Surplus Lines vs. Residual Insurer

joshchou

Could I get a bit of clarification on the differences between Surplus Lines and Residual Markets? It seems to me that both consist of insured's that are unable to get insurance through the primary insurance market. Is the main difference that residual markets are typically for personal auto insurance, and I assume surplus lines are primarily for commercial insurance?

graham

You're right that they both serve the purpose of providing insurance to customers who cannot find coverage in the primary market. Residual markets aren't restricted to personal auto, although that's probably the common type. There are residual markets for WC and property coverage also (and maybe others.)

Some of the differences between surplus lines insurers and residual markets are as follows:

• A residual market operates at the state level and requires all insurers who write that coverage to share in the profits and losses. A surplus lines carrier operates independently and assumes all profits and losses themselves.
• A residual market provides greater protection for insureds. A bankrupt insurer will have less adverse impact since the residual market can draw from remaining insurers. If a surplus lines carrier goes bankrupt however, the insured is not protected since there would not be any sort of guarantee fund as a backstop.

In terms of what lines of business surplus lines generally cover, the NAIC states:

• Surplus lines insurers mainly focus on the development of new coverages and the structuring of policies and premiums appropriate for risks. New and innovative insurance products for which there is no loss history are difficult, if not impossible, to appropriately price using common actuarial methods. Often, after a new coverage has generated sufficient data, the coverage eventually becomes a standard product in the admitted market.

(One specific example of surplus lines coverage is flood insurance as an alternative FEMA.)