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US Regulatory change and Surplus lines. Steve Yates, Manager, International Regulatory Affairs Giles Taylor, Manager, International Regulatory Affairs 27 July 2011. Agenda. Focus on surplus lines implications of the Non-Admitted And Reinsurance Reform Act (Title V, Subtitle B, Part I,

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Us regulatory change and surplus lines

US Regulatory change and Surplus lines

Steve Yates, Manager, International Regulatory Affairs

Giles Taylor, Manager, International Regulatory Affairs

27 July 2011


  • Focus on surplus lines implications of the Non-Admitted

    And Reinsurance Reform Act (Title V, Subtitle B, Part I,

    of Dodd-Frank)

  • Legislative intent and implementation

  • Tax

  • Impact on doing surplus lines business

    • Exempt Commercial Purchaser

    • MAT Exemptions

    • Independent Procurement

    • Group schemes

    • Admitted business

  • Eligibility filings

  • What are Lloyd’s expectations of how this will continue to develop?

Nrra intent implementation
NRRA: Intent & Implementation

  • Gives the insured’s ‘Home State’ exclusive authority:

    • for tax, statutory and regulatory requirements

  • Congress placed a tight deadline for implementation (330 days) of interstate agreement on how to implement NRRA

  • Intent was to create uniformity:

    "the letter and spirit of the NRRA [are] to provide a simpler, uniform tax reporting and payment process....“, Rep Dennis Moore, sponsor of the NRRA Bill

    ‘Congress intends that each State adopt nationwide uniform requirements, forms and procedures….’, Dodd-Frank S.521 (b) 4.

  • The reality of how NRRA has been implemented has made several changes to an already complicated surplus lines landscape

Tax implications
Tax Implications

  • NRRA says: ‘The States may enter into a compact or otherwise establish procedures to allocate among the States the premium taxes paid to the insured’s home State.’

  • Pressure of a 330 day deadline and budget crises

    • Key states keeping 100% of tax (e.g. NY, TX, CA)

    • NIMA: Backed by NAIC leadership, opposed by industry - establishing a clearing house to handle tax monies but requiring more data

    • SLIMPact-Lite: Backed by NCOIL and NAPSLO – clearing house allocates tax using existing data

  • Biggest challenge is going to be balancing all three in various scenarios

Industrial insured to exempt commercial purchaser
‘Industrial Insured’ to ‘Exempt Commercial Purchaser’

  • New concept of ‘exempt commercial purchaser’ (ECP) – a class of commercial insured who is exempt from the usual requirement for a ‘diligent search’.

  • ECP definition: means a person purchasing commercial insurance that:

    • Retains a qualified risk manager to negotiate coverage, and

    • Paid nationwide P&C insurance premiums in excess of $100,000 in the preceding 12 months.

  • In addition, the person must meet at least one of the following criteria.

Net worth in excess of $20 million

More than 500 full time employees

If a municipality population more than 50,000

If an NFP, annual expenditure of $30 million

Annual revenue in excess of $50 million

Industrial insured to exempt commercial purchaser1
‘Industrial Insured’ to ‘Exempt Commercial Purchaser’

  • Surplus lines brokers must get the ECP to sign a disclosure acknowledging cover may be available in the admitted market.

  • ECP is still treated as a surplus lines transaction, unlike industrial insured which is exempt business.

  • Some states have replaced industrial insured exemptions with the ECP standard, some states now have both an industrial insured and an ECP exemption

    • Need to review individual state pages on Crystal to determine which is available, or if both are.

Mat exemptions
MAT Exemptions Purchaser’

  • Originally, some states were going to repeal their MAT exemption

  • States who had this in their bill have since removed this from their NRRA legislation

  • All states who had an MAT exemption prior to the NRRA have kept this exemption

Independent procurement
Independent Procurement Purchaser’

  • Independent procurement is defined as ‘non admitted’ insurance (like surplus lines) and is therefore impacted by the NRRA.

  • However, independent procurements are permitted by virtue of federal case law, therefore the eligibility of independent procurement is not affected by the NRRA.

    • The requirements for tax are impacted by the NRRA.

    • Only the ‘home state’ may regulate and tax independent procurements.

Group schemes
Group Schemes Purchaser’

  • Group schemes may be impacted in some states, were they have included the definition of ‘home state’ found in the Nonadmitted Insurance Multistate Agreement (‘NIMA’)

    • The definition requires individual regulatory compliance (i.e. a diligent search of the admitted market) for every group member

    • These states cannot be covered under a group policy, post-NRRA

    • Further information will be issued shortly by Lloyd’s

Group schemes1
Group Schemes Purchaser’

  • However, the NRRA may result in improvements in states where group schemes have in the past been problematic, ‘problem states’.

    • Historically, some states have required premium for group members in their state to be carved out and premium tax paid.

    • After NRRA implementation on July 21, these states can no longer require this because only the ‘home state’ can tax the transaction.

    • Premium tax paid 100% to the home state – i.e. State where master policy is issued

    • Again, revised information from Lloyd’s will be issued shortly

Admitted licensed business
Admitted / Licensed Business Purchaser’

  • Lloyd’s is an admitted (licensed) insurer in Kentucky, Illinois and the USVI.

  • Multistate Risks

    • Multistate risk surplus lines placements sometimes include risks located in Kentucky, Illinois or the USVI.

    • For these risks the portion of the premium allocated to Kentucky or Illinois may be carved out and premium tax paid on an admitted basis for that portion of the premium.

  • Admitted Business will continue to be carved cut

    • Brokers will need to continue reporting Kentucky, Illinois & USVI admitted business and allocating premium so that Lloyd’s can pay the appropriate licensed tax

Surplus lines eligibility
Surplus lines: Eligibility Purchaser’

  • Under NRRA states cannot prevent brokers from placing surplus lines business with insurers listed on the NAIC Quarterly Listing of Alien Insurers (“White List”)

  • Current Position of State Filings

    • Many states have adopted this in their NRRA implementation legislation and will no longer require filings from Lloyd’s

    • But this doesn’t necessarily mean an end to all state filings

    • For now, Lloyd’s will continue to make filings, but will include a disclosure that the filing is done on a voluntary basis

    • Filing Run-off – the goal is to reduce the number of filings in line with NRRA intent

  • NAIC International Insurers Department (IID) Filing more important

    • Role of the IID office will be more significant for alien surplus lines insurers that are listed on the White List

    • Lloyd’s is working with IID to discuss filing requirements

Surplus lines eligibility1
Surplus lines: Eligibility Purchaser’

  • Filings responsibility of both managing agents & Lloyd’s:

    • Syndicates make individual state eligibility returns in May each year.

    • Lloyd’s produces in excess of 180 U.S. returns including:

      • Eligibility returns state by state

      • Supported by transactional data at state level

      • Annual filing with the NAIC IID

      • Quarterly and annual Trust Fund solvency filings

  • Returns include a mixture of financial, statistical & global financial details

  • Trend towards increased data demands and more intrusive review

State eligibility requirements
State eligibility requirements Purchaser’

  • Some states may continue to request data.

    • Through IID

      • State regulators ultimately determine IID policy and may want additional data which may be deemed relevant to in-state activity

    • Additional Eligibility Requirements

      • Some states have explicitly included additional eligibility requirements in their NRRA implementation legislation for alien insurers

        • Example: California A/B list

    • Requirements not Linked to Eligibility

      • States may impose filing requirements by characterizing them as something other than eligibility (e.g., premium statistical filings, etc.)

      • The penalty for non-compliance would not be stripping eligibility but could be some form of penalty

What next
What next? Purchaser’

  • Clearly a developing situation

  • Challenges over tax

  • Eligibility filings

  • Federal view of state implementation

    • Act allows NAIC to submit a report to Congress [from now onwards]

    • Act mandates a GAO report on non-admitted insurance to be completed by January 2013