Surplus Lines Regulation

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1 Surplus Lines Regulation Keri Kish NAPSLO Director of Government Relations 2017 NAPSLO E&S School June 4-7, 2017

2 1. Define Surplus Lines Insurance Specialized property or liability coverage provided by a nonadmitted insurer in instances where it is unavailable from insurers licensed by the state. Insurance coverage not available from an admitted company in the regular market; thus a surplus lines broker agent representing an applicant seeks coverage in the surplus lines market from a nonadmitted insurer according to the insurance regulations of a particular state. A statutory provision in a state insurance code that allows insurance buyers to access the nonadmitted market through specially licensed brokers when the admitted market is unable to fulfill the buyer s insurance needs.

3 2. What is the Purpose of Surplus Lines Insurance? Provides access to a supplemental outlet or safety valve market. Provides unique risks with options. Keeps the insurance in the private market.

4 3. What is the fundamental principle of surplus lines? Freedom from Rate & Form! This means that surplus lines insurers can write a risk without having to get the rate or form approved, allowing us to provide unique, individualized and tailored solutions. This does NOT mean surplus lines transactions are unregulated.

5 4. Give 2-3 Examples of Surplus Lines Risks; Explain Why They are in the Surplus Lines Market The surplus lines industry generally serves as the innovator for new and emerging risks and related insurance products, such as vacant properties, nursing homes, builder s risk and older high-value homes. For example, a new business venture with a new innovative product may not be able to find insurance in the standard market, because of the lack of experience, loss history and approved underwriting processes or rates for emerging risks. Other examples of coverage innovations in surplus lines that now have evolved to the standard market include employment practices liability, directors and officer s liability, medical malpractice and cyber risk, among many others.

6 5. Who is Primarily Responsible for the Regulation of the Surplus Lines Industry? State Insurance Commissioners U.S. state-based system of insurance regulation Broker: home state of the insured (either a resident or non-resident license) Insurer: home state/domestic state of the insurer

7 6. Who is more heavily Regulated in the Surplus Lines Market? The Broker or the Carrier? Both are well regulated! Licensed surplus lines brokers are responsible for placing risks with eligible, reputable and financially strong surplus lines insurers. They are directly regulated by the state in the surplus lines transaction. The insurer is directly regulated by their home state and must comply with all the same laws and rules as the standard market insurers regarding financial solvency and market conduct in that state.

8 7. A Risk is Located in Illinois, where would a (1) Domestic, (2) Foreign, and (3) Alien Insurer be Located? Domestic: Illinois. Illinois is one of 11 states that allows an domestic surplus lines insurer. DSLI states: Arizona, Arkansas, Delaware, Illinois, Louisiana, Missouri, New Hampshire, New Jersey, North Dakota, Oklahoma and Wisconsin* (*pending signature of Governor) Foreign: any other U.S. state where the insurer is domiciled as a surplus lines insurer Alien: any other non-u.s. jurisdiction (such as Bermuda, London, etc.)

9 8. Is Lloyd s Admitted to do Business in a U.S. State? All Lloyd's syndicates that write surplus lines insurance in the U.S. appear on the NAIC Quarterly Listing of Alien Insurers ( IID List ), which is subject to regulatory oversight by the NAIC s IID. The IID is governed by the NAIC s IID Plan of Operation Review Group and the Surplus Lines Task Force, which is comprised of 19 states. Lloyd s is admitted on a very limited basis in Kentucky and Illinois and only for specific purposes.

10 9. Can a Surplus Lines Insurer Write Surplus Lines Business in their Domestic State? In general, no, because the theory of surplus lines is that the insurer exports surplus lines coverage to other states. However, in the 11 Domestic Surplus Lines Insurer states, they may write surplus lines in their own state.

11 10. Are Surplus Lines Companies Subject to the State Guaranty Funds? Guaranty funds do not cover surplus lines, with the exception of New Jersey, which is limited NAPSLO believes surplus lines guaranty funds are unnecessary for the following reasons: They promote a false security because the coverage is typically inadequate for commercial lines; They promote the use of financially weak companies; Potential premium assessments are an unfair burden on surplus lines consumers; and The surplus lines marketplace is financially secure and dominated by companies with average ratings significantly higher than the overall market.

12 11. What is Diligent Effort and Who is Responsible? Most state statutes and/or regulations require insurance agents to demonstrate a diligent effort was made to place the risk with the standard market. These requirements are often referred to as diligent search requirements within state laws and regulations. In practice, insurance agents will generally seek insurance quotes from the standard market carriers licensed to write such insurance. If the risk is declined by the standard market (most states require declinations from three markets that write the type of coverage being solicited), insurance agents may seek coverage from the surplus lines market. Generally, the retail agent performs diligent effort and the surplus lines broker is responsible for maintaining and/or filing the diligent effort affidavits.

13 12. Are all States Uniform in their Diligent Effort Requirements? No, states have different rules regarding diligent effort. In general, states require between 3-5 declinations from an admitted insurer that writes that type of risks. In some states a diligent effort affidavit has to be filed and in some states is just has to be maintained as part of the broker s file. Louisiana, Mississippi (7/1/17), Virginia & Wisconsin do not require DE for all risks; Florida doesn t require for most commercial property risks)

14 13. What are Export Lists and How Do They Work? Regulators use export lists to regulate the flow of business between the standard and surplus lines markets. An export list outlines the types of insurance products and coverages the state allows to be exported to the surplus lines market without a diligent search of the standard market. They represent an effective tool for each individual state to monitor and regulate their own insurance markets. The fact that the export lists vary by state, (i.e., there is no national, multi-state export list) is evidence that not all products and coverages are available in all states on a standard basis and that insurance regulators have recognized the need for this option for their consumers.

15 16 States with Export Lists

16 14. What is the Purpose of a Stamping Office and How Many States Have One? Stamping offices are non-governmental offices that play a vital role in the surplus lines industry. These organizations, which exist in 15* states, help oversee transactions in order to prevent ineligible insurers from transacting business in a given state s surplus lines market. They also play a role in evaluating eligible insurers for financial security. Depending on the statutory authority and structure of a given stamping office, these evaluations may take a variety of forms.

17 Reports from state stamping offices 17

18 15. Who is Required to have a Surplus Lines License and must a Retailer have a License? The surplus lines broker is required to have a surplus lines license. Only Tennessee requires the retail agent to also have a surplus lines license. NAPSLO is working to eliminate this requirement!

19 Surplus Lines Transaction Standard/Admitted Transaction

20 16. What is the NRRA and How has it Impacted the Surplus Lines Industry? The Nonadmitted and Reinsurance Reform Act of 2010 Simplify the regulation and taxation of surplus lines transactions amongst the states One state regulates the transaction: home state of the insured Insurer eligibility established by the home state of the insured as well Most important regulatory impact in last 30 years 20

21 17. What is NARAB II and is It a Good Thing? The National Association of Registered Agents and Brokers. Called II because it s the second try. Passed with the reauthorization of TRIA in January Will create a national nonresident license for agents/brokers/producers to operate on a nationwide basis. President and Congress have yet to appoint board so no movement on getting started. It is a very good thing, potentially! 21

22 18. How do you determine the home state within the NRRA? HOME STATE S EXCLUSIVE AUTHORITY. No State other than the home State of an insured may require any premium tax payment for nonadmitted insurance. HOME STATE AUTHORITY. Except as otherwise provided in this section, the placement of nonadmitted insurance shall be subject to the statutory and regulatory requirements solely of the insured s home State. HOME STATE. (A) IN GENERAL. Except as provided in subparagraph (B), the term home State means, with respect to an insured (i) the State in which an insured maintains its principal place of business or, in the case of an individual, the individual s principal residence; or (ii) if 100 percent of the insured risk is located out of the State referred to in clause (i), the State to which the greatest percentage of the insured s taxable premium for that insurance contract is allocated. (B) AFFILIATED GROUPS. If more than 1 insured from an affiliated group are named insureds on a single nonadmitted insurance contract, the term home State means the home State, determined pursuant to subparagraph (A), of the member of the affiliated group that has the largest percentage of premium attributed to it under such insurance contract. 22

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26 19. What is FATCA and how does it impact surplus lines? The Foreign Account Tax Compliance Act Implemented in July 2014 Purpose is to prevent tax evasion. U.S. broker forwarding premium to non-u.s. broker must confirm FATCA status of both the non-u.s. insurer and non-u.s. broker prior to making payment to either. Most non-u.s. entities that NAPSLO members do business with will be considered to be exempt but you are still required to confirm. 26

27 20. What is the Flood Insurance Market Parity and Modernization Act and how does it impact surplus lines? Protects and clarifies that eligible surplus lines, and standard insurers, may provide private market flood insurance solutions to consumers to satisfy the mandatory purchase requirements for a mortgage, providing choices beyond the NFIP. Pending in the House and Senate. Likely to become provision in NFIP reauthorization (expires Sept 30, 2017). 27

28 21. What is the one federal and state ongoing regulatory issue that most impacts the surplus lines business? You tell us--answers from the audience! 28

29 Regulatory Resources On the Legislative Advocacy and PAC page you will find issue summaries, letters we have submitted and other helpful materials for compliance and regulatory issues. Watch for our biannual comprehensive legislative updates (February and July) and our special legislative updates when import information develops. You can access previous messages on the News page of the NAPSLO website.

30 Surplus Lines Regulation Keri Kish NAPSLO E&S School June 4-7, 2017

Common Misconceptions of the Surplus Lines Industry

Common Misconceptions of the Surplus Lines Industry In the Consideration of Private Flood Insurance Options H.R. 1422/S. 563 MISCONCEPTION: The surplus lines industry is unregulated The surplus lines industry