The Expert Podcast

A huge area of growth in the financial services industry is within the insurance industry. Specifically, the insurance profession in the subset of surplus lines, excess, and surplus lines is expanding. This area of insurance, if you're unfamiliar with it, involves policies that are either not in many carriers or not filed with the regulator. This happens because they either cover a new line of business or one that doesn’t have a very substantial market. For instance, if it’s a niche market for insurance or a new type of risk that’s not fully developed, a surplus lines carrier or an excess insurer will create a market. However, because it may be hybrid or fluctuating, they don’t have filed policies or an admitted carrier in that marketplace.

The premium increases in this segment have set records. Last year, direct premiums written grew 25 percent to a record $82 billion, an exceptional gain attributed to better underwriting in surplus lines. Where is all this growth coming from? According to the article, the primary drivers are cyber and environmental liabilities. These two areas involve very high potential losses and risks, but they are also relatively new for companies. If you’re a mid-sized company, you might suddenly realize that your biggest exposure is not the risk of your building burning down or other physical damage. Instead, it’s cyber or environmental risks.

Many company activities—such as manufacturing, sales, and distribution—create environmental risks. Similarly, cyber risks are prevalent even for non-tech companies. For instance, if you have computer systems, customer lists, or any kind of online presence, these can create cyber vulnerabilities. These risks are massively increasing the exposure companies face. In the case of environmental risks, the heightened awareness of climate change and environmental advocacy further amplifies the potential losses a company might encounter if it inadvertently exposes the public to harm.

Fortunately, surplus lines insurers have been reviewing their books of business for several years and are feeling more comfortable with these risks. The segment is increasing its retention, which factors into premium growth. As a company, you may find greater access to markets and potentially more reasonable premiums. However, the percentage of premiums for these lines may start to eclipse other lines, as traditional losses and risks become a smaller portion of the total risk your company faces.

It’s important to work with a good broker, agent, or insurer to understand how these types of coverages can factor into your overall risk management strategy. Another consideration is that, over time, some of these policies may no longer remain in the excess and surplus lines category. They may eventually become filed policies with admitted carriers. Having a claims history could make it easier to transition to a standard line in the future, as you’ll have a loss run or claims history to demonstrate your risk profile instead of being a new client.