The surplus lines markets in several of the largest states, interms of premiums, continue to wait.

It's the cyclical nature of the business. In a soft market thepolicies go to the admitted market, leaving surplus carriers to viefor what little new business is available in this economy.

"Terms get generous from the admitted market," said Dan Maher,executive director of the Excess Line Association of New York."Then at some point you see losses up--maybe some insolvencies--andthe [surplus] market is all of a sudden back up."

Phil Ballinger, executive director of the Surplus Lines StampingOffice of Texas, said admitted companies have been acceptingmarginal risks to recoup losses in other business segments due to anumber of factors, mainly the difficulties that arise from a downeconomy. "There is no evidence that this is turning any time soon,"Mr. Ballinger shared.

Theodore Pierce, executive director of the Surplus LineAssociation of California, added: "There was supposed to be arecovery, but that didn't happen and I don't think it's doneyet."

Mr. Pierce was referring to the decline in premiums and policycount in California during the last three years.

After the first nine months of 2010 the California associationprocessed 2.4 percent fewer policies than it did during the sametime period in 2009, said Mr. Pierce. Using the same timecomparison, Mr. Pierce said premium volume declined 13 percent.

California, with just over $1.9 billion in premium written aftersix months (a 15.4 percent decline compared with the first sixmonths of 2009), is no longer tops in surplus lines. Thatdistinction now belongs to Florida, with about $2.35 billion inpremiums after six months.

Texas recorded about $1.59 billion in surplus premiums after sixmonths, about a 10 percent drop from the first six months of 2009.New York rounds out the top four states with about $1.37 billion,compared with $1.81 billion a year ago at the end of June.

"The economy is not growing; there are no new risks," Mr. Mahersaid. "There is no new business being formed. Construction is waydown. Payroll and revenues are down."

On the local front--aside from the implications of the federalDodd-Frank Wall Street Reform and Consumer Protection Act--thesebig surplus line states are either dealing with or watching theeffects of new state regulations and court decisions.

Raising Capitalization Requirements
California and New York are each moving toward new minimumcapitalization requirements for surplus carriers from $15 millionto $45 million. California Gov. Arnold Schwarzenegger signed abill, AB 1708, in late September. Nonadmitted insurers on thestate's list of eligible surplus lines carriers must meet capitalsurplus requirements of at least $30 million as of Dec. 31, 2011and at least $45 million by the end of 2013.

Mr. Pierce said the old $15 million surplus requirement was"kind of a joke. You can't afford to play in this market withthat." The surplus market consists of mostly general liability andearthquake policies.

New applicants to the California surplus market as of Jan. 1,2011 must have $45 million in surplus, he added.

New York was waiting to see a draft amendment to currentregulation that would also set a $45 million capitalrequirement.

Mr. Pierce and Mr. Maher said that although the regulation seemsto be significant, a large majority of eligible surplus carriers ineach state already meet the $45 million capital and surplusrequirement.

Mr. Maher said 75 percent of carriers have at least $45 millionin surplus. Mr. Pierce said 80 percent meet the requirement inCalifornia.

Another bill, AB 1837, is awaiting a signature in California.This bill would authorize a surplus insurer domiciled in Californiato have common directors with an affiliated nonadmitted insurer, solong as the common directors do not have a majority of the vote ofthe nonadmitted insurers and do not have any managementfunctions.

The bill would also allow a domestic surplus carrier to performspecified administrative, claims adjusting and investmentmanagement services on behalf of an affiliated nonadmitted insurerthat has qualified as an eligible surplus line insurer.

Also important to the market, a California appellate court ruledthat surplus lines insurers should remain exempt from a 2.35percent tax paid by admitted insurers.

In Texas, surplus carriers are now subject to assessments forthe first time as part of a new funding structure of the state'slast-resort insurer, the Texas Windstorm Insurance Association(TWIA).

TWIA used up all of the cash it had on hand after HurricaneDolly in July 2008. It assessed member insurers $530 million. Now,after TWIA uses the cash it has on hand, and after a round ofpost-event bonds to pay for the first $1 billion in losses, theinsurer will turn to insurers to fund the next round of bonds viaassessments, including on surplus policies.

Mr. Ballinger called this prospect as "hairy, complex andonerous."