The Surplus Line Market is a Well-Regulated and Well-Functioning Market
The non-admitted market is often misunderstood. The non-admitted market (surplus
line market) is not unregulated, as some believe. The non-admitted insurance carriers
are regulated in their domiciliary jurisdiction and must be eligible under federal and
California law before business can be placed with them (exported to them).
Additionally, the surplus line broker in California is licensed and regulated directly by
the California Department of Insurance. Surplus line brokers are also subject to
periodic audits by the California Department of Insurance. In a summation, the nonadmitted
market is a well-functioning, well-regulated market that serves as an
appropriate place for consumers to obtain coverage when the admitted market is
unable to meet their insurance needs.
State and Federal Regulations
There are twenty-one sections of the California Insurance Code devoted to regulating
surplus lines. Sections 1760 through 1780 provide the surplus line broker licensing
requirements, policy placement conditions with a non-admitted insurer, and the
prerequisites of a non-admitted insurer writing business in California.
Surplus Line Broker Licensing Requirements:
To transact business as a surplus line
broker, a resident broker must hold a property and casualty (P&C) license, which
requires passing the fire and casualty examination for broker-agents, before applying
for a surplus line license. In addition to holding a P&C license in their resident state, a
non-resident broker must also hold a surplus line license in their resident state before
applying for a surplus line license.1
The broker must complete an application, complete
a Surplus Line and/or Special Line Certification form stating the applicant has read the
sections of the California Insurance Code pertaining to surplus lines, and file a surety
bond of $50,000 to the people of the State of California.
To maintain the surplus line license, the resident broker must complete a renewal
application and pay a fee to renew his/her license every two years. To maintain the
P&C license, the resident broker is required to complete continuing education each
license term. The non-resident broker must complete the continuing education
required by their resident state.
For an applicant applying for a business entity surplus line license, brokers transacting
under the organizational license must be named under the license and a surety bond of
$50,000 must be filed to the people of the State of California.
Conditions of Placement with a Non-Admitted Insurer:
Before a risk is placed in the
surplus line market, the surplus line broker must ensure that insurance is not generally
available from admitted insurers qualified to write that type of insurance. Except for
narrow exemptions for commercial insureds, specialty lines, and coverages listed on
the "export list" maintained by the California Department of Insurance, brokers must
complete an affidavit (Diligent Search Report or SL2 form) documenting the diligent
search effort to place the risk in the admitted market. Insurance buyers must sign a
disclosure statement (D1 form) acknowledging that the risk is being placed with a nonadmitted
insurer and that guaranty fund protection is unavailable to the buyer. If the
SL2 form shows that three admitted insurers that actually write the particular type of
insurance decline the risk or fewer than three admitted insurers write the type of
insurance, it is prima facie
evidence that a diligent search was made.
The broker must not place insurance with a non-admitted insurer solely for obtaining a
premium less than the lowest premium offered by an admitted carrier. A premium tax is
levied on all surplus line transactions to the insured with payment remitted to the CDI
by the broker. The broker must submit the policy and required documents to the
stamping office for review to verify that the placement was handled correctly by the
The brokers are audited by the Premium Tax Audit Bureau of the CDI to ensure
compliance with tax filings.
Eligibility Requirements for a Non-Admitted Insurer:
Non-admitted insurers on the
LASLI (List of Approved Surplus Line Insurers) must demonstrate their financial
stability, reputation and integrity; maintain a minimum of $45 million in capital and
surplus at all times; have three years' seasoning (or qualify for an exception); have a
valid license to transact insurance in their domicile; file financial information with the
CDI; and adhere to specific capitalization, investment and solvency standards
established under the California Insurance Code.
On July 21, 2011, the Non-Admitted Reform and Reinsurance Act (NRRA) went into
effect, establishing federal guidelines for non-admitted insurer eligibility in all states.
The SLA worked with California regulators to adapt the federal standards to conform
with existing California law, which led to the creation of AB315. AB315 established the
requirements for non-admitted insurers not on the LASLI to write policies in California:
About The Surplus Line Association of California: Overview
- Foreign companies must maintain a minimum capital and surplus of $45 million and be authorized to transact in their state of domicile.
- Alien companies must be included on the NAIC's Quarterly List of Alien
The Surplus Line Association of California (SLA) is a private, non-profit entity that
serves as the statutory surplus line advisory organization to the California Department
of Insurance (CDI). As the advisory organization, the SLA is assigned responsibilities
by California's elected Insurance Commissioner. The Commissioner utilizes the
expertise, knowledge, and statistical data of the SLA in implementing the surplus line
laws and regulations of California.
The Surplus Line Association of California
The Association's membership is comprised of surplus line brokers who are licensed
by the state to negotiate and place insurance coverage for California consumers with
non-admitted insurers (insurers unlicensed in California). When California consumers
with unique or unusual risks are denied coverage by admitted insurance companies
(insurers licensed in California) they need access to insurance in the non-admitted
market. The SLA currently has over 4,000 members.
The mission of the SLA:
Our mission is to ensure that a responsive and lawful non-admitted insurance
market is maintained in California. Our measure of success in this respect is that
the consumer is protected, the needs of the regulators are well-served, and
unlawful activities are curtailed. Through a professional and committed
organization, utilizing state of the art technology and a challenging work
environment, we respond to the needs of the California consumer, our
membership, and appropriate public agencies. We provide education,
processing, evaluation, and dissemination of surplus line data and information to
help ensure the financial integrity and stability of the non-admitted market.
The SLA is a self-governed private organization in which the governing body, the Board
of Directors, is elected by the membership annually. The Association operates under
the direction of the Board of Directors and six other committees appointed by the
Board of Directors. These committees include the Stamping, Information Technology,
Education, Legislative, Audit, and Admitted Market Liaison.
In 1937, the state legislature of California revised surplus line law enabling the
Insurance Commissioner to oversee the regulation of the surplus line industry. To
assist with the oversight, surplus line brokers formed the Surplus Line Association of
California to keep their members aware of regulations and guidelines relating to surplus
line insurance. In 1939, the Commissioner requested the SLA expand its role of a
"stamping office" to receive and examine broker filings.
In the late 1980s and early 1990s, surplus line activity increased significantly and
California regulators passed additional rules and regulations to tighten controls on
surplus line transactions. Regulation 2174 established stricter financial and operational
standards for non-admitted insurers doing business in California.
Stamping Office and Its Duties
Historically, the stamping office performed two functions in assisting the Commissioner
oversee surplus line activity: 1) ensuring broker filings were in order and compliant with
existing laws and regulations, and 2) collecting and reviewing the financial information
regarding the non-admitted insurers used by its members.
Today these two functions remain essential components in monitoring surplus line
activity. In addition, information from the filings is entered into a database providing
statistical data and reports requested by the CDI.
The data from 2008 through 2012 show that the majority of consumers purchasing
insurance with non-admitted carriers were commercial entities; only 4% of all policies
processed by the SLA and only 1% of premium processed by the SLA were in personal
lines. In the same time period, the top five coverages based on premium processed
were in commercial lines: commercial general liability, commercial difference in
condition and stand-alone earthquake, commercial property all risk, errors and
omissions, and special multi-peril coverage.
The Executive Director oversees the operations of the office and executes the strategic
goals set forth by the Board of Directors. The Executive Director represents the
Association and serves as the liaison between the membership and state and federal
Other duties performed by the Executive Director include:
- Reporting to the Commissioner any fraudulent or illegal insurance activities in
the surplus line market.
- Responding to any request by the Commissioner on proposed legislation or
regulation affecting the placement of insurance in accordance with surplus line
- Receiving, disseminating, and educating its members about surplus line laws
- Communicating with admitted insurer organizations with respect to the proper
use of the surplus line market.
The SLA is funded by a stamping fee charged for each premium-bearing document
reviewed. The fee reflects all reasonable costs associated with the services provided
by the SLA.
Under the direction of the CDI, the SLA is committed to maintaining a responsive and
lawful California surplus line market that protects the policyholders. The SLA continues
to honor its mission statement by working with the regulators and its membership to
maintain a healthy, fair and competitive surplus line marketplace in California and
protect the interests of the California consumer.
A non-resident broker does not need to hold a California P&C license in addition to the P&C license
from their resident state in order to apply for and obtain a California surplus line license.