Surplus Lines Fundamentals Study Notes

Overview of Surplus Lines Market

Introduction

  • Course Information:
    • SPEC 210 - Surplus Lines Fundamentals
    • Conducted by Faulkner University, Stumbaugh School of Risk Management & Insurance.
    • Affiliated with WSIA (Wholesale & Specialty Insurance Association) and The Institutes Knowledge Group™.

Importance of WSIA

  • Legislative Advocacy:
    • Monitors issues affecting the surplus lines industry on state and federal levels.
    • Expresses positions of the membership regarding compliance and advocacy efforts.
  • Educational Resources: Offers education, networking, and talent outreach programs, particularly for members under 40 (U40).

Course Assignments Overview

  • Topics Covered:
    • Overview of the Surplus Lines Market.
    • Surplus Lines Distribution System.
    • Surplus Lines Insurers.
    • Surplus Lines Insurance Products.

Detailed Breakdown of Assignments

1. Overview of the Surplus Lines Market

Definition and Necessity
  • Surplus Lines Market:
    • Defined as a non-admitted and non-standard insurance market.
    • Functions as a supplementary market to provide coverage that the admitted (standard) market cannot satisfy.
    • Referred to as the market of last resort and includes excess and surplus (E&S) lines.
  • Why is it Needed?:
    • Essential for covering risks not common to the market, including:
    • Unusual or high-capacity risks.
    • Distressed risks (high frequency of losses).
    • Unique risks requiring specialized underwriting.
    • Emerging risks that are new or have unknown attributes.
Enabling Factors
  • Characteristics of Surplus Lines Market:
    • Operates independent of the constraints that regulate admitted insurers, allowing for flexible underwriting.
    • Licensed surplus lines brokers assist in finding coverage, influencing the marketplace operation.
  • Regulatory Freedom:
    • Freedom from standard rate and form regulations, helping promote profitable underwriting, which otherwise may not be feasible in the admitted market.
  • Individual State Surplus Lines Laws:
    • Although not licensed in the home state, various surplus lines laws ensure regulation and consumer protection.

2. Risks Covered by Surplus Lines Insurance

Types of Risks
  • Distressed Risks:
    • Characteristics involve having unfavorable attributes such as:
    • High frequency of insurance claims (e.g., properties with recent significant losses).
    • Operations associated with hazardous activities (e.g., crop dusting, serving alcohol).
    • Example: An apartment complex with a high frequency of general liability claims.
  • Unique Risks:
    • Insurers may lack the specialized skills needed to underwrite these risks; examples include:
    • Events like festivals or parades.
    • New medical devices undergoing clinical trials.
  • High-Capacity Risks:
    • These represent potential significant loss exposures:
    • Museums with valuable art collections.
    • Chemical plants prone to leaks of toxic chemicals.
  • Emerging Risks:
    • Newly identified risks that may arise such as:
    • Employment practices liability insurance, environmental insurance, and cyber risk coverages.
    • Often begin in surplus lines due to their novel nature before moving towards the admitted market.
Coverage Offered
  • Typical Coverages in Surplus Lines:
    • Professional liability, environmental impairment liability, excess and umbrella liability.
    • Unique personal items like valuable art collections.
    • Catastrophic risk coverage in areas prone to natural disasters, such as hurricanes or earthquakes.

Conclusion

  • Surplus lines insurance provides essential coverage for high-risk and specialized needs that standard markets cannot accommodate. The flexibility and unique regulatory frameworks of surplus lines benefit businesses and non-profits seeking essential insurance solutions.
  • Understanding the nuances and operations of the surplus lines market is crucial for navigating and effectively utilizing these insurance products.