedom than admitted carriers: they can set their own rates, design their own policy forms, and write risks that fall outside standard market appetite.
Surplus lines placement requires a licensed surplus lines broker who serves as the intermediary between the retail agent and the non-admitted carrier. Many states require a diligent search of the admitted market before placing a risk in surplus lines, and the surplus lines broker must certify that admitted coverage was unavailable. Surplus lines policies are subject to state surplus lines taxes (typically 3-5% of premium) in addition to the policy premium.
The E&S market has grown significantly, reaching over $100 billion in premium and representing approximately 20% of the US commercial P&C market. Major surplus lines carriers include Lloyd's of London syndicates, Lexington (AIG), Scottsdale (Nationwide), Nautilus (W.R. Berkley), and USLI (Berkshire Hathaway). The market serves as a safety valve for risks that cannot find coverage in the standard market, including emerging risks, unusual exposures, catastrophe-prone properties, and distressed accounts.
Why It Matters for Brokers
Surplus lines expertise is essential for commercial brokers because many mid-market and all complex accounts require at least some E&S coverage. Brokers must understand surplus lines licensing requirements, tax obligations, and the regulatory differences between admitted and non-admitted carriers. Improperly placed surplus lines business can result in regulatory penalties and uninsured clients if the non-admitted carrier fails (no guaranty fund protection).
Real-World Example
A nightclub with a $2M total insured value and two liquor liability claims in the past three years cannot find coverage in the admitted market after three declinations. The broker engages a surplus lines broker who places the risk with a Lloyd's syndicate: $32,000 annual premium for a commercial package plus $18,000 for liquor liability, plus 3.5% surplus lines tax ($1,750). Total cost: $51,750. The surplus lines broker completes the diligent search affidavit documenting the three admitted market declinations, fulfilling the state's regulatory requirement.
Common Mistakes
- 1Not collecting and remitting surplus lines taxes, which is a regulatory violation that can result in penalties against both the retail agent and the surplus lines broker.
- 2Placing risks in surplus lines without documenting the diligent search of the admitted market, creating compliance exposure in states with diligent search requirements.
How brokerageaudit.com Handles This
brokerageaudit.com tracks surplus lines placements separately, calculating applicable state surplus lines taxes, maintaining diligent search documentation, and generating compliance reports. The system flags surplus lines policies in the COI Manager to ensure certificates accurately note the non-admitted status where required by state law.