Property/casualty coverage that isn’t available from insurers licensed by the state (called admitted insurers) is often written by non-admitted insurers. Before an agent can place coverage in the non-admitted market, there must have been a good faith effort to place the coverage with an admitted insurer. Only agents licensed as surplus lines brokers can directly place coverage with a non-admitted company.State insurance departments do not have the same financial regulatory control over non-admitted insurance companies as they do admitted companies. (See Admitted Insurer). Additionally, non-admitted companies are not part of the state guaranty fund. Further, the rates and forms used by non-admitted companies are not subject to state regulation giving those companies more freedom to adjust to unusual risks.
There are two reasons the excess and surplus lines market exists. One is that an unusual risk cannot be underwritten in the same way more common risks are written. For example, an oil refinery has inherently more risk associated with it than does a convenience store. Thus, the criteria for insuring convenience stores cannot be applied to oil refineries. Second, insurance rate making is based, in part, on the law of large numbers. That is, if the insurance company can insure a large number of homogenous risks (e.g., convenience stores), statistically the company can predict with relative accuracy the number and amount of losses. Moreover, there are thousands of convenience stores and very few oil refineries. Therefore, if the oil refineries were lumped in with the convenience stores, one large refinery loss would skew the entire loss data for convenience stores. The excess and surplus lines market is designed, then, to handle the unusual and out-of-the-ordinary risk.