Because of the multiplicity of U.S. insurance jurisdictions, each with its own laws and regulations, all statements made about the U.S. market as a whole must of necessity be general.

Admitted vs. Non-Admitted

Each of the 56 U.S. jurisdictions regulates all forms of insurance within its borders. Generally, an insurer may operate within a jurisdiction as an admitted or non-admitted carrier. Stated simply, an admitted carrier in a U.S. jurisdiction is subject to the regulatory authority of that same jurisdiction; a non-admitted carrier in a U.S. jurisdiction is subject to the regulatory authority of another jurisdiction, whether a U.S. or a non-U.S. jurisdiction.

If a carrier desires admitted status, it enters into an agreement, often called a “charter,” with the jurisdiction’s Department of Insurance or equivalent body. Such agreement stipulates how the carrier must operate when it conducts business in the jurisdiction. Typically, among other requirements, the admitted carrier agrees to file certain financial information, undergo inspections, pay premium taxes, maintain an office or offices in the jurisdiction, and contribute to the jurisdiction’s solvency or guaranty fund or pool. In consideration of that agreement, an admitted insurer is granted a license or certificate of authority, which allows it to conduct insurance business in the jurisdiction.

A non-admitted carrier may be “foreign” or “alien.” From the point of view of a U.S. insurance jurisdiction, a “foreign non-admitted carrier” is any insurer not regulated by that jurisdiction but by at least one other U.S. jurisdiction. An “alien non-admitted insurer” is an insurer regulated by any non-U.S. jurisdiction.

U.S. jurisdictions allow certain foreign and alien non-admitted carriers to sell insurance within their borders. A foreign or alien non-admitted carrier may be either eligible or ineligible to sell insurance in U.S. jurisdictions, depending on the statutes and regulations of the jurisdiction, which may require proof of financial soundness, among other conditions, before eligibility is granted.

Surplus Lines Carriers — Paradox

In the market, eligible foreign and alien non-admitted carriers are called “surplus lines carriers,” or sometimes “excess and surplus lines carriers,” reflecting the name given to the coverages they sell. In short, “surplus lines carriers” = “non-admitted carriers.”

Non-admitted status is not the only characteristic that distinguishes surplus line carriers. A degree of freedom arising out of their non-admitted status — allowing them to operate, in effect, as deregulated specialty insurers — also distinguishes them. In fact, absent regulatory freedom, a surplus lines carrier would have no special market strengths. Thus, “surplus lines carriers” = “non-admitted carriers” = “deregulated specialty carriers.”

However, as stated, to operate in the United States, a U.S.-domiciled surplus lines carrier is always an admitted carrier in at least one U.S. jurisdiction (typically, in its jurisdiction of domicile). In that jurisdiction, the carrier is on the same regulatory footing as all other insurers admitted in the jurisdiction and thus indistinguishable from them.

Therein lies the paradox: to achieve a degree of regulatory freedom as a deregulated specialty carrier, a U.S.-domiciled surplus lines carrier must first be subject to all the same regulations imposed on non-surplus lines (that is, standard) carriers. That’s because admitted carriers are treated equally under the laws and regulations of U.S. jurisdictions, irrespective of whether a company’s mission is to operate in the marketplace as a surplus lines or standard carrier. Differing legal treatment arises only regarding admitted versus non-admitted insurers.

Let’s take, for example, three imaginary U.S.-domiciled carriers — Would-Be Surplus A, In-Fact Surplus B, and Standard C — in California, the country’s largest surplus lines market in premium volume. Would-Be Surplus A is domiciled in California and admitted there; In-Fact Surplus B is domiciled and admitted elsewhere in the United States; Standard C is domiciled elsewhere in the United States and admitted in California. Would-Be Surplus A is not treated under California law and regulations like In-Fact Surplus B with which it shares a mission as a surplus lines carrier, but receives the same treatment as Standard C, a completely different type of operation. As a result, if Would-Be Surplus A were to sell insurance on its own paper in California, it would be bound by the same wording and rating constraints as Standard C. Would-Be Surplus A can fulfill its mission as a surplus carrier outside California only. This situation occurs throughout the United States.

Faced with the paradox imposed by the regulatory system in the United States, surplus carriers, like Would-Be Surplus A in the example, do not sell insurance on their own paper in the jurisdictions where they are admitted. They serve policyholders within their admitted jurisdictions through other insurers that are able to operate as surplus insurers in those jurisdictions.

Surplus Lines — Scope

Although surplus lines, in principle, are not limited to any one type of insurance or buyer, they consist, in practice, almost entirely of specialty commercial property / casualty coverages. Satisfying a variety of specialized needs, surplus lines can respond to demands for:

• Normal coverages, such as property damage or liability insurance, not available from non-surplus lines (standard) carriers because of exposures, loss experience, or limits,
   
• Unusual or unique coverages, such as broader-than-normal liability insurance or specialty risks not available from standard carriers: event cancellation or fine-art insurance or unique risks, a movie star’s legs, for example.