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Washington State OFFICE OF INSURANCE COMMISSIONER. The NRRA, HB 1694, and More June 29, 2011. Legislative Changes – Impact on Insurance Producers and Surplus Line Brokers. UNIFORMITY—Underlying Policy of the NRRA. Not new to you

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Washington State OFFICE OF INSURANCE COMMISSIONER

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Washington StateOFFICE OF INSURANCECOMMISSIONER

The NRRA, HB 1694, and More

June 29, 2011


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Legislative Changes – Impact on Insurance Producers and Surplus Line Brokers


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UNIFORMITY—Underlying Policy of the NRRA

  • Not new to you

    • The reason for moving to the “single license system”—Insurance producer

    • In conforming surplus line broker licensing to that system

    • Also a result of a federal law—the Gramm-Leach-Bliley Act—that was not specifically focused on the surplus line market

  • That’s changed

    • NRRA targeted surplus lines for uniformity

    • Surplus lines is now on the national and federal radar screen.


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The NRRA and Uniformity

  • The NRRA expressly encourages states to “adopt nationwide uniform requirements, forms, and procedures… for the reporting, payment, collection or allocation” of surplus line premium taxes.

  • Expect more changes to promote uniformity—some that will directly affect the way you conduct business in this state and others.


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House Bill 1694New Concepts / Requirements

HB 1694 is intended to implement the NRRA in Washington

  • Applies:

    • To property and casualty insurance [NRRA section 527(9)]

    • Not to life and disability (health)

    • Not to workers’ compensation insurance [NRRA section 522(d)]


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The “Insured’s Home State” Rules!

Only the “insured’s home state” has authority regarding:

  • Licensing;

  • Reporting of transactions; and

  • Surplus line premium tax reporting and collection [NRRA sections 521 and 522]


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Significance of the “Insured’s Home State”

  • For policies only covering in-state risks, there will probably be no change.

  • But for policies covering multi-state exposures, it will be necessary to ascertain what the home state of the insured is.


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Significance of the “Insured’s Home State”

  • Must hold a surplus line broker license in the insured’s home state—Not in other states where covered exposures are located.

  • Filing of annual statements / diligent effort or search: Only required in the insured’s home state.

  • Surplus line premium taxes must be paid to the insured’s home state—How much depends upon state law.


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Determining the Insured’s Home State” [NRRA section 527(6)]

  • If the insured is a business, it’s the principal place of business;

  • If an individual, it’s the individual’s principal residence; or

  • If 100% of the insured risk is located out of the state of either, it’s the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated.


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Determining the “Insured’s Home State”

  • If more than one insured from an affiliated group are named insureds on a single insurance contract, the principal place of business of the member of the affiliated group that has the largest percentage of premium attributed to it under the insurance contract is the insured’s home state

  • HB 1694: The “principal place of business” is the state where the insured maintains its headquarters and where the insured’s high-level officers direct, control, and coordinate the business activities of the insured. [Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010)]


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“EXEMPT COMMERCIALPURCHASER”

  • Significance: The surplus line broker is not required to satisfy the diligent effort requirement [NRRA section 525]

  • But there must be:

    • Disclosure by the surplus line broker to the customer that the insurance may or may not be available from the admitted market that may provide greater protection and regulatory oversight; and

    • A written request must be made by the insured after the disclosure to place the insurance with a surplus line carrier.

  • HB 1694: “Commercial” insurance means property and casualty insurance pertaining to a business, profession, occupation, nonprofit organization, or public entity. [Derived from WAC 284-20B-170(2) and 284-24-1001(10)]


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“Exempt Commercial Purchaser” [NRRA section 527(5)]

Any person purchasing commercial insurance that, at the time of placement, meets these requirements:

  • The person employs or retains a “qualified risk manager” to negotiate insurance coverage; [Definition in NRRA section 527(13)]

  • The person has paid aggregate nationwide commercial property and casualty insurance premiums in excess of $100,000 in the immediately preceding 12 months; and


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“EXEMPT COMMERCIALPURCHASER”

  • The person meets at least one of these criteria:

    • The person possesses a net worth in excess of $20 million, as adjusted;

    • The person generates annual revenues in excess of $50 million, as adjusted;

    • The person employs more than 500 full-time or full-time equivalent employees per insured or is a member of an affiliated group employing more than 1,000 employees in the aggregate;

    • The person is a not-for-profit organization or public entity generating annual budgeted expenditures of at least $30 million, as adjusted; or

    • The person is a municipality with a population in excess of 50,000 persons.


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“EXEMPT COMMERCIALPURCHASER”

The amounts must be adjusted to reflect the percentage change for the five-year period in the consumer price index for all urban consumers published by the Bureau of Labor Statistics of the U.S. Department of Labor.


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“INDEPENDENTLY-PROCURED” INSURANCE

“Independently-procured” insurance

  • Recognized by the NRRA [section 521(c)]

  • Not permitted in Washington

  • All surplus line coverage is still required to be placed through a licensed surplus line broker


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Financial Eligibility of Surplus Line Carriers [NRRA section 524]

  • HB 1694: Implements sections 5A(2) and 5C(2)(a) of the NAIC’s Non-Admitted Insurance Model Act

  • Foreign insurers:

    • That are authorized to write the kind of insurance in their domiciliary jurisdictions; and

    • Have capital and surplus or its equivalent under the laws of the domiciliary jurisdiction which equals the greater of:

      • The minimum capital and surplus requirements under the laws of this state; or

      • $15 million.


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FINANCIAL ELIGIBILITY OF SURPLUS LINE CARRIERS

  • Requirements may be satisfied by a foreign insurer’s possessing less than the minimum capital and surplus upon an affirmative finding of acceptability by the Commissioner.

  • The finding must be based upon factors such as quality of management, capital and surplus of any parent company, company underwriting profit and investment income trends, market availability, and company record and reputation within the industry.

  • The Commissioner is prohibited from making an affirmative finding of acceptability when the foreign insurer’s capital and surplus is less than $4.5 million.


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FINANCIAL ELIGIBILITY OF SURPLUS LINE CARRIERS

Alien insurers:

Listed on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the NAIC.

Waiver of financial requirements:

“[I]n circumstances where insurance cannot be otherwise procured on risks located in this state….” [WAC 284-15-050]

Proposed Amendment:

  • Applies to both foreign and alien insurers.

  • No waiver where capital and surplus is less than $4.5 million.


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SURPLUS LINE PREMIUM TAXES

Surplus line premium tax reporting and collection will be different.

  • Currently, the tax is based upon the portion of the premium that may be allocated to risks or exposures in Washington.

  • Under the NRRA a state is permitted to collect taxes only where that state is the insured’s home state.


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HOUSE BILL 1694

  • HB 1694—Signed by the Governor on April 11, 2011.

    • Authorizes Washington to collect all surplus line premium taxes where Washington is the insured’s home state without regard to the location of the covered exposure.

    • Applies to all P&C surplus line policies where Washington is the insured’s home state with an effective date of July 21, 2011 or after.


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HOUSE BILL 1694

  • Example: If Washington is the “insured’s home state “and a portion of the covered risk is located in Oregon, Washington will collect premium tax on the entire premium for the policy. Since Washington is the “insured’s home state,” Oregon may not collect any tax regarding the policy even though a portion of the covered risk is located in Oregon.

  • All other lines—e.g., life, disability, workers’ comp—will continue to be taxed based upon the location of the covered exposure.


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HOUSE BILL 1694

  • Budget / Revenue

    • Estimate: If Washington did nothing, about $1 million a year would be lost in General Fund revenue.

    • Compare: In 2010, the surplus line premium tax was about $10.5 million. Before the 2011 session, the estimated budget deficit was over $5 billion.


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NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS

NAIC’S role:

  • Established a Task Force to help implement provisions of the NRRA—Focus was on taxes and their allocation.

    • Nonadmitted Insurance Multistate Agreement (NIMA)

    • SLIMPACT

  • Commissioner’s approach—HB 1694

  • The NAIC will continue to work on a tax allocation solution that is acceptable to the states and the industry.


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HOUSE BILL 1694

  • Certification replaces affidavit (electronic):

    • The surplus line broker must certify to the accuracy of the facts showing compliance with the diligent effort requirement:

      • Sets forth the facts supporting the surplus line broker’s diligent effort;

      • Must state that under the penalty of suspension or revocation of the surplus line broker’s license, the facts contained in the certification are true and correct.


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HOUSE BILL 1694

  • May be in electronic, digital, or another format as designated by the Commissioner.

  • Must be filed within 60 days from the date the insurance is procured (instead of the current 30 days for filing an affidavit).


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HOUSE BILL 1694

  • Reporting: Annual Statements

    • The requirement to file does not apply to P&C surplus line policies when Washington is not the “insured’s home state.”

    • The requirement applies to all other lines as well as to P&C policies where Washington is the “insured’s home state.”


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HOUSE BILL 1694

  • Rulemaking—To provide guidance regarding:

    • Certification;

    • Process;

    • Forms;

    • Data; and

    • Records.

  • Effective Date: July 21, 2011


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LICENSING CHANGES

Mandating online licensing—July 2011

  • Statistics:

    • Percentage of licensees registered as of May 31, 2011: Over 91%-out of 118,679

    • Percentage of companies registered as of May 31, 2011: Over 75%-out of 1,199

    • Percentage of licenses issued online YTD—includes through NIPR—as of May 31, 2011: Over 56%

    • Percentage of licenses renewed online YTD—includes through NIPR—as of May 31, 2011: Over 94%

  • Applies to all licenses except premium finance, rental car agent, self-service storage, and specialty producer.


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LICENSING CHANGES

  • Effective dates [WAC 284-17-055]:

    • May 1, 2011—Company appointments including new, renewal, and terminations;

    • June 1, 2011—All renewals including individual and business entities; and

    • July 1, 2011—All original applications including affiliations.

  • Go to OIC web site (www.insurance.wa.gov) for information about licenses and licensing services that will be accessible via online only.


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LICENSING CHANGES

  • OIC will not print or mail documents related to those services that are online.

  • Keeping your e-mail address up-to-date is critical—30 days to notify of changes in address including your email address [WAC 284-17-065]


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LICENSING CHANGES

  • Customer satisfaction survey

  • In the works:

    • Adding a payment option—American Express

    • Electronic submission of fingerprints


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The NRRA, HB 1694, and MoreJune 29, 2011

QUESTIONS

Washington State Office of Insurance Commissioner


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