Dearie.Excess

This reading is edited by John P. Dearie and it titled Excess & Surplus Lines Laws in the United States. It covers key federal NRRA provisions regarding surplus or excess lines insurers. (NRRA = Nonadmitted & Reinsurance Reform Act of 2010.) It also covers state eligibility and filing requirements for surplus lines insurers. (The source text is about 150 pages, but you are only responsible for about 6-7 pages near the beginning. The rest of the text covers individual state regulations which you don't have to know.)

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Study Tips

Since this is a new reading for 2019.Fall, there is no history of exam questions. That makes it harder to predict likely questions, but the questions on new readings are often easy. That means if you put in the time, it should be easy points. It's a short reading and there are no calculations, just memorization.

Estimated study time: 1 day (not including subsequent review time)

BattleTable

• this reading is new for 2019.Fall and has not been tested

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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In Plain English!

Intro

NRRA = Nonadmitted & Reinsurance Reform Act of 2010

Take a few minutes to review the short section on NRRA from NAIC.Solvency. The Dearie reading fleshes out some of the details of NRRA. Recall that surplus lines is the same things as excess lines. I used the term excess in the title of this wiki article to avoid confusion because in accounting, surplus refers to assets minus liabilities.

Click to review the definition of surplus lines.

Question: what is the purpose of NRRA

• create a better surplus lines tax payment and regulatory system

Question: briefly describe how NRRA accomplishes its purpose

• limit regulatory authority of surplus lines to an insurer's home state
• establish federal standards for surplus lines regarding: premium taxes, insurer eligibility, commercial purchaser exemptions

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The NRRA Today

Let's dive into the details of the NRRA. Please settle down and try to contain your excitement.

Question: identify the key provisions of NRRA discussed in the Dearie reading

• 1-state compliance (only an insured's home state can regulate surplus lines)
• uniform eligibility standards (for an insurer to sell surplus lines coverage)
• ECPs or Exempt Commercial Purchasers (a diligent search is not required for sophisticated commercial purchasers)
• national producer database (producers must be in a database to collect licensing fees from a surplus lines insurer)

Alice the Actuary's home state is Hawaii. (Hate her!) But her favorite surplus lines insurer, Cold & Frozen, is domiciled in Alaska. For Alice, Cold & Frozen is an out-of-state U.S. insurer so we refer to them as a foreign insurer. That sounds wrong. You would think a foreign insurer would be one that's domiciled outside of the U.S., but that's called an alien insurer. Anyway, since Cold & Frozen is domiciled in AK, that means AK has exclusive authority to regulate them (since they are a surplus line). That includes licensing.

You might think that would lead to conflicts between the AK and HI regulatory frameworks, but the eligibility standards for licensing surplus lines insurers are uniform across the country. If a surplus lines insurer is licensed in AK, Alice knows exactly what that means because the requirements are exactly the same in HI. How convenient! Washington bureaucrats did something right. :-)

Let's dig a little deeper...

Question: describe the key provision of NRRA: 1-state compliance

• insured's home state has exclusive authority to regulate nonadmitted insurance (which includes surplus lines)

   - 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

A U.S.-domiciled insurer must meet 2 main requirements under the NAIC Nonadmitted Insurer's Model Act. (See below.)

Question: describe the key provision of NRRA: uniform eligibility standards

• states are empowered to create uniform eligibility standards but all are currently using the NRRA default standards

U.S. domiciled insurers (also called foreign insurers because they are foreign to all but the home state)

   ==> must have ≥ 15m in capital & surplus (or the state minimum if it's higher)

   ==> must be authorized to write in its domiciliary jurisdiction

non-U.S. domiciled insurers (also called alien insurers, not foreign insurers!!!)

   ==> if insurer is listed the Quarterly Listing of Alien Insurers, states may not prohibit placing insurance with them

         (this list is also called the "IID" list because it's maintained by the NAIC's International Insurer's Department)

The next block of information on ECPs is very detailed and I'd be surprised if an exam question required you to have memorized all of it. But Alice came up with a Bloom's Taxonomy question that's interesting and not too hard. See the pop quiz further down.

Question: describe the key provision of NRRA: Exempt Commercial Purchaser (ECP)

definition of ECP: any person purchasing commercial insurance that:

• employs a NRRA-qualified risk manager
• has paid aggregate commercial premiums ≥ $100,000 (in past 12 months)
• the person's company is "large" (high net worth ≥ ~20m or high revenues or lots of employees,...)

the related NRRA provision is:

• states cannot force a broker to do a diligent search if the purchaser is an ECP and:

   ==> the broker has disclosed to the purchaser that coverage may be available in the admitted market (which is better regulated)

   ==> the purchaser has then instructed the broker to purchase insurance in the nonadmitted market

Pop Quiz A    :-o

A particular state has a regulation that surplus lines brokers must perform a diligent search before placing commercial insurance with a nonadmiited surplus lines insurer. (A diligent search determines whether coverage can be found in the admitted market, which is generally better because the admitted market is better regulated.)

Would NRRA permit this regulation to apply for the following purchasers: Click for Answer 

Purchaser 1:

• employs a NRRA-qualified risk manager
• has paid aggregate commercial premiums of $500,000 (in past 12 months)
• has a net worth of 50m and 4,000 employees
• the broker has disclosed to the purchaser that coverage may be available in the admitted market
• the purchaser has then instructed the broker to purchase insurance in the nonadmitted market

Purchaser 2:

• employs a NRRA-qualified risk manager
• has paid aggregate commercial premiums ≥ $110,000 (in past 12 months)
• has a net worth of 30m and 1,500 employees
• the broker has not disclosed to the purchaser that coverage may be available in the admitted market

Purchaser 3:

• employs a NRRA-qualified risk manager
• has paid aggregate commercial premiums ≥ $110,000 (in past 12 months)
• has a net worth of 5m and 10 employees
• the broker has disclosed to the purchaser that coverage may be available in the admitted market
• the purchaser has then instructed the broker to purchase insurance in the nonadmitted market

Ok, we're almost done. Just 1 more key provision to go. It's an easy one.

Question: describe the key provision of NRRA: national producer database

• this database (or another national equivalent) is for the licensure & renewal of surplus lines brokers
• the specific NRRA requirement is that:

   ==> if a state doesn't participate in such a database then they cannot collect licensing fees (which would suck)

Pop Quiz B    :-o

A state participates in a southwest regional producer database. Does NRRA permit this state to collect licensing fees from surplus lines insurers? Click for Answer 

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Eligibility & Filing Requirements by State

The syllabus covers portions pages 1.1 - 1.5 of the source text. Certain sections are excluded and much of the rest is a repeat of material from the previous section. There are only 3 short sections you need to cover.

Surplus Lines Laws - Generally

This section is so short that Alice explained the whole thing to Ian-the-Intern on their morning elevator ride up to the office. And their office is only on the second floor. Here's the skinny:

• there is very little regulation regarding forms & rates (compare that with auto insurance which is very highly regulated)
• surplus lines regulation is focused mainly on brokers (not the surplus lines insurers)
• brokers must perform a diligent search before exporting business from the admitted market to the nonadmitted surplus lines market

   ==> or the broker can instead use an "export list" which is a list of coverages deemed to be unavailable through the admitted market

• brokers submit tax and other filings

Poor Ian badly wished he'd waited for the next elevator rather than listen to Alice drone on. But it was all over quickly.

Fun Homework: Next time you're on the elevator with a senior manager, see if you can impress him or her with your knowledge of surplus lines regulation. And see if you can do it in the time it takes to travel just one floor. (This is not a joke assignment. If you can rattle it off confidently in under 15 seconds then you're ready for the corporate boardroom.)

Independent Procurement / Direct Placement

This section has a real treat - a legal precedent!

Question: identify 2 methods of accessing the nonadmitted market

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

Question: what is independent procurement / direct placement

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

Question: describe a legal precedent related to home state regulation of independent procurement

Case: State Board of Insurance v. Todd Shipyards Corporation

Facts:

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

(and remember this is a wiki so you can just click on McCarran-Ferguson if you need a quick review)

There have been subsequent qualifications to this decision (or in legal terms, the case has been distinguished) but it is still applicable in vast majority of the almost 10,000 jurisdictions in the U.S.

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Broker Licensing

We already know that the home state may require a license for surplus lines broker. The situation is different however for a wholesale broker

Question: what is a wholesale broker

• 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: how is licensing of a wholesale broker different from that of a "regular" retail broker

• the wholesale broker must have a license in the home state of each insured they place with an insurer

That means the wholesale broker may have to have many separate licenses. Very inconvenient.

Question: how are the licensing requirements of wholesale brokers being addressed

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

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Pop Quiz A Answers

Purchaser 1: diligent search regulation would not apply because:

• this purchaser is an ECP
• the broker has disclosed to the purchaser that coverage may be available in the admitted market
• the purchaser has then instructed the broker to purchase insurance in the nonadmitted market

Purchaser 2: diligent search regulation would apply because:

• even though the purchaser is an ECP, the broker has not disclosed that coverage may be available in the admitted market

Purchaser 3: diligent search regulation would apply because:

• this purchaser does not satisfy the definition of an ECP

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Pop Quiz B Answers

No, this state cannot collect licensing fees. The producer database must be national, not regional.

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