5 Challenges for Human/Social Service Organizations Entering the Excess & Surplus Lines Insurance Marketplace

The Human/Social Service non-profit sector has recently experienced significant changes in their insurance programs from standard carriers. These changes include limit reductions, price increases, and non-renewal notices, with California being the most affected due to drastic adjustments made by one of the largest non-profit-focused carriers, Nonprofits Insurance Alliance of California (NIAC). As a result, insureds and the retail insurance brokers representing them have been forced to seek replacement insurance coverage through wholesale brokers and their carriers in the Excess and Surplus Lines (E&S) insurance marketplace. According to the Wholesale & Specialty Insurance Association (WSIA), “surplus lines insurers fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers.”

The diagram above was originally created by the Wholesale & Specialty Insurance Association (WSIA) and published in their 2023 publication “An Introduction to the Surplus Lines Market.”

As more non-profit organizations turn to the E&S marketplace for insurance solutions, we will explore some of the challenges these organizations face.

Standard carriers are known for offering multiple lines of business under a single insurance policy, commonly referred to as a package policy. These lines include General Liability (GL), Professional Liability (PL), Auto Liability (AL), Employee Benefits Liability (EBL), Sexual Abuse & Molestation (SAM), Crime, Equipment Breakdown, and Property coverage. Packaging these coverages simplifies insurance management for insureds, often at a discounted rate.

However, when insureds are non-renewed by a standard carrier and their coverage is moved to the E&S marketplace, this convenience is lost. E&S carriers typically focus on singular coverage lines due to the complexity and difficulty of placement. Consequently, what was once a single standard policy may be replaced by up to four or five different policies, often with different carriers. Coordinating multiple policies introduces new challenges for insureds.

Standard carriers rate primary liability exposures for human and social service organizations based on metrics such as the number of dwellings, square footage, payroll, and revenue. When these accounts are non-renewed or excess limits are reduced, E&S carriers use different rating metrics, including revenue, the number of beds, and the number of visits. This shift in rating basis requires insureds to provide different applications and additional underwriting information. For example, underwriters may need to convert square footage data from the expiring standard carrier policy into the number of outpatient/office visits or bed count if there is an overnight exposure.

Apart from price, terms and conditions often reveal the most significant differences between standard and E&S carrier policies. For instance, standard carriers usually provide PL and SAM coverage with an occurrence-based claims trigger. But, when a non-profit organization transitions to an E&S carrier, the carrier often requires PL and SAM coverage lines to be on a claims-made basis rather than occurrence-based. (Insurance Training Center provides a good explanation of the differences between the two claims triggers.) This change is significant and not easily reversible. There may be scenarios in which insureds do not need to give up their expiring policy and the reduced limits the standard carrier is now offering would be enough to satisfy current contract obligations. Therefore, we advise our retail partners to review all contracts carefully to ensure they comply with the required insurance limits.

Over the last two decades, standard carriers have consistently offered primary and excess quotes for human/social service organizations, often providing excess limits up to $10 million. Recently, due to industry-wide large-limit losses, these limits have been reduced—first to $5 million, then $2 million, and more recently non-renewal of all entire excess policies for certain classes of business. In some cases, carriers are not offering any excess limits for high-risk coverage lines, such as Professional Liability and Sexual Abuse & Molestation (SAM). While E&S carriers may be willing to replace these reduced limits, they often cannot provide all the necessary limits. Wholesale brokers must work with multiple carriers to build an excess coverage tower, introducing additional complexities. Terms and conditions may differ between carriers, including variations in claims notice provisions and appetites for certain risks.

We advise our trading partners that retaining a standard marketplace quote, even with price increases, typically provides the best terms and pricing compared to E&S options. Historically, standard marketplace pricing has been a fraction of E&S marketplace costs. Placements in the E&S marketplace can be 3–10 times more expensive than expiring standard market policies. Due to these differences, E&S underwriters often decline accounts with standard market options still available. The accounts we work on generally involve cases where no standard market option exists.

With the shifting marketplace and unique appetites of E&S carriers, partnering with the right wholesale broker is crucial. Generalist wholesale brokers often lack the expertise and carrier relationships needed for effective placement.

Here are some recommendations when preparing for renewals and working new business opportunities:

• Set Expectations: Prepare insureds for the higher pricing and different terms in the E&S marketplace.
• Vet Wholesale Partners:
         ◦  Ask wholesale representatives to share examples of similar placements they’ve handled.
         ◦  Confirm access to limited-distribution markets specializing in these exposures.
         ◦  Request supplemental applications tailored to E&S carrier requirements.

• Request Loss Runs: Obtain loss runs for the past five years (preferably 10) and detailed claims write-ups for losses exceeding $50,000.
• Coordinate Marketing Efforts: Avoid sending submissions to multiple brokers, which can harm negotiation leverage and lead carriers to decline the account.

While adjustments and non-renewals are challenging, proper preparation and communication can help insureds find suitable solutions to protect their organizations for years to come.

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Dennis Fox, Principal, Senior Vice President, is part of the Healthcare and the Non-Profits: Human Services practice groups at Brown & Riding, one of the foremost wholesale insurance brokerage firms in the United States, consistently recognized on local, regional, and national levels. The firm continues to be recognized as one of the Top 10 Largest P/C Wholesalers in the country and serves professional retail brokerages and their clients nationwide.