What is the primary function of reinsurance in surplus lines?

The primary function of reinsurance in surplus lines is to manage high-risk policies and mitigate exposure. Surplus lines insurance typically deals with risks that standard insurance markets are unwilling or unable to cover due to their high risk. By utilizing reinsurance, surplus lines brokers can transfer a portion of that risk to another insurer, thereby reducing their potential exposure to large losses. This process allows them to underwrite and maintain coverage for high-risk policies while ensuring that they have a safety net for extreme losses.

Reinsurance acts as a financial safety valve. When a surplus lines insurer takes on a particularly risky policy, they may seek reinsurance coverage to share that risk with a reinsurer. This arrangement not only stabilizes the insurer's financial standing but also ensures they can continue to provide coverage for difficult-to-insure risks. This risk management aspect is crucial in the surplus lines market, which is often characterized by a higher concentration of unusual or unique risks.