Surplus Lines Placements Now A Necessity On Many Accounts Traditionally, the use of the excess and surplus lines markets has been placement of what insurers considered the less desirable or more risky lines of business. That definition has not changed in the new, tougher market we face today.
What has changed is many standard insurers definitions of "desirable" and "risky." More independent agents and brokers are finding that surplus lines carriers are much more eager for their business, while standard carriers are finding reasons to avoid it.
Independent agents and brokers say they are finding that many of the same stringent underwriting criteria applied during previous hard markets is being re-employed by standard markets today.
Surplus lines have become a necessity to write almost any account with an unacceptable level of risk that would cause an underwriter to rate up an account, exclude a vital coverage on an account, or decline to renew or even quote a new account.
Presently, most standard carriers require that a business be operational, have insurance for at least three years, and possess a proven track record with few or no losses.
Two years ago these same accounts would have been gladly accepted by almost any standard company. But now they are not "desirable." There is too much "risk" involved.
In these hard market conditions, the E&S market has emerged as a critical industry component. In the 80s, business was placed with a huge stable of standard markets that could handle almost everything. Using an E&S market was uncommon, usually reserved for special events cover or certain types of professional liability. Now the starting point seems to be the E&S markets.
The Independent Insurance Agents & Brokers of America is helping agents to better understand and use specialty markets.
The association provides an online gateway to connect member agents with select insurance company partners who offer a host of specialized insurance products and services. There are no volume commitments or access fees. The program picks its insurance partners and provides agents access to underwriting and coverage information, program administrator and insurer credentials, educational tools, and policy forms.
IIABA also offers independent agents free access to hundreds of specialty lines through an online specialty insurance network. Through a toll-free number, agents and brokers can receive faxed information about MGAs and underwriters that can help them.
If the current hard market is anything like past cycles, count on the amplified use of E&S markets due to increased demand and the inability of admitted markets to get regulatory approval of coverage reductions or rate increases.
There are some excellent E&S markets providing products and services considered superior to those in the standard market. However, while the majority of business transacted in the E&S market is done in a highly professional manner, agents must always be aware of potential pitfalls and caveats.
Some useful tips to help agents properly manage their accounts in the E&S markets are:
Know and obey state laws.
Many states prohibit some coverages from being written in an E&S market. Others disallow the placement of business with an E&S carrier when an admitted market is available. Some states stipulate that business placed in the E&S marketplace come only following a "diligent search" and must include a list of admitted carriers that declined the risk. In at least one state, Tennessee, if an unapproved E&S carrier becomes insolvent, an agent is held personally liable, not the agency.
Make your clients aware of possibly more stringent policy conditions.
In many states, certain cancellation and non-renewal laws may not apply to E&S carriers.
Have the client sign an E&S waiver letter that states the client understands the policy does not fall under the usual regulatory protections of the standard market and that the agency is not to be held responsible for actions of the insurer under certain conditions.
Evaluate the E&S carriers financial stability.
Admitted carriers are better regulated for solvency and usually meet more stringent financial requirements and tests. Most states do not have an E&S guaranty fund.
Be wary of more restrictive policy provisions.
Any state prohibitions, restrictions or exclusions might not apply to E&S carriers. When moving a client from a standard to E&S program, the agent should review the policy when it results in coverage reductions.
Paperwork might increase.
The agency may have to file monthly reports and be responsible for paying surplus lines taxes. There likely would be less reliance on automated systems for work processing.
There could be fewer services.
The E&S carrier may not be able to offer the same level of claims, loss control or audit services expected by clients. This, and product scope, should be considered when comparing prices.
Guarantee continuing ownership of expirations.
While it is rare an E&S carrier would seek ownership of business, make sure the brokerage agreement clearly specifies the retail agent as the owner.
Review contractual agreements very carefully, particularly hold-harmless provisions.
Some contracts make agents responsible for more than negligence, including fines and penalties. An E&O policy will usually not cover these contractual liabilities.
Outplacement could create a broader duty to clients.
Depending on statutory or case law, an agent may be considered a broker, representing the client rather than insurer. This may create a higher standard of care.
You will most likely have no binding authority.
Agents may neither be able to place coverage quickly nor issue urgent certificates, if they can issue certificates at all.
Consider other pricing issues and ability to negotiate effectively.
The premium may be cheaper, but there could be a large minimum premium requirement. By abandoning a long-term standard carrier relationship, the client might lose negotiating clout if they return. Also, the agent may have little or no influence on the carrier in contractual or claims situations.
Bill Wilson is the Executive Director of the Big "I" Virtual University, the online educational service of the Independent Insurance Agents & Brokers of America based in Alexandria, Va. For additional information contact IIABA at info@iiaba.org.
Reproduced from National Underwriter Edition, February 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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