The surplus lines industry represents a significant portion ofthe country's available insurance capacity, with estimated totalpremiums of $38.6 billion in 2006. Of that amount, Floridaaccounted for roughly $4.6 billion; making the state the secondlargest surplus lines market in the country with total premiumsreaching $4.6 billion. Considering all the market's moving partssuch as agents, brokers, reinsurers, and carriers, it is amazingthat a market as complicated and large as Florida's, manages to runalong as smoothly as it does. But that is no accident. Much of thatcredit goes to the one entity that is charged with pulling all thestrings together, namely the Florida Surplus Lines ServicesOffice.

The FSLSO was created by the legislature in 1999 as a means toprovide some regulatory oversight of the excess and surplus linesindustry, which largely falls outside of the insurance code. Amongother things, the office is responsible for collecting all taxesand assessments such as the FSLSO service fee of 0.1 percent on alltaxable and non-taxable premiums, with the exception of policiesissued to government entities. The service office also collects theDepartment of Financial Service's premium tax of five percent ofall taxable premiums. All surplus lines policies issued in 2006 aresubject to a 6.84 percent assessment levied by Citizens PropertyInsurance Corporation.

While collecting taxes and assessments is a primary function ofthe FSLSO, the service office also works with regulators on avariety of other subjects. FSLSO Public Information SpecialistAshlee Weber noted that the service office must review allapplications by companies seeking to write coverage in the statebefore that application can be forwarded on to the Office ofInsurance Regulation for final action. The service office alsomonitors agents, although the DFS has the statutory authority tosuspend or revoke and agent's license.

Explaining how the service office and regulators interface is achallenge for many agents. A carrier with whom I've worked for overa decade constantly states that their customers just “don't listen”and that necessitates repeating ad infinitum everything from theirunderwriting “appetite” to their corporate message. As you mightexpect, despite all of their educational efforts, not everyonereally understands who or what the service office is and what itdoes.

Tiffany Varn from FSLSO said, “The most common misconception isthat we are the State of Florida and/or that we levy the taxes,assessments, and surcharges that we collect on behalf of the state.Many filers do not understand that we are collecting on behalf offour different entities and that the monies that are invoiced byour office are not funds of FSLSO. They do not make the distinctionbetween the State of Florida and our office.”

FSLSO Assistant Director of Education and Information ServicesSean Fisher stated that “FSLSO is the only stamping (office) thatbills and reconciles the state's taxes, as well as assessments forvarious state entities, i.e., Department of Community Affairs,Florida Hurricane Catastrophe Fund (FHCH) Emergency Assessment, andCitizens Property Insurance Corporation. The collection of thesevarious assessments has everything to do with the efficiency of ourfiling and accounting systems.”

Weber said that while the FSLSO is focused on important issuessuch as collecting taxes and assessments, much of the office'sresources are directed toward agents. The service office providesagents and brokers with educational courses, while maintaining ahost of market data. The FSLSO just published its 2006 annualreport, which paints a picture of a robust surplus lines' market.Looking at last year, the service office reported that 153 eligiblesurplus lines carriers provided coverage in Florida, of which 121were foreign insurers and 32 alien insurers. The FSLSO had 1,061licensed member agents and 570 submitting agents. Those agentsreportedly wrote nearly $4 billion in premiums–which when combinedwith the $ 600 million in independently procured coverage (IPC)premiums–equaled a total industry premium of $4.6 billion. Thismakes Florida the second largest surplus lines market in thecountry, a fact that is unlikely to change.

By the Numbers

To gain some perspective of the volume of activity proportionateto the premiums, in the past three years (through the 3rd quarterfor each year), the FSLSO has handled the following transactionsand premiums:

As expected with this level of volume, FSLSO exhausts a greatdeal of resources to make sure that the reporting of surplus linestax and fees are accomplished in a timely and accurate fashion.Surplus lines agents are required to report all transactions andFSLSO tracks such reporting on a continual basis. It's complicated,so there has to be a pretty sophisticated system in place to handleof all this and it's good to know that there is, including a welldeveloped electronic filing system.

Fisher noted that there are 14 states currently with someversion of an electronic filing system in place. However, he said,Florida is the first to do so through a service office. Receivingthe phenomenal number of transactions coming to the service officeis just the beginning; that information has to be reviewed,corrected if necessary, and efficiently and securely stored. (Justthink for a moment about your office handling more than one milliontransactions a year!)

As to the methodology, Fisher offers this: “The accuracy of theinformation submitted to the FSLSO is measured on two differentplatforms. The first is an Agent Report Card. Each quarter agentsreceive a report card relaying their level of compliance withFlorida's surplus lines filing procedures following a set of fourcriteria which include measures such as timeliness and accuracy.”The overall industry average for each quarter is available in thechart below:

YearQuarter 1Quarter 2Quarter 3Quarter 4

200586.34%91.21%87.14%88.32%

200687.43%88.31%87.97%88.47%

200786.69%88.68%87.24%TBA

In addition to the report card, there is an ongoing reviewprocess administered by FSLSO. That process is focused on review ofthe conduct of a surplus lines agent regarding submissions by theagent to FSLSO. “The Compliance Review Program utilizes theexpertise and experience of contract analysts in reviews thatcompare a sampling of a surplus lines agent's policies to thetransactions submitted to the FSLSO,” said Fisher. “Agents reviewedin a particular quarter who write surplus lines business areprovided a compliance review score. This overall score is based onthe elements of the compliance review where the information on thedeclarations page of the policy is compared for its accuracy withthe information that is filed with our office. The grade representsthe compliance performance with respect to filing transactions withFSLSO.” (See table below)

YearQuarter 1Quarter 2Quarter 3Quarter 4

200595.7%92.4%94.4%95.1%

200693.5%90.6%93.7%90.6%

200794.5%94.8%93.3%

While there are many other details to consider regarding thefiling process, one of the areas that presents some confusion isthe “export” requirements. Retail agents must perform a “diligentsearch” in order to export coverage to the non-admitted market, andthey must document three declinations from admitted companies. Thisarea can be a challenge for the surplus lines agents who arerequired to receive and maintain those documents in their file. Tothis point FSLSO Agent Services Administrator Matt Wester states,“An agent must remember that he or she must be licensed andappointed for the types and class of business in order to properlyexport the coverage. In other words, they cannot use a life companyas a rejection in order to export a general liability policy. Theymust also remember that if they do not have three companies thatthey are licensed and appointed with, they must check with theircompetitors first in order to properly execute the duediligence.”

Agent Resources

To help with these and other issues, FSLSO does a tremendous jobof providing education and training to Florida insurance agents andsurplus lines agents involved in the transactions. CE classes andjoint presentations to and with many of the local independentagents' associations (FAIA, PIA, etc) are one method. Fisher alsopoints out, “there's an 8-minute DVD regarding the retail agents'role in the surplus lines marketplace, as well as an online 2-hourCE class for retail agents explaining their role in surplus linesmarket.”

Other educational tools include a free online electronicbulletin subscription announcing status changes of surplus linesinsurers, OIR or DFS bulletins, and changes in filing requirements.Agents and brokers also can receive a free subscription for thequarterly newsletter, The Advisor. The FSLSO provides Floridalicensed surplus lines agents' contact information to Kirschner'sRed Book – Southeast Edition.

FSLSO are also associate members of the Florida Surplus LinesAssociation and several key national surplus lines associations.FSLSO works closely with those organizations through industrymeetings, panel discussions, and committee/project work, along withother state stamping offices to stay current with (or ahead of) themyriad issues involved with the insurance industry, includinglegislation, technology, and the like.

When working with surplus lines business, questions are bound toarise. If a retail agency has a question or concern about a surpluslines' carrier or a surplus lines' agent, Ashlee Weber recommendsthe FSLSO web site (www.fslso.com). “Through FSLSO's web site, anagent or consumer has the ability to research any eligible Floridasurplus lines insurer by checking our Insurer Financial Datareports,” says Ashlee. “These reports compile financial informationfor all surplus lines insurers eligible to operate in Florida, fiveyears for foreign insurers, and four years for alien insurers.”These reports can be found by visitingwww.fslso.com/market/insurer/.

For information concerning agents, Ashlee also recommends aprogram called the Market Data Reports. “Through the Market DataReports, a retail agent or a consumer may look up the top (surpluslines) agents writing a particular coverage for a specific timeperiod,” she said. This report further provides the contactinformation for agents, including mailing address and phone number.These reports can be accessed by visitingwww.fslso.com/market/reports/. Finally, Ashlee reminds you that“beyond the web site, FSLSO provides assistance via e-mail and mostpredominately by telephone.” Anyone searching for additionalinformation may do so by calling 800-562-4496.