Surplus Lines Proposal Could Streamline Insurance Market

Published September 1, 2009

Regulatory reform could be on the horizon for the surplus lines insurance market, which provides coverage for hard-to-place risks not handled by standard insurance markets.

The Reinsurance Reform Act of 2009, introduced by Rep. Scott Garrett (R-NJ) and Rep. Dennis Moore (D-KS), would reform how surplus line insurers are regulated.

The proposed reforms are a positive step for the excess and surplus (E&S) market, says Eli Lehrer, an insurance expert and senior fellow at the Competitive Enterprise Institute.

“The proposed legislation would streamline regulation of surplus lines insurance and make it somewhat easier to offer innovative new products across state lines while simultaneously increasing regulatory certainty for surplus lines insurers,” Lehrer said.

More Freedom, Flexibility

The E&S market allows consumers to buy property and casualty insurance through the state-regulated insurance market, with greater freedom to negotiate specific coverage and price. That additional freedom would allow the surplus lines market greater flexibility and an ability to adapt to market conditions and special consumer needs.

E&S insurance is popular with commercial customers whose risk management is an especially significant part of business, such as general contractors, trucking companies, and other businesses with unique or difficult risk exposures.

Home State Regulation

The measure modernizes surplus lines regulation by making the policyholder’s home state the source of regulation for individual surplus lines transactions.

According to the Property and Casualty Insurance Association of America, the new rules would “streamline a critical component of the surplus lines insurance market, particularly in regard to conflicting state laws governing the placement, tax payment, and allocation of premium for multi-state surplus lines risks.”

“This legislation is a vital step toward reforming and streamlining our current insurance regulatory system,” said David A. Sampson, the association’s president and CEO, in a press statement on the bill. “This bill, if enacted, will create greater legal and regulatory certainty for surplus lines consumers, which will benefit insurers, businesses, and the economy.”

John Wood, president of the National Association of Professional Surplus Lines Offices Ltd., said in a statement, “We believe that the bill would make the surplus lines marketplace more efficient by facilitating the payment of surplus lines premium taxes and eliminating unnecessary duplicative compliance requirements on surplus lines multi-state risks.”

Important for Risk Management

Lehrer says surplus lines coverage is an important component of risk management for many businesses.

“It’s very rare that individual consumers buy anything in the E&S market. Those that do may see slightly more choices and slightly lower prices,” Lehrer said. “Businesses, who are the main E&S customers, will see the largest changes and could well see meaningful, although not enormous, price reductions and better product selection.”

Two similar proposals were made in the last two Congressional sessions but did not make their way through Congress.

Matthew Glans ([email protected]) is legislative specialist in insurance and finance at The Heartland Institute.