Transcript Surplus lines

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,
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?
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© Lloyd’s
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
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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
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© Lloyd’s
‘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
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Annual
revenue in
excess of
$50 million
More than
500 full
time
employees
If an NFP,
annual
expenditure
of $30
million
If a
municipalit
y
population
more than
50,000
© Lloyd’s
‘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

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Need to review individual state pages on Crystal to determine which is
available, or if both are.
© Lloyd’s
MAT Exemptions

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
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Independent Procurement
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.



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The requirements for tax are impacted by the NRRA.
Only the ‘home state’ may regulate and tax independent
procurements.
© Lloyd’s
Group Schemes

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
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Group Schemes

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.


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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
© Lloyd’s
Admitted / Licensed Business

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

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© Lloyd’s
Surplus lines: Eligibility

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


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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
© Lloyd’s
Surplus lines: Eligibility

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
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© Lloyd’s
State eligibility requirements

Some states may continue to request data.

Through IID

Additional Eligibility Requirements
-

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State regulators ultimately determine IID policy and may want
additional data which may be deemed relevant to in-state activity
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
© Lloyd’s
What next?

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
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© Lloyd’s
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