Surplus Lines Products For Homeowners – Salvation or Cause for Concern’

In 2004, the California homeowners and dwelling marketplace continues to erode. In October 2003, catastrophic wildfires destroyed 790,000 acres of brush and forest land, and along the way destroyed 3640 homes, 1141 outbuildings and 33 business entities. This catastrophe, resulting in approximately $2.2 billion in losses, ranks as the single largest homeowner calamity in the history of the state. And the catastrophes may be far from over.

With increasing development into brush areas, coupled with dead timber in scenic mountain enclaves and suburban sprawl into our foothills and other forested areas, can a disaster of this magnitude happen again? And if it does, what will happen to the homeowners and dwelling marketplace then? Will standard writers continue to write business in the affected areas? Are they continuing to do so now? Will the Department of Insurance be able to attract new capacity to the state? Will the carriers writing now continue to write in the future?

All of these questions and more face the independent agent writing homeowner and dwelling business in California today. How can the retail agent continue to find a source for the traditional homeowner and dwelling products, and how can an insurance company provide profitable products to those same agents?

After several years of soft pricing by standard companies, homeowner policy rates have increased dramatically. Underwriting guidelines have continued to tighten and numerous insurance carriers changed their posture regarding personal property. With increased scrutiny by the California Department of Insurance (CDI) regarding rate and form filings, the homeowner and dwelling market has, and will likely continue, to tighten significantly.

Many insurance carriers, distressed at their poor results for past misdeeds, have either restricted writing business with methods previously outlined, or have simply withdrawn from the marketplace. The effect has been dramatic on the homeowner and dwelling insurance buyer, potential homebuyers and the insurance agent that is trying to cope with an increasingly difficult environment.

Add to this a tough marketplace, and an Insurance Department focused on reducing rates for policyholders, and the result is more and more difficulty finding a market that will successfully, and continuously, write this type of business. These conditions translate into an overall lack of product availability.

Clearly, there are still companies willing to write homeowners coverage in California, and other companies who are willing to look at business that is claim-free, or with few losses, or when the same company has the insured’s supporting business, but what about those homeowner and dwelling risks that are unsupported or are second homes, rental homes or vacation properties? What coverage is available to them?

Homes that have had several claims, or are older, or are higher-valued or low-valued, or tenant-occupied, are having difficulty in finding coverage. Additionally, homes that may be in forested or brush areas are also experiencing increased difficulty in finding companies willing to insure them.

While there is some product availability, many independent agents may not have many methods to place such coverage. And at this point in time, it appears that this situation is unlikely to change. Or is it?

Surplus lines carriers have been around to solve problems such as these in the commercial marketplace for many years. Often, in distressed cases, surplus lines companies have written products for these types of risks, generally with significant differences in coverage, or with many exclusions.

Today, we are once again seeing surplus lines companies as a potential solution for the types of risks which, for whatever reason, no longer meet the tightened underwriting criteria established by standard admitted carriers. So salvation, and no cause for concern.

Surplus lines companies are now beginning to fill the void that admitted carriers have created. While surplus lines companies do not participate in the California Insurance Guarantee Fund, each surplus lines company allowed to transact in California is highly scrutinized by both the Department of Insurance and the California Surplus Lines Association.

These companies must pass rigid financial analysis tests, and are reviewed on a regular and consistent basis to ensure compliance with state financial, claims paying and other criteria. In many cases, these surplus lines companies are more financially solvent than some of the admitted carriers transacting here in the state.

These surplus lines companies are likely using standard HO-3 and DP 1 or 3 coverage forms containing little or no difference from standard contract language. However, because these policy forms are not required to be filed with the CDI, and can only be placed after completing a diligent search of available admitted markets, independent agents should carefully review all contracts, whether admitted or non-admitted. This will enable the agents to clearly explain all conditions, inclusions and exclusions of each particular insurance contract.

Companies like Lloyd’s of London, Lexington, USF&G and others are already writing homeowner and dwelling policies in California. These companies and other authorized non-admitted carriers are likely to increase their writings in the state as admitted capacity continues to shrink.

Generally, these companies can be accessed through MGAs and surplus lines brokers authorized and appointed to transact in California and other states where they are licensed to transact. Not all MGAs and surplus lines brokers are equally expert in providing non-admitted solutions for these types of products. Be sure to check the expertise of the entity of choice before you begin to do business with them. Make sure to find an MGA or surplus lines broker that can expertly and efficiently meet your needs.

Ronald A. Abram is president/CEO of Citrus Heights, Calif.-based Abram Interstate Insurance Services Inc., a specialty MGA and Lloyd’s broker. He has been in the insurance business since 1979. Before forming Abram Interstate Inc. in 1996, he was president/COO of Markel Insurance Company. Abram is a member of CIWA, NAPLSO and AAMGA. He can be reached via e-mail at ron@abraminterstate.com.

Topics California Carriers Agencies Excess Surplus Homeowners Insurance Wholesale