Surplus lines insurance — also referred to as Excess and Surplus lines or the non-admitted market — has been in existence since the early 1800s. It is a segment of the insurance market that provides coverage for the unique, unusual, or high-hazard account, be it commercial or personal lines. The most recognized carrier providing surplus lines coverage in Florida is Underwriters at Lloyd's, although there are many other E&S carriers doing business here today.

The surplus lines market acts as a complement to standard insurance carriers licensed by the Florida Office of Insurance Regulation (OIR). It is not a market of last resort such as the auto or workers' compensation assigned risk plans. E&S carriers provide a much needed outlet for insurance buyers who present a more challenging type of risk to the insurance market. They are willing to underwrite and accept difficult risks that standard carriers will not consider. As entrepreneurs, they do this voluntarily and look to produce an underwriting profit.

One of the unique characteristics of surplus lines carriers is they are not required to file policy forms or rates with the OIR. This is often referred to as the “freedom of rate and form.” They are also exempt from other regulations imposed on admitted carriers. These freedoms and exemptions give surplus line companies the flexibility to design and price their product according to the risk being underwritten. Of equal importance, it allows them to react immediately to the needs of consumers for coverage or capacity when market conditions change, regardless of the reason, including the occurrence of a catastrophe or a calamity.

The 2004 and 2005 hurricane seasons were good examples of events that caused rapidly changing market conditions that standard carriers could not and did not respond to. Because of the flexibility allowed by the “freedom of rate and form,” E&S carriers were able to respond, expanding their capacity and filling gaps in coverage. The surplus lines market provided the safety valve needed by the economy and commercial and personal lines consumers. While wind coverage was expensive, the E&S community played a vital role in allowing Florida's economy to continue to function and operate without a prolonged interruption.

Florida Regulation

The freedoms granted by statute to surplus line carriers do not equate to a lack of regulation. In practice, the regulation follows a different path than the regulation of standard markets.

Historically, E&S companies have not been subject to regulation by insurance departments beyond their home state. Since they operate as an admitted carrier in their home state, they are regulated in all respects by that state's insurance department just like any other admitted carrier. There are several techniques used in Florida to keep a very watchful and supervisory eye on both the E&S carriers and the agents who represent them.

To market their products in Florida, every E&S carrier must undergo extensive financial scrutiny by the OIR prior to being deemed “eligible” or authorized to write business. This review is very similar to the review conducted for an admitted company. It is no less stringent, as surplus line companies are not subject to the Florida Insurance Guaranty Fund.

Florida imposes a minimum policyholder surplus of $15 million for E&S companies seeking to do business in Florida. Under certain circumstances, that minimum is increased to $25 million. By comparison, standard carriers are only required to have a minimum of $5 million in policyholder surplus.

Once declared eligible to do business in Florida by the OIR, subsequent regulation flows through the company's appointed agents and brokers. A special license is required to do business with E&S carriers and only licensed surplus lines agents may work with these carriers. Surplus lines agents are under the close supervision of the Department of Financial Services, must pass a special exam to conduct their operations, and must post a financial security bond with the state. By contrast, there is no financial security required of general lines agents.

Every three years, each surplus lines agent undergoes a regulatory compliance audit performed by the Florida Surplus Lines Service Office (FSLSO). Reporting to the OIR, the FSLSO's statutory purpose includes the protection of consumer interests by facilitating compliance with the laws and rules governing the Florida surplus lines community. During 2008, FSLSO performed 279 agent audits and reviewed 7,845 policies and 8,880 transactions. By comparison, there is no audit performed on general lines agents.

Every 30 days, surplus lines agents report all premium transactions, including specific policy data, premium taxes and other fees to the state through the FSLSO. This data is compared to what is submitted by the E&S carrier; any discrepancies are analyzed and corrective action is taken immediately.

Premiums charged and forms of coverage offered by E&S carriers cannot be more competitive or broader than those offered by the standard market.

E&S carrier financial statements are reviewed on an ongoing basis by the major rating agencies and financial ratings are assigned. These ratings are public record.

As E&S carriers are admitted in their home state, they are regulated extensively every three to five years by the home state insurance department. Audited company financial statements, referred to as “Convention Statements,” are supplied to the home state annually with a physical audit performed every three to five years.

Financial Impact

The financial impact from the surplus lines industry in Florida is significant.

In 2008, the Sunshine State was the second largest state in the nation for surplus lines business. According to data from the FSLSO, for calendar year 2008, $4.3 billion of surplus lines premium was written in Florida. This generated tax revenue to the state in excess of $210 million. On a combined basis from 2005 to 2008, over $600 million in tax dollars were placed in Florida's general revenue fund from surplus lines. Surplus lines policyholders have also paid in excess of $204 million in assessments for Citizens Property Insurance Corp. since 2005 and contributed over $40 million to the Florida Hurricane Catastrophe Fund during 2008 alone.

For calendar year 2009, Florida surplus lines premium reported to the FSLSO was down slightly to just over $4 billion. Despite this reduction, Florida moved in to first place as the leading writer of surplus lines business in the U.S. Premium taxes paid to the state of Florida during 2009 exceeded $180 million.

For this same time frame, Citizens assessments paid by surplus lines policyholders exceeded $35 million with an additional $38 million contributed to the Cat Fund.

As these numbers ably demonstrate, the Florida surplus lines industry is a major contributor to our Florida economy.

Irvin “Skip” Wolf III is senior vice president of Regional Excess Underwriters, LLC, a wholly owned subsidiary of W.R. Berkley Corporation. Wolf is a member of the Board of Directors and Treasurer of the Florida Surplus Lines Association and is a member of the board of Governors of the Florida Surplus Lines Service Office. He may be contacted at 866-873-017 or [email protected].