Surplus Lines Insurance in California Explained

Published Date: 06/25/2024

California’s insurance market is in flux. With major carriers retreating, homeowners scrambling for coverage, and regulators rewriting decades-old rules, the industry is 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 how surplus lines work within California’s regulatory system and why they have become a lifeline for many homeowners and businesses as traditional markets tighten.

The Role of Surplus Lines as 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, also known as non-admitted carriers, operate outside the rate and form filing requirements that govern traditional admitted insurers. This flexibility allows them to insure risks the standard market cannot or will not accept.

McKay describes surplus lines as California’s “safety valve.”

“Surplus lines carriers exist to insure risks that the admitted market can’t or won’t,” he said. “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, insure specialized commercial risks, and customize coverage for unique or high-value homes. All surplus lines transactions must go through licensed surplus lines brokers and are tracked by the SLA to ensure compliance and transparency.

Admitted vs. Non-Admitted Insurers: What’s the Difference?

A central part of the discussion focused on the difference between admitted and non-admitted insurers.

Admitted insurers are licensed by the California Department of Insurance (CDI). Their rates and policy forms must be approved by regulators, and their customers are protected by the California Insurance Guarantee Association (CIGA) if the insurer becomes insolvent.

Non-admitted, or surplus lines, insurers are not regulated in the same way. They are often large global carriers that must be approved as eligible by the CDI and financially vetted by the SLA. While surplus lines policies do not include CIGA protection, they are backed by strong capital and global reinsurance networks.

“Surplus lines companies aren’t second-tier insurers,” McKay explained. “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.”

Why Surplus Lines Are Expanding During the Insurance Crisis

Over the past two years, California’s admitted insurance market has contracted sharply. Major carriers such as State Farm, Allstate, and Farmers have paused or limited new business. Regional carriers have followed, citing regulatory delays, rising reinsurance costs, and the inability to secure timely rate approvals under Proposition 103.

This retreat has pushed record numbers of homeowners and business owners toward the FAIR Plan and surplus lines coverage.

“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.”

While surplus lines policies typically cost more because rates are not regulated, they often represent the only available option for properties that would otherwise be completely uninsured.

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

Proposition 103, Regulation, and the SLA’s Oversight Role

A major theme of the discussion was how Proposition 103 has constrained flexibility in the admitted market. Passed in 1988, Prop 103 requires insurers to file and receive approval for every rate change, a process that can take months or even years.

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

This rigidity has made surplus lines even more important. While surplus lines carriers are not subject to Prop 103’s rate-approval process, they are far from unregulated.

The Surplus Line Association acts as a state-sanctioned self-regulatory organization. It monitors transactions, ensures compliance with eligibility rules, and reports all data to the Department of Insurance.

“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.”

The Trade-Off Between Flexibility and Consumer Protection

Surplus lines operate under a “buyer beware” framework. Policies are customized, and rates are not filed with the CDI. Because of this, consumers must work through licensed surplus lines brokers who understand the market and can ensure proper coverage placement.

McKay emphasized the importance of transparency. Every surplus lines policy must include a disclosure stating that the policy is not protected by CIGA and that rates are not regulated by the CDI.

“That transparency is key,” he said. “It ensures consumers understand exactly the type of policy they’re purchasing.”

For informed buyers working with experienced agents, surplus lines offer flexibility and access that the admitted market cannot currently provide.

Wildfire Risk and the New Normal for California Insurance

Wildfire exposure is the single biggest driver of California’s insurance crisis. As admitted carriers retreat from high-risk zones, surplus lines insurers have become essential for properties in wildfire-prone regions across Los Angeles County, the Sierra foothills, and beyond.

While these policies are often expensive, they provide a critical bridge for homeowners and businesses waiting for the admitted market to stabilize.

McKay said this role will remain essential until California’s broader insurance reforms, including the Sustainable Insurance Strategy, fully take 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,” he said.

How Market Reforms Could Reshape the Role of Surplus Lines

Both Susman and McKay agree that long-term stability depends on restoring balance between regulation and flexibility.

The Department of Insurance’s reforms, expected to roll out more fully by 2025, aim to modernize rate reviews, introduce catastrophe modeling, and encourage insurers to return to the state. These changes could shift surplus lines back into a supporting role rather than a primary one.

“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 view: “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.”

What Homeowners and Businesses Should Know Right Now

As the insurance market remains tight, several key takeaways are especially important:

Surplus lines are legitimate and closely monitored.

Non-admitted does not mean unregulated. These carriers must meet strict financial standards and are overseen by both the SLA and the CDI.

Work only with licensed surplus lines brokers.

These specialists know how to navigate the non-admitted market and match clients with reputable carriers.

Expect higher premiums but greater flexibility.

Surplus lines pricing reflects true risk rather than regulated formulas, which often results in higher costs.

Invest in risk mitigation.
Fire defensibility, mitigation systems, and documented upgrades can improve eligibility and pricing.

Monitor regulatory reforms closely.
As new rules take effect, opportunities may emerge to move back into the admitted market.

Final Thoughts: Surplus Lines as a Bridge to Market Stability

California’s insurance challenges are complex, but the surplus lines sector is playing a crucial role in keeping the system from collapsing.

As Benjamin McKay summarized, surplus lines are not a replacement for the admitted market — they are a bridge.

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

In a time of uncertainty for homeowners and businesses alike, that bridge may be exactly what keeps communities protected as California works toward a more stable insurance future.