The surplus lines market saw plenty of growth in 2018 and one-third of the way through 2019 there is no reason to think that the trend won’t continue.
As reported by the Surplus Lines Stamping Office of Texas (SLTX), from information provided by the 15 U.S. tax stamping/servicing office states, surplus lines premium grew in those benchmarked states to more than $31 billion for 2018. The SLTX noted that the growth speaks to the positive impacts the wholesale insurance community has had in quickly reacting for “hard-to-place, unusual and unique, or high capacity” coverage requests. According to the report, the surveyed states that experienced double-digit premium increases in 2018 were led by Nevada (23.9%), Washington (23.1%), California (16.5%), Texas (11.4%), Florida (10.9%), and New York (10.6%). So far in 2019, the SLTX has already reported a 17% year over year premium increase in Texas through the first 4 months over the same period last year.
A.M. Best reported in their 2019 US Property/Casualty Review and Preview that they expect surplus lines coverage to continue to grow. A.M. Best noted in its report that (1) standard lines carriers continue to creep into the surplus lines market, a trend that they also expect will continue in 2019, and that (2) favorable conditions have attracted new entrants presenting themselves as alternatives to established players. A.M. Best is maintaining its Stable outlook on the surplus lines segment, and they expect that market conditions will remain supportive of appropriate levels of risk-adjusted capitalization and strong operating performance.
Changes in the regulatory environment support continued growth. These include the easing of placement requirements and expansion of lines/types of products that can be written on a surplus lines basis. Mississippi and Louisiana are two jurisdictions that have recently eliminated diligent search requirements, joining Virginia and Wisconsin. Earlier this year, New York introduced Senate Bill 769A amending N.Y. Ins. Law § 2118 to allow for wholesale excess lines brokers to skip the diligent search requirement with respect to commercial lines policies. The exemption would apply when an unaffiliated retail broker is involved in the transaction in order to avoid circumstances where retail brokers may establish affiliated surplus lines licensed producer entities to bypass the admitted market. The change is to expedite service to insureds while maintaining the state’s ability to protect consumers. It was noted that approximately 17% of New York licensed insurance brokers place excess line business through wholesale brokers for an annual average of twenty-five transactions each.
The theory is that the market should take care of itself and risks will only enter the surplus lines space when the admitted market refuses to place the coverage and therefore the diligent search should not always be necessary. This can be significant in the Insuretch space where companies are looking at new and innovative ways to bring products to the market. The diligent search requirements can be an unintended roadblock for coverage that is, for example, intended to be purchased instantly via an app on a mobile phone, or for policies that are intended to be turned on and off as needed by the insured. The help, California amended its laws to allow the insurance commissioner to exempt certain surplus lines policies from the diligent search requirement for “new, innovative products for which a reasonable or adequate market among admitted insurers has not had time to develop.” Cal. Ins. Code § 1763.1.
State are also eliminating the diligent search requirement for specific important product lines, such as flood. Texas recently introduced House Bill 1306 relating to the provision of flood coverage under insurance policies issued by surplus lines insurers. The bill would eliminate the diligent effort requirement prior to placement of flood coverage on a surplus lines basis.
While some states are looking at eliminating procedural requirements others are also expanding the types of insurance that may be written by surplus lines insurer to meet the needs of the market. One of these areas is accident and health coverage. At the NAIC Spring National Meeting in April, 2019, the NAIC adopted the Guidelines on Nonadmitted Accident and Health Coverages developed by the Surplus Lines Task Force. The Guidelines are meant to help states regulate the nonadmitted accident and health market. The types of accident and health coverage that some states are permitting in the nonadmitted market include, but are not limited to, short term medical, international major medical, excess disability, high-risk disability and other similar coverages. The Guidelines stress that comprehensive health plans, Medicare supplement insurance and standard disability insurance coverage are not suitable for the nonadmitted market. On April 5, 2019, the Governor of Maine signed an amendment to its laws permitting disability insurance to be written on a surplus lines basis.
Whether it is the elimination of the diligent search requirements, the expansion of exports lists to meet the demand for new and innovative products, or the removal of barriers to write certain types of coverage, opportunities for growth continue.