Surplus Lines

Question 1

purpose of Nonadmitted and Reinsurance Reform Act (NRRA) for surplus lines (2)

Answer 1

• simplify and increase efficiency of surplus lines regulation by limiting authority to the insured’s home state
• establish federal standards for collection of premium taxes, insurer eligibility, and commercial purchaser exemptions

Question 2

differences between admitted market and surplus lines (3)

Answer 2

• almost no rate and form regulations apply to surplus lines
• neither government mandated programs nor guaranty funds apply to surplus lines
• surplus lines cannot compete directly with licensed insurers

Question 3

one-state compliance definition

Answer 3

• insured’s home state has exclusive authority to regulate and collect premium taxes
• home state is where insured maintains principal business; or if 100% of risk is out of state, where greatest percentage of premium is allocated

Question 4

foreign surplus lines eligibility

Answer 4

states cannot impose eligibility requirements on foreign surplus lines insurers except:
1) standards that comply with NAIC Non-Admitted Insurance Model Act
* foreign surplus lines insurer to be authorized in its domiciliary state
* carry capital the greater of $15 million or
minimum capital under insured’s home state law
* home state commissioner may reduce capital requirement down to $4.5 million
2) nationwide uniform requirements, forms, and procedures

Question 5

surplus lines placement process

Answer 5

• can only be placed by licensed surplus producers

* must be declined by the admitted market before surplus lines placement occurs

Question 6

direct placement/independently procured insurance, and related U.S. Supreme Court case

Answer 6

• another method of accessing the nonadmitted market: insured goes out of state to purchase from a nonadmitted insurer, directly or through an unlicensed broker
• U.S. Supreme Court case State Board of Insurance v. Todd Shipyards Corporation (1962) provides this right: a state cannot tax or regulate an insurance transaction that has no connection with the state other than the location of the risk

Question 7

exempt commercial purchasers (ECPs)

Answer 7

• NRRA established a commercial purchaser exemption for certain large policyholders
• diligent search requirement waived under two conditions:
  1) broker discloses that coverage may be available from admitted market with more protection
  2) ECP requests in writing for the broker to place coverage with a surplus lines insurer

Question 8

National Association of Registered Agents and Brokers (NARAB)

Answer 8

creates a one-stop licensing system for agents and brokers operating outside their home state