The role of stamping offices in surplus lines insurance

by Digital Payment Processing

The role of stamping offices in surplus lines insurance

For many businesses, the concept of surplus lines insurance can be complex and confusing. The role of stamping offices in this industry can be even more difficult to navigate. Among the most important recent changes in surplus lines insurance is the creation of stamping offices. Such offices serve as a voluntary partnership between state regulators and the surplus lines insurance industry.

The role of these offices is to facilitate consistency and encourage compliance even though the surplus lines insurance industry exists outside the typical regulatory structure. While stamping offices might seem like a new concept, the idea actually dates back to the 1930s when the first surplus lines association was formed in California. Along with educating the public regarding this insurance market, stamping offices offer help to buyers and assist in evaluating the eligibility of surplus companies.

There has been some debate regarding the importance of the role that stamping offices play in regards to the regulation of the surplus lines insurance industry. Stamping offices certainly make it easier for consumers to locate eligible carriers. Additionally, stamping officers allow for a much smoother flow of information between licensed surplus lines brokers and the insurance office. In an industry that can be quite complex, communication can be essential. Furthermore, stamping offices assist surplus brokers with making certain they comply with local stamping requirements.
All surplus lines policies are required to be stamped. This means that the policy is stamped to clearly indicate that the policy is, in fact, a surplus lines policy rather than a regular insurance policy, which would be subject to state regulations.

Requirements may vary from one state to another, but agents are typically required to submit a copy of every surplus lines insurance policy sold to their state stamping office. That office will then be responsible for reviewing the policy to make certain it was placed properly with an eligible surplus lines insurer.

The consequences for failing to submit the policy to the state stamping office may vary. In most states, compliance in regards to the stamping office is strict and significant penalties may be incurred should a broker fail to comply.

While surplus lines carriers remain relatively free from regulation on a state level, particularly in regards to rates, this does not mean that they are completely free from all regulation. Surplus lines carriers are still able to act as free agents while responding to the coverage needs of consumers and changing market conditions, but adherence to stamping office regulations and requirements is necessary in many states.

What Is Surplus Lines Insurance?

by Digital Payment Processing

What Is Surplus Lines Insurance?

The world of insurance can be complex enough, but when specialty insurance becomes involved, it can become even more complicated. A prime example of this is surplus lines insurance. In many instances, companies or individuals will go to a broker to find insurance coverage. The broker serves as an intermediary between the individual or company and the insurance company and works to find a policy from a state-licensed insurer that meets the client’s needs. In some cases, the individual or company may present too great of a risk because it does not meet the established guidelines of the licensed insurer. When this happens, a surplus line producer or broker may become involved in procuring a policy that will meet the needs of the client. Many times, this means working with an insurer that is not licensed in that state.

As the insurance company is not licensed by the state, this means it is also not regulated by the Department of Insurance in that state, or at least not the same degree as a licensed insurance company. This gives the surplus lines insurance company more freedom and flexibility in terms of how it operates. It is generally not restricted to the same rate regulations as are insurance companies that are licensed in that state. Additionally, a surplus lines insurance company has more flexibility in terms of establishing guidelines as related to accepting risks.

Also sometimes referred to as excess lines insurance, this type of policy makes it possible for companies or individuals to obtain coverage for unique risks, including a claims history that most insurance companies would not cover.

While there are obvious benefits to a company or individual seeking coverage from a surplus lines insurance company, there are also drawbacks. For instance, the policyholder takes on an additional risk since there is not a guaranty fund. This means that in the event the surplus line insurer files for bankruptcy, the policyholder may not be able to receive a claim payment. By comparison, if a state-licensed insurance company goes bankrupt, a policyholder’s claim could be paid from the state guarantee fund. Additionally, rates may be higher with a surplus line insurer. State-regulated insurance carriers must adhere to state regulations in regards to the rates they can charge. This is not the case with a surplus line carrier. Since a surplus line carrier is not regulated by the state, it is able to take greater risks and may also charge higher rates.

Perhaps one of the best examples of a surplus line carrier is Lloyd’s of London. While this carrier is not licensed in the United States, Lloyd’s of London does issue policies in the United States.
In situations in which a company or individual is not able to obtain coverage from an in-state provider, surplus lines insurance can provide an effective solution.