April 25, 2024 - Joe Nelson, Agency Owner
Our Florida Insurance marketplace has changed drastically since 2016, and more and more policyholders are now given insurance quotes and policies with "Excess & Surplus Lines" carriers. These insurers and the policies they offered used to be a rare sight, but are becoming more and more prevalent as a response to the increasing needs for options in Florida. Let's take an impartial and factual look at what separates these two types of offerings in regards to Florida Home Insurance.
Let's start first with introducing the governing body in charge of "Admitted" or "Excess & Surplus" lines carriers: The Florida Office of Insurance Regulation. Learning their function will help you understand the critical differences between the types of carriers.
What is the Florida OIR?
The Florida Office of Insurance Regulation (OIR) serves as the sentinel for the state's insurance landscape, overseeing the complex interactions between insurance carriers, policyholders, and regulatory frameworks. Tasked with ensuring that the insurance market operates fairly and effectively, the OIR plays a pivotal role in monitoring admitted carriers and the language used in insurance contracts, enforcing that it aligns with established state statutes. This ensures clarity, fairness, and compliance in the terms offered to Floridians, preventing ambiguous or misleading terms that could negatively impact consumers.
Beyond contract oversight, the OIR is instrumental in maintaining the financial stability of admitted insurance carriers. By setting stringent solvency requirements and conducting regular financial examinations, the OIR safeguards the industry's health, ensuring that insurers have sufficient reserves to cover claims, particularly in a state prone to hurricanes and other natural disasters. This rigorous financial scrutiny helps prevent insolvencies that can leave policyholders vulnerable.
Moreover, the OIR provides a crucial avenue for consumer protection through its management of complaints and oversight of claims handling practices. By enforcing standards and addressing grievances, the OIR ensures that insurers adhere to fair practices, thus protecting policyholders from potential abuses. Through these multifaceted roles, the OIR upholds its mission to foster a stable, competitive insurance market while securing the trust and safety of Florida's insured population.
Now that we know what the OIR does, now let's discuss the difference between the two types of companies and their policies.
What Are Admitted Insurers?
Admitted insurers are those that have been formally approved or "admitted" by the Florida Department of Insurance. They comply with state regulations regarding pricing and policy terms and contribute to the Florida Insurance Guaranty Association (FIGA). FIGA acts as a safety net, providing protection for policyholders if the insurer becomes insolvent, ensuring that claims are still paid out up to certain limits.
The Florida Office of Insurance Regulation exists to protect consumers by regulating insurance companies, their contracts, and their behavior. Every word of policy language in an insurance contract must be approved by the state. In order to increase or decrease their rates, an insurance company must send in a rate filing to be approved by the OIR, which includes financial evidence and reasoning for the rate change. A hearing could be scheduled in person and the company may have to make their case in person, arguing for whatever rating action seems necessary.
What Are Excess & Surplus Lines Insurers?
Florida Surplus lines, or E&S lines carriers, on the other hand, started by catering to non-traditional insurance risks with custom policies but have since become more and more popular as it gives insurers and consumers different policy options. They are not "admitted" by the state in the sense their policy language and financial stability are not governed by the state but are allowed to operate under special circumstances. E&S insurers typically handle risks that admitted carriers are unwilling or unable to insure, or can include policy language that may not be allowed by state statutes governing admitted carriers. This flexibility is crucial in Florida, where E&S carriers can operate with fewer regulatory hurdles and where unique risks like hurricanes and flooding are common.
Key Differences in Operation
Regulation: The most prominent difference lies in the regulatory environment. While admitted insurers are closely regulated by the state in terms of pricing and policy terms, E&S lines insurers enjoy more flexibility. This allows them to cover unique or higher-risk situations but also means they don’t have to follow the rate or form restrictions that bind admitted insurers. They can add in language that favors the insurance company like restricting assignment of benefits, or offering a roof deprecation schedule on homeowners HO-3 policy forms. They can also change their rating guidelines without seeking approval from the Florida CFO or the Florida Office of Insurance Regulation. This allows them to better change their pricing model to better keep up with the rapidly changing marketplace. E&S Carriers can operate much more in a "laissez-faire" business environment with much less red tape to gunk up their operations, but much less consumer protection as the handoff.
FIGA Protection: Admitted insurers contribute to the Florida Insurance Guarantee Association, which is essentially the FDIC of Florida insurers, giving their policyholders an added layer of security if their insurance carrier was to go insolvent. As apart of the insolvency FIGA takes over the liquidation of assets for the company and works to settle all outstanding claims. In contrast, E&S lines insurers do not participate in FIGA. If an E&S insurer fails, there is state or federal backing and no guarantee that claims will be paid by the association, posing a potential risk to policyholders.
Differences in Policy Contracts
Policies from E&S lines insurers can be significantly different from those offered by admitted insurers. They may offer less standard coverage or different terms and conditions. For example, an E&S policy might exclude certain risks or use different deductibles, which can be higher than those in standard admitted policies. This flexibility allows them to insure properties that admitted insurers might find too risky or unprofitable.
Advantages of Excess & Surplus Lines Insurers
Flexibility: They can provide coverage for risks that traditional insurers avoid by putting in clauses restricting certain coverages. They can offer MORE coverage with terms not approved by the OIR (keep in mind that all policy language must be approved - both endorsements adding coverage AND restrictions on coverage)
Customization: Policies can be more tailored to individual needs, accommodating unique homes or circumstances that do not fit into the one-size-fits-all approach of admitted insurers. These could be cost / benefit coverage choices, or increases to sub-limitations on certain reduced coverages on admitted policies.
Disadvantages of Excess & Surplus Lines Insurers
Lack of FIGA Coverage: The absence of protection from FIGA can be a significant drawback, as there is less security for policyholders if the insurer becomes insolvent.
Regulatory Oversight: With less state regulation, there can be more variability in policy terms and pricing, which might result in less favorable terms for the homeowner.
Are Excess or Surplus Lines Carriers bad companies, undercapitalized, or otherwise not as good as admitted companies?
NO! In fact, many E&S Carriers carry A- or better AM Best® ratings, which is usually much more of a sure determination of their financial stability than a Demotech® or KBRA® rating as there has not been an AM Best rated carrier with an A rating that has failed in the state of Florida. Demotech and KBRA are the ratings agencies most bespoke / regional carriers like Florida's home insurers use as AM Best may not rate a smaller company, or their rating methodology can be unfairly critical on the newer Florida carriers.*
Is Surplus Lines Insurance Right for You?
Choosing between an admitted and an E&S insurer often comes down to your specific situation. If your property is in a high-risk area or has unique characteristics that admitted insurers won’t cover, E&S lines insurance might be your only option. It may be an option which represents the best cost versus policy coverage. However, it’s crucial to weigh the potential risks, especially the financial stability of the surplus carrier against the lack of FIGA protection, against the need for specialized coverage.
Navigating the waters of home insurance requires understanding all the available options. Whether you choose an admitted insurer for its state-regulated stability and FIGA protection, or an E&S lines insurer for its flexibility in covering unique risks, make sure your decision aligns with your needs and risk tolerance.
Need help choosing what is right for you?
Our goal has never been to offer anything through these blogs other than information that is relevant to our clients, prospects, friends, and neighbors. If you need a second opinion on what is being offered in order to make sure that you have adequately weighed whether or not the risk is right for you, please ask and we are happy to give you free second opinion without the need for a quote.
*this sentiment is not our own but has been reiterated multiple times in interviews by Joe Petrelli, President of Demotech. Demotech was started in the 1985 specifically to evaluate smaller or regional carriers for Fannie Mae as no large ratings agency would review them. Their ratings were the first to be formally reviewed and accepted by Fannie Mae, Freddie Mac, and HUD.
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