Excess Lines

Question 1

Purpose of NRRA (Nonadmitted & Reinsurance Reform Act of 2010)

Answer 1

• Purpose
  ○ Create a better surplus lines tax payment and regulatory system
• Accomplish the purpose by
  ○ Limits regulatory authority of surplus lines to the customer’s home state
  ○ Establishes federal standards for surplus lines regarding
  § Premium taxes
  § Insurer eligibility
  § Commercial purchaser exemptions

Question 2

NRRA Today: 4 Key Provisions

Answer 2

OsUEN
1. One-State compliance
2. Uniform eligibility standards (for an insurer to sell surplus lines coverage)
3. ECPs (Exempt Commercial Purchasers) (a diligent search is not required for sophisticated commercial purchasers)
4. National producer database (producers must be in a database to collect licensing fees from a surplus lines insurer)

Question 3

NRRA: One-State Compliance

Answer 3

• Insured’s home state has EXCLUSIVE AUTHORITY to regulate placement of nonadmitted insurance
  □ Only home state can require a broker’s license to sell nonadmitted insurance (WC is an exception)
  □ Only home state can collect premium taxes

Question 4

NRRA: Uniform eligibility standards

Answer 4

• U.S. domiciled insurers (foreign insurers)
  □ Must have >- 15m in capital & surplus (or state minimum if higher)
  □ Must be authorized to write in its domiciliary jurisdiction
• Non-U.S. domiciled insurers (alien insurers)
  □ If insurer is listed in Quarterly Listing of Alien Insurers, states may not prohibit placing insurance with them

Question 5

NRRA: ECPs (Exempt Commercial Purchasers)

Answer 5

• An ECP is any person purchasing commercial insurance that
  □ Employs a NRRA-qualified risk manager
  □ Has paid aggregate commercial premiums >= $100K (in past 12 months)
  □ The person’s company is “large” (high net worth >= ~20m or high revenues or lots of employees, etc.)
• States cannot force a broker to do a diligent search if the purchaser is an ECP and
  □ The broker has disclosed to the purchaser that coverage may be available in the admitted market
  □ The purchaser has then instructed the broker to purchase insurance in the nonadmitted market

Question 6

NRRA: National Producer Database

Answer 6

• Database is for licensure & renewal of surplus lines brokers
• Require that if a state doesn’t participate in such a database then they cannot collect licensing fees

Question 7

Describe Surplus Lines Laws (Generally)

Answer 7

• There is very little regulation regarding forms & rates
• Surplus lines regulation is focused mainly on brokers (not the surplus lines insurers)
• Brokers must perform a diligent search before exporting business from the admitted market to the surplus lines market
  ○ Or the broker can instead use an “export list” which is a list of coverages deemed to be unavailable through admitted market
• Brokers submit tax and other filings

Question 8

2 Methods of accessing nonadmitted market

Answer 8

1. Surplus lines (local licensed broker to buy coverage from nonadmitted insurer in your home state)
2. Independent procurement (direct placement)

Question 9

Independent procurement / direct placement

Answer 9

○ When a U.S. citizen leaves their home state to insure a risk located in their home state
○ And the purchase is either directly from an unauthorized insurer or a broker not licensed by the home state

Question 10

Legal precedent related to home state regulation of independent procurement

Answer 10

○ Case
§ State Board of Insurance v. Todd Shipyards Corporation
○ Facts
§ The buyer purchased property coverage from an out-of-state unauthorized insurer
§ The only connection between the buyer and the home state was the location of the covered property in the home state
○ Issue
§ Can the home state tax or otherwise regulate the transaction
○ Ruling
§ Under McCarran-Ferguson, the home state could NOT tax or regulate the transaction
§ Because federal laws applying exclusively to insurance supersede state laws

Question 11

Wholesale broker

Answer 11

○ An intermediary broker between a regular retail broker and an insurer
○ They place business brought to them by retail brokers and have no contact with the insured

Question 12

Licensing of a wholesale broker vs a regular retail broker

Answer 12

Wholesale broker must have a license in the home state of each insured they place with an insurer (inconvenient)

Question 13

How licensing requirements of wholesale brokers are being addressed

Answer 13

○ 2015 legislation established the NARAB (National Association of Registered Agents and Brokers)
○ It’s a 1-stop national licensing system for brokers operating outside of their home state
○ Requires submission of an application and adherence to strict standards

Question 14

Domestic Surplus Lines Insurance Companies (DSLIs) Criteria

Answer 14

○ Policyholder Surplus >= 15m
○ Insurer is an eligible surplus lines insurer in a jurisdiction other than its state of domicile
○ The insurer’s board of directors passes a resolution seeking to be a DSLI in the state of domicile
○ Insurance commissioner approval and issuance of certificate of authority

Question 15

Surplus/capital requirements for surplus lines

Answer 15

There is a minimum capital requirement (can vary by state)

Question 16

Authorization/licensing requirement for surplus lines

Answer 16

Insurer must be authorized in domiciliary jurisdiction

Question 17

Managerial requirements for surplus lines

Answer 17

Must meet managerial requirements to ensure that surplus lines carrier can meet customer’s needs

Question 18

Must coverage be declined by admitted market to enter surplus lines?

Answer 18

Coverage must first be declined after a diligent search for an admitted insurer unless insured is an ECP