3.2 E&S Distribution: Retail Agents, Surplus Lines Agents, MGAs, Commissions, and Fees
Key Takeaways
- A surplus lines agent may originate surplus lines business or accept it from another agent licensed for that kind of insurance, and may share its commission with that agent (TIC § 981.212).
- A surplus lines agent becomes a managing general agent under TIC § 4053.002 only if it accepts 50% or more of its business, or $500,000 or more of premium, whichever is less, from policies produced by other agents.
- Texas MGAs need a written contract with each insurer, must send each insurer a quarterly account report, keep separate records, and deposit collected money in an FDIC-insured escrow account (TIC §§ 4053.102-.105).
- A property and casualty agent may charge a service fee only after notifying the client and obtaining written consent for each fee (TIC § 4005.003), and agent fees charged in addition to or instead of commission are part of the premium taxed at 4.85% (34 TAC § 3.822).
- A surplus lines agent may not absorb the surplus lines tax or rebate any part of the tax or its commission as an inducement or for any other reason (TIC § 225.010).
3.2 E&S Distribution: Retail Agents, Surplus Lines Agents, MGAs, Commissions, and Fees
Surplus lines business reaches the market through intermediaries more than admitted business does. Eligible surplus lines insurers are not licensed in Texas, and Texas law allows surplus lines insurance to be placed only through a licensed surplus lines agent (TIC § 981.004(a)(2)). Knowing who does what in the chain, and what each party may be paid, answers a large share of the licensing, commission, and marketing-practice questions on the exam.
1. The Typical Distribution Chain
+--------------------+ +--------------------+ +------------------------------+
| THE INSURED | ----> | RETAIL AGENT | ----> | SURPLUS LINES AGENT / MGA / |
| (Commercial Buyer) | | (TIC Ch. 4051 P&C) | | MANAGING UNDERWRITER |
+--------------------+ +--------------------+ +------------------------------+
|
v
+-------------------------+
| ELIGIBLE SURPLUS LINES |
| INSURER |
+-------------------------+
The Insured
The insured normally buys through agents. The main exception is independently procured insurance: coverage the insured negotiates directly with a non-admitted insurer entirely outside Texas. That coverage must be reported, and the insured pays premium tax under TIC Chapter 226 (TIC § 101.053(b)(4)). It is not surplus lines insurance and is not placed by a surplus lines agent.
The Retail Agent
- Holds a Texas general lines property and casualty license (TIC Chapter 4051) and owns the client relationship.
- Gathers exposure information and loss history and tries to place the risk with authorized insurers. That attempt is the diligent effort covered in Chapter 5.
- May refer surplus lines business to a surplus lines agent without holding a surplus lines license, as long as the surplus lines agent completes the transaction (28 TAC § 15.101(a)(2)-(3)).
The Surplus Lines Agent
- Must hold a surplus lines license to issue or cause to be issued any contract with an eligible surplus lines insurer (TIC § 981.202).
- May originate surplus lines business directly or accept it from another agent licensed to handle that kind of insurance (TIC § 981.212(a)). Most Texas surplus lines agents operate as wholesalers, but nothing in Chapter 981 limits a surplus lines agent who also holds a P&C license to wholesale work. The exception is a surplus lines license granted to a managing general agent who is not also licensed under Chapter 4051: that license is limited to business originating through a licensed P&C agent (TIC § 981.220).
- Places coverage only with eligible insurers, files with the Surplus Lines Stamping Office of Texas (SLTX), and collects the 4.85% tax from the insured.
The Eligible Surplus Lines Insurer
The risk-bearing carrier: a U.S. insurer meeting the Chapter 981 eligibility standards, a Texas domestic surplus lines insurer, or an alien insurer on the NAIC Quarterly Listing (Chapter 4).
2. Managing General Agents and Managing Underwriters
Managing General Agents (TIC Chapter 4053)
A managing general agent (MGA) has supervisory responsibility for an insurer's local agency and field operations in Texas, or is authorized by the insurer to accept or process policies produced and sold by other agents (TIC § 4053.001). An MGA license is required to act as one (§ 4053.051), and one license covers any number of insurers (§ 4053.053).
When is a surplus lines agent also an MGA? Under TIC § 4053.002, a surplus lines agent is not an MGA unless it accepts 50% or more of its total annual business, or $500,000 or more of total annual premium, whichever amount is less, from policies produced and sold by other agents. A wholesaler writing $4,000,000 a year that accepts $800,000 from other agents' production has crossed the lesser threshold ($500,000) and needs an MGA license.
Core MGA duties:
| Requirement | Statute | What It Requires |
|---|---|---|
| Written contract | TIC § 4053.102 | Responsibilities, cancellation, reports, records and audits, and where applicable premium volume limits, agent appointments, claims settlement, underwriting, and reinsurance |
| Quarterly account report | TIC § 4053.103 | Written, earned, and unearned premium; losses paid and outstanding; IBNR; management fees |
| Separate records | TIC § 4053.104 | Separate records for each insurer, open to the insurer and TDI examiners |
| Escrow account | TIC § 4053.105 | Deposit all money collected for each insurer in an escrow account at a Federal Reserve member bank with FDIC-insured accounts |
| Fiduciary capacity | TIC § 4053.106 | Money held for insureds or insurers is held as a fiduciary |
| Examination | TIC § 4053.107 | Financial and compliance examinations as the commissioner considers necessary, at the MGA's expense |
Many MGAs also send insurers line-by-line bordereaux (premium and loss listings). This is an industry practice that supports the statutory account reporting.
Managing Underwriters (Surplus Lines)
In Chapter 981, the delegated-authority role is the managing underwriter: a surplus lines agent or agency that exercises underwriting authority for an eligible surplus lines insurer under a written agreement and derives its business from a surplus lines agent (TIC § 981.002(6)).
- A surplus lines agent may exercise underwriting authority only under a current written agreement that identifies the insurer, states the scope of authority, and reserves final underwriting review to the insurer. The authority may include rating, accepting risks, binding, issuing evidence of coverage, and cancelling (28 TAC § 15.102(f)).
- Claims authority also requires a written agreement. A Texas-licensed adjuster must perform the adjustment unless the policy covers multiple states and the loss is on a non-Texas risk (28 TAC § 15.102(g)).
- When a surplus lines agent places a policy with a managing underwriter, the managing underwriter collects, reports, and pays the tax, unless the two sign a written agreement at or before binding that makes the surplus lines agent responsible (TIC § 225.006(b)-(c)).
- A managing underwriter may hold both a surplus lines license and an MGA license (TIC § 981.223(c)).
| Dimension | Wholesale Surplus Lines Agent | MGA / Managing Underwriter |
|---|---|---|
| Authority | Negotiates with insurer underwriters; binds only on the insurer's written confirmation | Binds and issues within a written delegated-authority agreement |
| Agency relationship | Intermediary between the retail agent and the market | Acts for the insurer within its contract |
| Tax and filing | Files and pays when it is the responsible agent | Collects and pays tax unless a written § 225.006(c) agreement shifts it |
3. Commissions
- A surplus lines agent that accepts business from another licensed agent may share its commission with that agent (TIC § 981.212(b)).
- No insurer or agent may pay a commission or other valuable consideration for agent services to a person who does not hold a Texas agent license. Deferred or renewal commissions to former licensees are the exception, and an agent may not pay an unlicensed person a referral fee based on the customer's purchase (TIC § 4005.053).
- The 4.85% tax is computed on the gross premium, meaning the premium before any commission is deducted. Commission is not subtracted from the tax base.
Example: An eligible insurer pays a 15% commission on a $40,000 premium ($6,000). The surplus lines agent keeps $2,800 and pays the retail agent $3,200 under § 981.212(b). Tax is still 4.85% of $40,000, which is $1,940.
4. Fees Charged to the Insured
Texas limits what may be collected in connection with an application or policy to: premium, tax, finance charge, policy fee, agent fee, service fee, inspection fee, and membership dues in a sponsoring organization (TIC § 550.001).
- Service fees (TIC § 4005.003). A P&C agent may charge the actual cost of a motor vehicle record or property photograph, and a reasonable fee for costs such as special delivery, printing, email, and telephone charges incurred for the client. The agent may charge these fees only if, before incurring the expense, the agent notifies the client of the fee and obtains the client's written consent for each fee.
- No double compensation (TIC § 4005.054). An agent paid a commission may not receive an additional fee for the same services except a fee allowed under § 550.001 or § 4005.003 with the required disclosure.
- Compensation disclosure (TIC § 4005.004) applies to agents who receive compensation from both the customer and the insurer. It expressly does not apply to a surplus lines agent placing surplus lines insurance or to an intermediary agent such as an MGA.
- Taxation of fees. The Comptroller's rule treats policy fees, membership fees, assessments, and agent fees charged in addition to, or in lieu of, a commission as taxable premium. Only a separately billed finance charge is excluded (34 TAC § 3.822(a)(4)-(5)).
5. Rebating and Inducements
- Surplus lines rule: A surplus lines agent may not absorb the surplus lines tax and may not rebate all or part of the tax or its commission as an inducement for insurance or for any other reason (TIC § 225.010).
- Casualty and bond business: Except as provided in an applicable filing, an insurer, agent, or broker may not pay or offer a rebate, discount, credit, special favor, or other valuable consideration not specified in the policy, and an insured may not knowingly accept one (TIC § 1806.104).
- Licensing consequence: Offering or giving a rebate of premium or commission is a ground for license denial or discipline (TIC § 4005.101(b)(9)).
- Small promotional items: Texas allows promotional advertising items, educational items, or traditional courtesies valued at $25 or less (for example, TIC § 4005.053(d)).
A Texas wholesale surplus lines agency writes $4,000,000 of total annual premium. Of that amount, $800,000 comes from policies that were produced and sold by other agents and that the agency accepts and processes for an insurer. Under TIC § 4053.002, is the agency acting as a managing general agent?
A retail property and casualty agent wants to charge a commercial client for overnight courier and printing costs incurred while marketing the client's account to surplus lines agents. Under TIC § 4005.003, what must the agent do?
A Texas surplus lines agent places a $20,000 policy and bills the insured a separate $500 agent fee in addition to the commission it receives. What Texas surplus lines premium tax is due on the transaction?
To win a large coastal account, a Texas surplus lines agent offers to return one-quarter of its commission to the insured and to pay the 4.85% surplus lines tax itself so the insured's invoice looks lower. How does Texas law treat these offers?