Surplus Lines

Question 1

Describe a surplus lines transaction

Answer 1

a specially licensed surplus lines broker places insurance with an unauthorized/non-admitted insurer

Question 2

2 regulatory exemptions for surplus lines and benefits to policyholders

Answer 2

Exempt from filing rates
- insurer can always charge adequate premium

Exempt from guaranty funds
- costs of fund not passed to policyholder

Question 3

Purpose of NRRA

Answer 3

create a better surplus lines tax payment and regulatory system

Question 4

Key provisions of NRRA

Answer 4

• 1- state compliance
• uniform eligibility standards
• ECPs or Exempt Commercial Purchasers
• national producer database

Question 5

Describe 1-state compliance

Answer 5

insured’s home state has exclusive authority to regulate nonadmitted insurance:
- only home state can require a broker’s license to sell nonadmitted insurance (but note that WC is an exception)
- only home state can collect premium taxes

Question 6

Describe uniform eligibility standards

Answer 6

NRRA default standards (all states currently using)
US Domiciled insurers
- >= 15m in capital and surplus (or higher state min)
- must be authorized to write in its domiciliary jurisdiction

Alien Insurers:
- if insurer is listed in Quarterly Listing of Alien Insurers, states can’t prohibit placing insurance with them

Question 7

Describe Exempt Commercial Purchaser (ECP)

Answer 7

definition of ECP: any person purchasing commercial insurance that…
- employs a NRRA-qualifed risk manager
- has paid aggregate commercial prems >100k (in past 12 mos)
- the person’s company is large (high net worth >= 20m or high revenues or lots of employees)

NRRA provision is:
- states can’t force broker to do diligent search if the purchaser is an ECP and:
- broker has disclosed to purchaser that coverage may be available in the admitted market
- purchaser has then instructed the broker to purchase insurance in the nonadmitted market

Question 8

Describe national producer database

Answer 8

• database (or national equivalent) is for licensure and renewal of surplus line brokers
• provision: if a state doesn’t participate in such a database, they can’t collect licensing fees

Question 9

2 methods of accessing nonadmitted market

Answer 9

• use local licensed broker to buy coverage from a nonadmitted insurer in your home state
• independent procurement (also called direct placement)

Question 10

What is independent procurement/direct placement

Answer 10

• when a US citizen leaves their home state to insure a risk located in their home state
• and purchase is either from an unauthorized insurer or a broker not licensed by the home state

Question 11

Legal precedent related to related to home state regulation of independent procurement

Answer 11

State Board of Ins v. Todd Shipyards Corporation

Facts:
- buyer purchased property coverage from an out-of-state unauthorized insurer
- the only connection between buyer and home state was location of 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 12

Wholesale broker

Answer 12

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 13

Wholesale broker licensing

Answer 13

the wholesale broker must have a license in home state of each insured

Question 14

How licensing requirements of wholesale brokers being addressed

Answer 14

• 2015 legislation established the National Association of Registered Agents and Brokers or NARAB
• 1 stop national licensing system for brokers operating outside of their home state
• requires submission of an application and adherence to strict standards

Question 15

4 regulatory requirements for a direct-to-consumer surplus lines

Answer 15

• surplus/capital requirements: meet min capital requirement (vary by state)
• authorization/licensing required: must be authorized in domiciliary jurisdiction
• coverage must be declined by admitted market: unless insured is an ECP, they must first perform a diligent search for an admitted insurer
• meet managerial requirements: ensures surplus lines carrier can meet customer’s needs