States are now scrambling to comply with the new surplus lines law, the Non-admitted and Reinsurance Reform Act (NRRA) which took effect on July 21, 2011.
States have been scrambling over the past year to update surplus lines laws that will conform with NRRA requirements, while agents and brokers have tried to prepare for changes on how they will process multi-state surplus lines accounts on July 21, 2011 and after.
Surplus lines insurance is a segment of the insurance market that allows consumers to buy property and casualty insurance through the state regulated insurance market, where policyholders, agents, brokers and insurance companies all have the ability to design specific insurance coverages and negotiate pricing based on the risks to be secured. “Freedom of rate and form” has given the surplus market the ability to adapt quickly to changing market conditions and those of the consumers and commercial entities seeking this unique insurance protection.
Many entities report not being ready as the NRRA takes effect. “Most are way behind the curve,” says Richard Brown, a San Francisco based attorney who represents surplus lines brokers, insurers, and industry organizations told the Insurance Journal.
The NRRA Law Requirements
- Beginning July 21, 2011 the insured’s home state will be the only state with jurisdiction over multi-state surplus lines transactions and the only state that can require a tax be paid by the broker.
- NRRA also requires more sophisticated and larger commercial purchasers to be exempt from the diligent search requirement.
- NRRA also requires additional data reporting and changes surplus lines insurer eligibility rules.
State Status Implementing NRRA
Overall 43 states passed legislation in the last year to bring their state laws into compliance with the NRRA; three states (Iowa, Illinois and Colorado) adjourned without taking action; and four states (Michigan, Wisconsin, Massachusetts and South Carolina) and the District of Columbia have not passed any legislation related to NRRA.
Phil Ballinger, executive director of the Texas Surplus Lines Stamping Office, says that like most states, his office has tried its best to update agents and brokers on what to do post-July 21. Despite these efforts, confusion remains, he says. Ballinger says that despite putting out a detailed bulletin at the end of June agents are panicked and have been calling looking for advice on what to do. Ballinger tells the Insurance Journal, “we are not able to tell them what to do in much detail because it’s such a moving target.”
That moving target has to do with whether states will support a tax sharing allocation agreement to handle the allocation of surplus line premium taxes in the future. As of the July 21 deadline, no such compact or tax sharing agreement is in place. But two proposals — Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT) legislation, supported by the National Conference of Insurance Legislators (NCOIL) and several industry groups, and another supported by the National Association of Insurance Commissioners, called the Non-admitted Insurance Multi-State Agreement (NIMA) — are creating chaos for agents and brokers when it comes to NRRA compliance.
According to Ballinger, there’s great difficulty for agents and brokers right now trying to program their systems for tax reporting and policy reporting because of the differences in NIMA and SLIMPACT. “So much for simplicity and uniformity,” he says.
Surplus Lines Background
The surplus Lines market is the distribution system of surplus lines insurers and intermediaries that provides insurance on risks for which insurance is not available from admitted insurers.
Types of Risks Insured in Surplus Lines Market
There are traditionally three categories of risk insured in the surplus lines market that are generally not acceptable in the admitted market. These are:
- A distressed risk is characterized by unfavorable attributes such as an insured who has sustained numerous losses in recent years.
- A unique risk is an entity that is unusual in that no policy meets its particular needs and no previous loss is available for analysis so that there is no ability to generate an acceptable quote without a great deal of extra effort and time.
- A high-capacity risk is an entity that requires an extraordinarily high insurance limit that exceeds underwriting criteria of admitted insurers. For instance a multi-billion dollar,one-of-a-kind building that requires liability insurance with multi-billion dollar limits is an example of high-capacity risk that is difficult to meet all their insurance needs in the admitted market.
Surplus line insurers can meet the needs of unique insureds in the above categories because of their freedom from rate and form-filing regulations. Because surplus line insurers are not licensed in the insured’s home state, they are not subject to requirements of the state insurance commissioner(s).
