The excess and surplus (E&S) market has seen exceptional growth in recent years as the insurance industry faces immense challenges. E&S exceeded 10% of the total industry premium in 2022, up from 8% in 2021 and early 2022, and is expected to continue to grow in market size. That said, E&S still has many myths surrounding it.
Is E&S beneficial for high-net-worth homeowners? We dive into explaining what E&S is, the myths surrounding E&S, and how it can be a tool for success.
What is Excess and Surplus Insurance? Admitted vs Non-Admitted Policies
Excess and surplus lines insurance, also called E&S or custom insurance, is a specialty underwriting market that insurers use to address complex, difficult, or high-risk situations.
What many people don’t realize is that high-value homes, especially those valued at $2M or more, often fall into the “complex risks” category. Affluent customers with luxury homes often have more customization with higher quality materials and live in areas prone to catastrophic weather. In general, these homes require more thought, detail, and innovation to insure.
Traditional personal lines insurance is often inflexible and doesn’t offer this customizable coverage. When a home is too complex to cover with traditional insurance, it is sometimes shifted to E&S coverage.
Traditional insurance is called “admitted,” because it falls within the state regulation guidelines. E&S insurance is called “non-admitted,” because it falls outside state regulation.
This does not mean the E&S market is unregulated. E&S lines are regulated differently than admitted ones because to write E&S, you must be licensed outside the state of the insured. The company’s domiciled state then regulates them.
A licensed E&S broker must verify that the policy meets the requirements to underwrite within the state. You must prove there was due diligence in attempting to write the policy within the state guidelines for the admitted market. And because of the processes to ensure E&S is a viable option within the state, E&S insurers are less likely to go insolvent.
There are pros and cons to both admitted and custom E&S policies.
Admitted, Traditional Insurance Policies:
Admitted policies are regulated and backed by the state, and this is their main benefit. This means if your insurer were to fail and you have a claim, the state-run insurance guaranty fund or association steps in to cover your claim.
But state regulation can be a double-edged sword in certain situations. The regulation was designed with the mass market in mind, not high-value risks.
Currently, the insurance market is dealing with extreme challenges, such as increasing catastrophic events, inflation, supply chain issues, and more. The housing and insurance markets are changing rapidly.
But regulations are slow to change. Houses are priced far higher than years ago, and their reconstruction costs have increased. This makes getting the coverage you need within the state’s admitted market more difficult.
Additionally, the main benefit of the admitted market, the state-backed guaranty fund, may not benefit high-net-worth customers at all.
Most states have payout caps or net worth limitations, and many high-net-worth customers do not even qualify to receive full coverage from their state’s guaranty fund or association.
For example, the South Carolina Insurance Guaranty Association or SCIGA caps claim payouts at $300k and has a net worth limitation of $10M. If a customer’s home valued at $2M is destroyed and their admitted insurer goes bankrupt, they will only receive $300k. If they have a net worth greater than $10M, they will not receive any payments from the guaranty association.
- Regulated rates & forms
- Backed by the state*
- Strict regulations on limits/coverage
- Slow to change
*If the customer falls within the coverage and net worth limitations
Custom Excess and Surplus Insurance Policies:
Excess and surplus lines are tools for high-net-worth customers who have exhausted their options through the admitted market. E&S offers flexibility and coverage tailored to the customer’s needs. It allows your policy to adapt to rapidly changing conditions, such as housing market values and reconstruction costs.
The main disadvantage to custom insurance is that it is not backed by the state’s insurance guaranty fund or association. However, there are panels that review insurers to assess their financial strength and stability. One such panel is AM Best, which assesses an insurer’s financial strength and ability to manage complex risks.
Insurers should have a strong AM Best rating, as well as a high reinsurance rating. Reinsurance is, essentially, insurance for insurers. Insurance companies that provide custom E&S options should have conservative reinsurance, as well as ample capital, to insure complex risks.
- Flexibility & creativity tailored to the risk
- Customizable coverage, limits, and pricing
- Speed to market
- Not backed by the state’s insurance guaranty association
E & S Insurance Myths
In addition to the regulation of E&S outside the admitted market, these are some of the top myths often discussed about E&S insurance:
Myth #1: Poor Claims and Response Time
Because E&S is often not a priority for many companies, their customer service may suffer from a lack of focus and dedicated resources.
However, that is not the case at Vault.
Vault offers the same service regardless of policy type. Our claims response time is best in class. We respond to all claims notifications within 2 hours of initial contact, and once damages are agreed upon, payments are issued within 48 hours on average.
Myth #2: Inferior Coverage
E&S is often thought to have worse coverage options since the state does not back it. While that can sometimes be the case, Vault does it differently.
We tailor the coverage to the risk. Our customers get exactly the coverage they need, for the price point they want, without the fluff.
Myth #3: Difficult Process & Bad Service
Until now, E&S was thought to be overly complicated for agents to work with because of the regulatory process you must go through. We have simplified this process and made it easy, fast, and seamless.
Vault has improved the backend processes for our brokers and agents with our proprietary technology. Our system allows our underwriting team to craft solutions to match the unique risks of high-net-worth individuals with ease.
Myth #4: E&S is a Last Resort
E&S was once thought to be a last-resort option. Now, it’s the way forward through this tough market for the growing number of complex risks. That is why we made it a core offering rather than an asterisk.
E&S allows for adaptability in a rigid, difficult market. It can change with the environment, and ensure customers are covered, cared for, and content with their insurance policy.
E&S Coverage for High-Value Homes
Does this mean all luxury homes need E&S insurance? No, not always. And not all luxury homes will fail to fit into admitted regulations.
But when affluent individuals and families need more consideration and care, custom insurance can be highly beneficial.
At Vault, we offer a blank canvas to add color and customization to your policy. We focus on an innovative insurance experience, with underwriters dedicated exclusively to the high-net-worth market.
Our customized, high-net-worth insurance is designed to protect the extraordinary quality and design of your home. We don’t only look at the assets we’re insuring; we look at your whole lifestyle and risk factors to ensure you have the right coverage.
This is why E&S is a tool for success for high-value home insurance.
The Vault Difference in Action
Here are two Tales from the Vault where our Vault Custom insurance provided the solution our customers were looking for:
Vault Found a Way
An open dog bite claim prevented a customer from finding the coverage they needed. They came to us looking for a solution.
The customer had no other claims. Their new home was not coastal, so it was relatively low risk.
We found a solution by customizing their insurance coverage to carve out dog bites. This allowed us to resolve the claim issue while providing the customer with the high-quality coverage their home deserved.
Vault Said Yes
A customer bought a second coastal home in Texas, not considering the impacts on their insurance. When they went to add the second home to their policy, their carrier could not insure both homes due to both coastal homes being high-risk.
The customer wanted to keep everything insured under one policy with one carrier, so they contacted our Vault team.
Our Vault Custom policy allowed us to take on both homes and write everything under one policy while providing exceptional service and coverage tailored to our customer’s needs.
Providing Creative Solutions and Risk Management
At Vault, we know risk education and mitigation are key to reducing severity of loss. Protecting your assets is more than insuring them, it’s looking at the bigger picture to reduce all possible risks. We provide all-encompassing risk management services to help proactively safeguard the life you’ve built – that’s the Vault difference.
Request a quote and experience the Vault difference.
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