By the time this column is printed, surplus line insurers and brokers will have roughly 45 days to adjust to the biggest change to impact their business in generations. The Non-admitted and Reinsurance Reform Act (NRRA) will stand many long-held assumptions on their heads. Surplus line brokers, corporate risk managers and property-casualty insurance underwriters will see regulatory Darwinism in action beginning July 21, the day that the NRRA takes effect.
Tectonic shifts in the ways business gets done bring with them the attendant risks of falling behind the curve and facing new liability exposures. As Charles Darwin observed, "It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change."
- NRRA preempts conflicting state laws and regulations and places the power to regulate non-admitted P&C insurance placements solely in the hands of the policyholder’s "home state."
- Under the NRRA, an insured’s surplus lines broker needs to hold that license only in the policyholder’s home state. Note that businesses with operations in multiple states will still need to use locally licensed surplus line brokers for lines of coverage other than P&C, and the NRRA expressly does not apply to worker’s compensation insurance.
- NRRA preempts state-based due diligence requirements, some of which require that surplus lines brokers submit a risk to one or more admitted markets, and obtain rejections from them, before submitting the risk to non-admitted markets. Only the home state’s due diligence requirements still apply to P&C placements and those requirements are trumped if they are more restrictive than a new national standard that applies to "exempt commercial purchasers."
- NRRA allows that only the insured’s home state may impose and collect a surplus line tax on a P&C placement. Although several states have considered compacts that would allocate surplus line tax revenues among the states where the insured has covered operations, the prospects that the states will come together and enact a joint plan before July 21 appear slim. Much of the writing about the NRRA has focused on the tax issues—not surprising when states are curtailing public services due to budget shortfalls. For those in the industry, a more important question may be, "What are these new rules about non-admitted placements and how do I comply?"
- Once NRRA takes effect, non-admitted insurers will be subject to a single, uniform eligibility standard. A state may only impose eligibility requirements that conform with the Non-Admitted Insurance Model Act, or under a nationwide interstate compact, on U.S. domiciled non-admitted insurers. As to non-admitted insurers domiciled outside the U.S., no state may prohibit a surplus line broker from placing coverage with such an insurer that is on the National Assn. of Insurance Commissioners’ (NAIC) Quarterly Listing of Alien Insurers.
- NRRA strengthens the uniformity reinsurance credit for financial solvency determinations, and prohibits any state from refusing to give the cedent the same credit that its state of domicile allows. As of this writing, each of the 50 states plus the District of Columbia have financial solvency requirements that are accredited by the NAIC, and allow reinsurance to be taken as a credit by ceding insurers that are domiciled in that state.
- NRRA permits that only the ceding insurer’s state of domicile may impose legal restrictions or rules of interpretation on that insurer’s contracts with reinsurers.
- A separate part of the Dodd–Frank Wall Street Reform and Consumer Protection Act creates a Federal Insurance Office (FIO). Although the FIO does not supplant the states’ or NAIC’s roles, it does have very broad powers that seem certain to have great influence on the insurance industry in the years ahead.
Quite simply, the NRRA fundamentally changes how P&C insurance will be regulated, sold and taxed in the U.S.
No Place Like Home
That sounds simple enough, but it isn’t as simple as the rule of thumb, ownership of 50 percent of the subsidiary’s stock. Under the NRRA’s definitions, two corporations are "affiliated" if one "controls" the other or if both are under common "control." There are two alternative tests for control:
- The ability to vote 25 percent or more of any class of voting stock, including doing so through intermediaries, or
- Controlling in any way the election of a majority of the directors or trustees of the other entity.
Business combinations and interlocking ownerships may not be immediately obvious at the time when an insurance policy is placed. The surplus line broker is dependent on his or her client for such information, especially in privately owned companies. This situation calls for questions beyond those that appear in many P&C insurance applications. As always, the safest course is to confirm the answers to those questions with the applicant in writing.
Who is "exempt?" The NRRA sets three tests, all of which must be met:
- The company must have a "qualified risk manager," either employed or contracted. The statute requires more than a title on a business card—the NRRA spells out specific educational, experience, and certification standards.
- It must have paid nationwide P&C premiums greater than $100,000 in the preceding 12 months.
- The insured must meet at least one of these additional criteria:
a. Its net worth is greater than $20 million
Those exemptions will include a great many commercial policyholders. Time will tell whether the NRRA exception to state diligent search requirements will swallow the rule.