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Leveraging the growth of the surplus lines market

The U.S. surplus lines market has seen double-digit growth in recent years for a reason: It’s a reliable solution.

December 21, 2023 — by Dan Maloney, Vice President Wholesale —

As admitted capacity decreases, there’s a growing segment of high-quality business that the surplus lines market is accommodating.

As major property insurers retrench from California due to wildfire risk, and admitted markets become scarcer in Florida, Louisiana and other coastal states, there is an all-time need for capacity solutions in catastrophe-exposed regions.

Surplus lines may be the answer many agents are looking for — they just don’t know it yet.

The surplus lines market has come a long way since its inception in 1890. Today, surplus lines is a $98.5 billion market and a major part of the property insurance landscape, accounting for 11.2% of total P&C industry premium. In fact, surplus lines direct premiums written grew by 19.2% in 2022, with the most significant growth in California (22.2%), Texas (27.3%), and Florida (26.5%), indicative of both the increasing need and increasing availability of surplus lines options.

By offering surplus lines coverage, agents can leverage a deep bench of innovative solutions for catastrophe-exposed property, resulting in more tailored coverage for policyholders. This also offers agents the opportunity to expand their customer base and write a broader range of risks.

Things every agent should know about surplus lines

Rethinking surplus lines — and gaining a better understanding of its benefits — can open valuable opportunities for agents in hard property insurance markets where admitted capacity remains limited. As surplus lines become an even more essential source of capacity over time, agents should be ready to educate their policyholders on the benefits:

No. 1: Surplus lines capacity is not only for hard-to-place risks.

While surplus lines were once the market for specialized risks, more and more property owners are becoming eligible for this coverage. Challenging market conditions — driven by elevated catastrophe activity, rising claims costs, carrier insolvencies, and increasing reinsurance costs — are pushing even desirable risks beyond the appetite of admitted markets.

As admitted capacity decreases, there’s a growing segment of high-quality business that the surplus lines market is accommodating, including high-value properties, ineligible locations, or slightly older roofs.

To cite a recent example, SageSure’s Expanded Markets program was created to provide capacity for desirable risks that fall just beyond the eligibility of its highly preferred programs.

No. 2: Surplus lines insurers have a very high solvency rate.

Surplus lines transactions are regulated on the state level, and thanks to the strength of state-based solvency monitoring, insolvency rates for surplus lines insurers have remained historically low, according to the National Association of Insurance Commissioners.

Many surplus lines operations are held to higher financial stability standards and are required to maintain more substantial financial reserves than standard market insurers, ensuring these markets have the capital to cover widespread claims and the ability to operate long term.

What’s more, surplus lines insurers tend to perform well, even during economic conditions that typically strain standard markets. According to Fitch Ratings, the overall excess and surplus lines (E&S) market is expected to generate an underwriting profit in 2023 and 2024 due to improved combined ratios and the ability to price products to keep pace with loss costs.

No. 3: The surplus lines market is well regulated.

Surplus lines contend with regulation at both the state and federal level, just differently from conventional markets. These regulations typically include requirements for financial solvency, licensing, and adherence to certain standards, ensuring that surplus lines operate within defined parameters to protect policyholders and maintain market stability. The difference in regulation between markets allows surplus lines brokers the flexibility to create specialized products, address the coverage needs of a wider range of clients, and price risks appropriately.

No. 4: Surplus lines are at the front lines of insurance innovation.

Without the same regulatory constraints as admitted markets, surplus lines products can be developed and launched quickly to respond to rapidly changing market conditions, new customer segments, and evolving customer needs. In fact, many products that began as specialized segments are now offered in conventional markets, highlighting the important role surplus lines plays in encouraging competition in the broader P&C insurance ecosystem.

The U.S. surplus lines market has seen double-digit growth every year for the past five years for a reason: It’s a reliable solution for many customers who would otherwise be unable to secure insurance coverage on the private market. Agents can both win more business and deliver more value to their customers by leveraging all this market has to offer.