As Congress readies new legislation to make it speedier to buy so-called surplus lines insurance for high-risk assets, Connecticut”™s top insurance cop issued a warning to brokers, telling them to slow the pace at which they are placing such policies for homes hugging the coast.
As hurricane and nor”™easter losses have mounted in the past decade, some insurance carriers have limited or ended coverage for homeowners in coastal towns in the Northeast, including Connecticut, which has the largest seawall in the nation ”“ Long Island ”“ protecting most of its coast. In 2006, Allstate Insurance Co. abruptly ended offering coastal homeowners insurance to new customers, while allowing existing customers to keep their policies.
Connecticut, New York, Massachusetts and other states have long maintained Fair Plan insurance pools to help homeowners obtain insurance when no carrier will underwrite the risk. And the problem is worse in other parts of the country. Earlier this year, Alabama”™s insurance commissioner removed a due-diligence requirement that forced brokers to get refusals from standard carriers before placing coastal homeowners insurance with surplus lines brokers.
Connecticut appears to be moving in the opposite direction. In a letter to insurance brokers in late May, Connecticut Insurance Commissioner Thomas Sullivan said he was aware of instances in which property and casualty insurance policies for coastal homes were being placed with surplus lines insurance carriers, rather than traditional homeowners insurance carriers.
“The department has been apprised of situations where a surplus lines broker is placing a coastal risk in the surplus lines market, despite the fact that the insured received a renewal offer from their existing Connecticut authorized insurer,” Sullivan wrote, in a letter to brokers. “When an insured has been offered a renewal from their existing admitted insurers; any other Connecticut admitted insurer; or any residual market mechanism, it would be a violation of Connecticut statutes ”¦ for the risk to be placed in the surplus lines market.”
Surplus lines insurance carriers are relatively lightly regulated entities that exist to take on the insurance risks that standard carriers avoid, usually charging more due to the profile of their overall loan pool. Most often, surplus lines policies are intended to cover complex commercial risks ”“ including maritime property ”“ and not for retail insurance such as homes.
As part of the financial stability act being crafted by U.S. Sen. Chris Dodd, buyers would have easier access to surplus lines insurance, and taxes would be centered in one state for risks that cross state borders. Both measures are supported by insurance carriers and surplus lines brokers alike.
Surplus lines insurance premiums nationally dropped 7.5 percent in 2009, according to estimates by SNL Financial, a Charlottesville, Va.-based market research company, following an 8.6 percent decline the year before.
Under Connecticut law, brokers are required during each period of renewal to attempt to move a policy out of the surplus lines market and back into the regular, regulated market.
Of more than 1,300 carriers licensed to sell property and casualty policies as well as life and health insurance in Connecticut, fewer than 100 are classified as surplus lines carriers, most of those affiliates of traditional insurers.
As a whole, surplus lines policies totaled just under $360 million in Connecticut, compared with more than $6.3 billion in regular property and casualty insurance written that year.
As measured by the number of surplus lines premiums written, the three largest surplus lines carriers in Connecticut are Lexington Insurance Co., Lloyds of London, and American International Group Inc., with AIG the leading writer nationally according to SNL Financial.
