N.Y. TRIA Regs Anger Surplus Lines Brokers

Mr. Maher indicated he found it regrettable that a reporter was in attendance to record the remarks he delivered at the midyear conference of the Professional Insurance Wholesalers Association of New York State.

During the legislative and regulatory update session of the conference program, he reported on a regulation released by the New York insurance department last month, relating to the earning of terrorism insurance coverage premiums.

Seen from the perspective of PIWA's membership, the new rule is an attack on "freedom of rate and form"–the cornerstone of excess and surplus lines business–in disguise.

In March, the department put out two emergency amendments–one to Regulation 57, which implements the rating law (Article 23 of the insurance law), and one to Regulation 41, which sets forth rules governing excess lines placements, Mr. Maher explained.

Regulation 57 was amended to say that TRIA premiums (terrorism premiums written in accordance with the federal Terrorism Risk Insurance Act) must be "prorated." The amendment to Regulation 41 says that "no excess line broker shall procure insurance from an excess line insurer unless that insurer consents" to proration.

Essentially, what the Reg 57 amendment means is that when a policy is cancelled, the premium refunded to the insured is calculated on a daily pro rata basis, according to the language of the amendment.

"It had come to our attention that some insurers participating in TRIA [the Terrorism Risk Insurance Program] were issuing policies containing cancellation provisions that provide that premiums are fully earned" upon policy issuance, said Joanna Rose, a representative for the department.

"Treating premiums as fully earned upon policy issuance," which would mean no premium returned to the insured in the event of cancellation, "violates fundamental insurance premium recognition rules, which generally provide that a policy premium is earned evenly over the entire policy period," the department said in a statement posted on its Web site explaining reasons for the amendment.

"This treatment of unearned premiums unjustly enriches such insurers and is contrary to TRIA's goal of making coverage more affordable," the department said.

With "wide fluctuations" in TRIA premiums out in the marketplace, the department wanted to make sure that businesses could continue to shop for the best deal without facing a penalty, Ms. Rose said.

While Mr. Maher suggested that what actually prompted the rule was a situation in which New York City real estate interests were unable to cancel stand-alone terrorism policies that they bought prior to TRIA's enactment to take advantage of lower TRIA premiums, he said that for insurers, the Reg 57 amendment is a non-issue.

"Most carriers yawned about that," he said. "No insurer said, ?I want to fully earn TRIA. That's essential to my book of business,'" he added.

But what they didn't yawn about was the amendment to Reg 41, which "sets an awful precedent" in his view and that of a broad industry coalition, he reported. "It's a backdoor approach to de facto partial rate regulation?of the non-admitted market," he said.

He explained that New York's rating law (Article 23) and the state's cancellation law for commercial policies each have specific exemptions for excess lines.

"When an insurance department issues a regulation, it's supposed to be pursuant to authority granted by statutes," he continued. The effect of the Reg 41 amendment is to allow the department to do indirectly "what it cannot do directly?regulate rating for non-admitted carriers."

The department, he said, is gaining this indirect power "by prohibiting the licensee, the excess line broker, from doing business with the carriers that don't expect to abide by these statutes that don't apply to them."

"Taken to its logical conclusion, any statute that doesn't apply to excess lines insurers can be swept into this model by forcing it through the excess line broker, who cannot deal with carriers that don't consent," he added.

"We always had the authority to regulate excess and surplus lines brokers," Ms. Rose told National Underwriter. "And they had the obligation to prorate the premiums prior to the regulation, anyway."

The document on the department's Web site explaining the need for the two amendments notes that an "alternative considered was to make these amendments applicable only to authorized insurers." This, however, "would result in an unlevel playing field between authorized insurers and excess line insurers," the document continued.

Mr. Maher said that PIWA and ELANY are members of a coalition of industry trade groups and insurers that are seeking to present their case to the department in opposition to the amendment and trying to hammer out some sort of compromise. He reported, however, that the department "unilaterally" cancelled a meeting to discuss the issue.

While Ms. Rose had no information or comment on the meeting cancellation, asked if there was any room for compromise, she said, "I don't believe so."

At the PIWA meeting, Mr. Maher said: "What we are intending to do is? tell them that the freedom of rate is so fundamental to our business that either we have to find a way to compromise [or] barring that, we're going to have to proceed in court," challenging the authority of the department to put out the amendment.

Mr. Maher began his remarks by noting that PIWA and ELANY had forged a good working relationship with the department in the last decade. "A lot of positive things have occurred," he said.

"These [emergency] amendments to the regulations?really appear to be a throwback to the old days when the insurance department would play hardball, particularly with the excess lines industry," he said.

He added that ELANY and PIWA are two groups that want to do everything possible to "maintain that positive working relationship?.[T]he last thing I want [is] to fuel or fan a fire" in the trade press "that suggests the industry is [staging an] uprising."