Navigating California’s Insurance Crisis: Surplus Lines & Solutions with Benjamin McKay

Published Date: 06/25/2024

Navigating California’s Insurance Crisis: How Surplus Lines Are Filling the Gap

California’s insurance market is in flux. With major carriers retreating, homeowners scrambling for coverage, and regulators rewriting decades-old rules, the industry finds itself at a critical turning point.

In this episode of Insurance Hour, host Karl Susman sits down with Benjamin McKay, CEO and Executive Director of the Surplus Line Association of California (SLA), to discuss one of the least understood but most vital segments of the insurance world — surplus lines.

McKay explains what surplus lines are, how they function within California’s complex regulatory system, and why they’ve become a lifeline for many homeowners and businesses as traditional insurance markets tighten.

The discussion also unpacks how Proposition 103, consumer protection rules, and new Department of Insurance reforms intersect with surplus lines — and what it all means for the future of insurance in California.

The Surplus Lines Sector: California’s Safety Valve

When standard insurance companies won’t write a policy — because a property is too risky, too remote, or too unique — the surplus lines market steps in.

Surplus lines insurers are often referred to as “non-admitted” carriers. They don’t operate under the same rate and form filing requirements as traditional (“admitted”) insurers, which gives them flexibility to underwrite high-risk properties that standard insurers avoid.

McKay describes the system as California’s “safety valve.”

“Surplus lines carriers exist to insure risks that the admitted market can’t or won’t,” McKay explains. “We’re not a replacement for the standard market — we’re the release valve that keeps the system functioning.”

This flexibility allows surplus lines carriers to:

• Cover wildfire-prone properties.
• Write specialized commercial risks.
• Customize coverage for unique or high-value homes.

But that freedom comes with strong oversight. Every surplus lines transaction must go through a licensed surplus lines broker and is tracked and reported to the SLA, which monitors compliance and collects data for the state.

The Difference Between Admitted and Non-Admitted Insurers

At the heart of the discussion is the difference between admitted and non-admitted carriers.

• Admitted insurers are licensed by the California Department of Insurance (CDI). Their rates and policy forms are subject to regulatory approval, and their customers are protected by the California Insurance Guarantee Association (CIGA) if the company fails.
• Non-admitted (surplus lines) insurers, on the other hand, are not directly regulated by the CDI in the same way. They’re often global carriers with substantial financial backing and must be approved by the CDI as eligible surplus lines insurers.

While surplus lines policies don’t come with CIGA protection, they do come with the strength of global reinsurance networks and financial vetting by the SLA and CDI.

“Surplus lines companies aren’t second-tier insurers,” McKay clarifies. “They’re some of the biggest and most financially secure carriers in the world — Lloyd’s of London, for example, has been doing this for centuries.”

The Current Crisis: Admitted Market Retreats, Surplus Lines Step In

Over the past two years, California’s admitted market has contracted dramatically.

State Farm, Allstate, and Farmers have paused or limited new business. Many regional carriers have followed suit, citing regulatory delays, rising reinsurance costs, and the inability to get timely rate approvals under Proposition 103.

This vacuum has driven record numbers of homeowners and business owners toward the FAIR Plan and surplus lines carriers.

“In the past, maybe 7–8% of the homeowners market was written in surplus lines,” McKay said. “Now it’s edging toward double digits, and for commercial property, it’s even higher.”

This surge underscores how critical surplus lines are to California’s economic stability — but it also raises concerns about accessibility and affordability.

Because surplus lines carriers can set their own rates, premiums are typically higher than in the admitted market. However, without them, many Californians would have no coverage at all.

“It’s not ideal for everyone,” McKay acknowledged, “but having an option is always better than having none.”

Regulation, Proposition 103, and the Role of the SLA

One of the key themes of the conversation is how California’s regulatory system — especially Proposition 103 — limits flexibility in the admitted market.

Passed in 1988, Prop 103 requires insurers to file and get approval for every rate change, a process that can take months or even years. This lag has become untenable in an era of rapidly changing wildfire risk, inflation, and reinsurance volatility.

“The admitted system has been handcuffed by Proposition 103,” Susman noted. “It’s so slow and rigid that companies can’t adapt.”

This is where the Surplus Line Association plays a unique role.

The SLA doesn’t regulate rates or approve filings — instead, it acts as a state-sanctioned self-regulatory organization. It monitors transactions, ensures compliance with state eligibility rules, and reports data back to the CDI.

“We’re essentially the bridge between the non-admitted carriers and the Department of Insurance,” McKay said. “We ensure everything is transparent, reported, and compliant.”

In other words, while surplus lines aren’t subject to Prop 103’s rate-approval process, they’re far from unregulated.

The Trade-Off: Flexibility vs. Consumer Protection

Surplus lines operate under a “buyer beware” framework. Because policies are customized and rates are unregulated, consumers must work through licensed brokers who understand the market and can ensure fair terms.

McKay stresses that this system works well for informed buyers — businesses, municipalities, or homeowners working with experienced agents.

But it can be confusing for those used to the standardized protections of the admitted market.

That’s why the SLA emphasizes education, transparency, and consumer awareness.

“Every surplus lines policy must have a disclosure statement,” McKay explained. “It says this policy is not protected by CIGA, rates aren’t filed with the CDI, and you should consult your broker for details. That transparency is key.”

Wildfire Risk and the “New Normal”

Perhaps the biggest factor driving California’s insurance crisis is wildfire exposure.

Surplus lines carriers have been crucial in filling gaps for properties in high fire-risk areas — from the foothills of Los Angeles County to the Sierra Nevada corridor.

These policies, while expensive, are often the only way homeowners can remain insured while waiting for the admitted market to stabilize.

McKay says this role will remain critical until California’s new Sustainable Insurance Strategy — which includes catastrophe modeling and reinsurance reforms — fully takes effect.

“Until the admitted carriers can re-enter those zones, surplus lines will keep doing what they’ve always done — taking the risks others can’t,” McKay said.

The Future of the Market: Reform, Innovation, and Balance

Looking ahead, both Susman and McKay agree that the key to stabilizing California’s market lies in balance — between regulation and flexibility, between consumer protection and business sustainability.

The Department of Insurance’s new reforms, expected to roll out fully by 2025, aim to modernize how rates are reviewed, introduce catastrophe modeling, and encourage insurers to return to the state.

These changes will also help the surplus lines market operate more efficiently — complementing, rather than replacing, the admitted system.

“Surplus lines shouldn’t be the default option,” McKay said. “They should be the specialized option. The goal is to have a healthy admitted market with a strong surplus lines sector as backup — not the other way around.”

Susman echoed that sentiment:

“When you have a competitive market, consumers win. Surplus lines are an essential part of that ecosystem, but the ultimate goal is to bring balance back.”

Key Takeaways for Homeowners and Businesses

For Californians struggling to secure coverage, understanding surplus lines is more important than ever. Here are the top lessons from this episode:

1. Surplus lines are legitimate and regulated.

Non-admitted doesn’t mean unregulated. Surplus lines carriers must meet strict financial standards and are monitored by both the SLA and CDI.

2. Use a licensed surplus lines broker.

These professionals understand how to navigate the non-admitted market and can match you with reputable carriers.

3. Expect higher costs — but greater flexibility.

Surplus lines policies are priced based on risk, not regulated formulas. While more expensive, they can provide coverage when no admitted carrier will.

4. Be proactive with risk mitigation.

Improving fire defensibility, installing mitigation systems, and documenting upgrades can make your property more attractive to surplus lines underwriters.

5. Monitor market reforms.

As new regulations take effect, more admitted carriers may return — offering opportunities to move back to standard policies.

Final Thoughts: A Bridge to a Healthier Market

California’s insurance challenges are complex, but the surplus lines sector is proving indispensable in keeping the system from collapsing.

As Benjamin McKay aptly summarized, surplus lines aren’t a replacement for the admitted market — they’re a bridge.

“We’re here to make sure Californians can still get insured,” McKay said. “Our role is to keep the market functioning until balance is restored.”

In a time when uncertainty dominates the insurance conversation, that bridge may be exactly what keeps homeowners, businesses, and entire communities afloat.