The Role of the Surplus Lines Market
The surplus lines industry is important because it provides a market for insurance covering hard to place risks that are not written by the standard markets. There are three basic categories of surplus lines risks: Nonstandard risks that have unusual underwriting characteristics; Unique risks for which admitted carriers do not offer a filed policy form or rate; and Capacity risks where a client seeks a higher level of coverage. Examples of such risks include aviation, product liability, inland marine, earthquake, and professional liability.
Since 1994 the A.M. Best Company has performed an annual survey of the excess and surplus lines market and has found that its solvency record is as good, if not better, than the overall industry.
The surplus lines market plays an important role in providing insurance for hard to place risks. With the ability to accommodate a wide variety of risks, the surplus lines market acts as a complement to the admitted market. Often called the "safety valve" of the insurance industry, surplus lines fills the need for coverage in the marketplace by insuring those risks that would otherwise not be protected.
Surplus lines companies are able to offer specialty insurance in large part because they are free of rate and form restrictions imposed on other insurance carriers. In this way, companies are able to react to changes in the market and design a policy that meets the needs of the insurer and the insured. While surplus lines companies may not be regulated as traditional carriers, that does not mean they are not regulated. Each company must be licensed (admitted) in one of the 50 states and must meet the solvency requirements of that state. As a result, the state of domicile becomes the regulator over that insurer.
Source: http://www.napslo.org/Content/AboutNAPSLO/AboutNAPSLO.htm