January 14th, 2020
If you own a business, chances are you require some form of insurance on either your liabilities or assets. These requirements can be for your risk management, bank requirements, contract requirements, or any combination of things. Every industry deals with these requirements, no matter how high risk or unique their business is.
This presents a significant problem for insurance companies.
Insurance companies rely on a principle called the law of large numbers to underwrite and predict future losses. That means they have to insure a large number of similar businesses in predictable, low claims industries to predict the rate they need to charge.
What if you have a unique business, or don't have thousands of competitors?
What if you just had a series of severe claims in the past three years?
What if you are in an industry that is too high risk for these heavily regulated insurance companies to insure?
These are all problems that excess and surplus insurance can solve while allowing almost all businesses to get insured.
There are many differences between excess and surplus versus standard insurance companies – often referred to as non-admitted and admitted, respectively. The biggest difference, however, is the amount of regulation between them.
Your state's insurance commissioner reviews the forms, rates, and financials of all standard insurance companies to make sure they are offering consumer-friendly products, and to protect the public's interest against insurance companies. The insurance commissioner provides pricing guidelines to these insurance companies and will prohibit certain exclusions if they are deemed unfair. Additionally, if you purchase insurance from a standard insurance company, you will be protected by your state's guaranty fund if the insurance company is unable to pay claims.
These regulations created marketplace conditions where only businesses in low-risk industries with a high number of similar companies were insurable. Standard insurance companies could not add specific exclusions to protect themselves, had less flexibility to change the insurance form to make an acceptable policy, and couldn’t adjust the rate to match the risk exposure, leaving many businesses uninsurable.
In contrast, excess and surplus lines insurance companies allow consumers to sacrifice some of their consumer protections for the opportunity to buy insurance for their businesses.
Generally, excess and surplus lines carriers provide the same types of coverage as standard insurance carriers, except for state-mandated insurance such as automobile and workers compensation.
In addition to providing similar types of insurance, excess surplus insurance can provide additional coverages or structure insurance programs in a way that standard companies cannot. This additional regulatory flexibility means that customers who require custom coverage or coverage structured in a particular way will find more options in the excess and surplus market.
Buyers of excess and surplus insurance often ask why fees and taxes are charged. After all, other insurance companies do not have similar charges. Here are three reasons why:
The Broker Fee: Most excess and surplus insurance policies are purchased through wholesale brokers such as AmWins, CRC, and R-T Specialty. They are licensed to sell surplus lines in your state and specialize in handling excess and surplus lines insurance. Most wholesale brokers charge a fee for their insurance placement services. Fees per policy can range from $150 for small businesses to $1,500 for large and complex insurance programs.
Surplus Lines Tax: Excess and surplus insurance customers are required to pay a certain amount of state tax for every policy. The percentage varies by state and is filed and paid by your insurance broker.
The Inspection Fee: Although many excess and surplus liability insurance policies require inspections, if you are buying excess and surplus property insurance, there is almost a guarantee that you will see an inspection fee on your policy. This inspection fee pays for a representative of the insurance company to visit your property and inspect it for insurability, risk, and to provide recommendations to the policyholder.
Although not as secure as the standard market, it is generally safe to purchase insurance on the excess and surplus lines marketplace if you follow certain guidelines. Here are a few questions to ask before you purchase a policy:
A.M. Best is a credit rating agency that assigns a score to insurance carriers. This score is a good indicator of the insurance carrier's ability to pay out future claims in various scenarios.
We suggest using carriers grouped in the "A" range of rankings. These rankings include A-, A, A+, and A++ ratings. This will provide you the assurance that your assets and liabilities are covered if you ever have a claim.
Additionally, the size of the insurance carrier does matter, especially if you are purchasing high liability limits or insuring a substantial amount of property. A.M. Best releases this information along with their rating. Talk to your insurance broker about choosing an insurance carrier of an appropriate size to handle your risk.
Most E&S insurance carriers are a division of a larger insurance carrier or a parent company, so find out if your quote is from a standalone insurance carrier or a subsidiary.
Having the backing of an A-rated larger insurance company could strengthen their ability to pay your large claims. Berkshire Hathaway is a popular example of how a large parent company can provide certain assurance that claims will be paid for their subsidiary insurance businesses. That being said, we still suggest adhering to our recommendation of only using A-rated insurance carriers.
Make sure to consult your insurance broker on their risk tolerance when placing insurance with low-rated carriers. Each insurance broker will have a different outlook on this. Following our above recommendation, LandesBlosch only uses carriers with an A rating.
Verify that you understand if your insurance program is part of a risk pool or captive agreement. There are insurance programs that look like traditional insurance but function in a very different way. Ask your broker whether you share limits with any other party and verify that you are purchasing a conventional insurance policy.
In the excess and insurance lines market, one of the largest and most notorious players is Lloyd’s of London. Lloyd’s does have some admitted insurance programs, but isn't an insurance company in the traditional sense; it’s more of a marketplace where insurance buyers and sellers come together to cover some of the world's most preeminent risks. Although a small portion of what Lloyd’s of London insures, it is largely known for the bizarre specialty coverages that they can provide, from their space insurance program to insuring celebrity body parts.
Lexington (a division of AIG) is one of the largest insurers in the E&S market. This company is known for covering hard-to-place homes, difficult real estate, and liability insurance. AIG and Lexington are also leaders in the program market, where they specialize in multiple different types of businesses.
Scottsdale (a division of Nationwide) is a common insurer in the E&S market. In addition to insuring mid to large-sized businesses, they have a broad appetite for insuring small businesses in the U.S. From fitness facilities to general contractors, Scottsdale can provide insurance for most businesses.
Westchester (a division of Chubb) is a significant player in the excess and surplus lines market. They insure businesses of all sizes for both liability and property coverages. In addition to providing traditional liability insurance, Westchester is a leader in liquor liability and property insurance.
No matter how large or unique your business is, or what type of high hazard industry you operate in, excess and surplus lines can likely accommodate you.
If you have questions about excess and surplus insurance or whether your business is insured correctly, reach out to one of our risk advisors.
You need insurance - we can help.
Start your free quote today.