Nonadmitted and Reinsurance Reform Act of 2010

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On July 21, 2010, President Barack Obama signed into law the federal Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), which contains the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA"). The NRRA applies to nonadmitted insurance, which includes surplus line insurance and directly-procured insurance, and to reinsurance.

Nonadmitted Insurance

State Preemption

The NRRA took effect on July 21, 2011 and generally provides that the placement of nonadmitted insurance will be subject solely to the statutory and regulatory requirements of an insured's home state, and that no state, other than an insured's home state, may require a surplus lines broker to be licensed to sell, solicit, or negotiate nonadmitted insurance with respect to the insured.[1] While the NRRA preempts state laws with respect to nonadmitted insurance, it does not have any impact on insurance offered by insurers licensed or authorized in a state.

The NRRA defines "nonadmitted insurance" as "any property and casualty insurance permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance."[2] A nonadmitted insurer is an insurer not licensed or authorized to engage in the business of insurance in a state.[3] The NRRA does not define “property and casualty insurance” and does not apply to workers' compensation insurance, excess insurance for self-funded workers' compensation plans with a nonadmitted insurer, or risk retention groups.;[4][5]

The NRRA defines “home state” as: (1) the state in which an insured maintains its principal place of business or, in the case of an individual, the individual’s principal residence; or (2) if 100% of the insured risk is located out of the state, the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated.[6] If more than one insured from an affiliated group are named insureds on a single nonadmitted insurance contract, the term “home state” means the home state, as determined pursuant to the foregoing, of the member of the affiliated group that has the largest percentage of premium attributable to it under the insurance contract.[7] The NRRA defines “state” as any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Northern Mariana Islands, the Virgin Islands, and American Samoa.[8]

The NRRA does not define “principal place of business”, “principal residence”, provide for a circumstance when the insured’s principal place of business or principal residence is located outside of the United States, or address how the insured’s home state is determined when there is a group insurance policy.

Taxation

The NRRA also provides that no state, other than an insured's home state, may require any premium tax payment for nonadmitted insurance.[9] Thus, if a state is the insured’s home state, then that state is the only state that may require any premium tax on the policy. States may enter into a compact or may otherwise establish procedures to allocate among the state the premium taxes paid to an insured's home state.[10] It was Congress' intent that each state adopt nationwide uniform requirements, forms, and procedures that provide for the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance.[11]

There are currently two competing compacts or agreements: the Surplus Lines Multistate Compliance Compact (“SLIMPACT”) and the Nonadmitted Insurance Multi-State Agreement (“NIMA”). While some states have enacted legislation that would enable them to join SLIMPACT and/or NIMA, many states have not. States that have not enacted such legislation include California, Illinois, New Jersey, New York, Ohio, Pennsylvania, and Texas, which account for approximately 50% of surplus line premium.[12] It is unclear whether a state will lose or gain money if it joins SLIMPACT or NIMA.

SLIMPACT

SLIMPACT has been proposed as a method of implementing the NRRA. SLIMPACT was drafted with input from over 60 insurance professionals representing various state regulators, tax officials, legislators, stamping officers, surplus lines brokers, and trade associations. The National Conference of Insurance Legislators (“NCOIL”) has supported the SLIMPACT concept since 2007.

SLIMPACT establishes a commission that has the power, among other things, to adopt mandatory rules and operating procedures that are binding on the compacting states, such as rules regarding uniform eligibility requirements for foreign insurers to be able to place nonadmitted insurance in a state (i.e., minimum capital and surplus, trust funds, etc.); a uniform policyholder notice; and uniform treatment of purchasing group nonadmitted insurance placements.[13] The commission also has the authority to establish and adopt rules regarding tax allocation formulas, as well as to establish an executive committee, operations committee, legislative committee, and advisory committees.[13] The membership of these committees may include executives and attorneys employed by surplus lines insurers, nonadmitted insurance licensees, law firms, representatives of state insurance departments, and representatives of state stamping offices.[13] SLIMPACT further permits the commission to accept any and all appropriate donations and grants of money (including donations and grants of money from surplus lines insurers and brokers) so long as the commission avoids any appearance of impropriety or conflict of interest.[13]

SLIMPACT applies to all kinds of nonadmitted insurance and is not limited to property and casualty insurance.[13] SLIMPACT also establishes a uniform definition of “principal place of business”, but not “principal residence” as used in the definition of “home state.”[13] SLIMPACT does not provide for a situation in which the insured’s principal place of business or principal residence is located outside the United States or explain how the insured’s home state is to be determined when the policy is a group policy.[13] Nor does SLIMPACT address, with regard to tax collection and allocation, the situation in which there is a multi-state risk and the insurer is an admitted insurer in one or more states.[13]

Once SLIMPACT takes effect, it will continue in force and remain binding upon each compacting state, provided that a compacting state may withdraw by enacting a statute specifically repealing the statute that enacted SLIMPACT into law.[13]

Nine states have enacted legislation that would enable them to join SLIMPACT: Kentucky, New Mexico, North Dakota, Indiana, Kansas, Vermont, Rhode Island, Alabama, and Tennessee.[14] Either ten states or states representing 40% of the U.S. surplus lines market share must join SLIMPACT before it may begin operations.[15]

States such as Florida, California, and New York have questioned the constitutionality of a compact that cedes a state legislature’s substantive rule-making authority to a commission or any other body.;[16][17]

NIMA

The National Association of Insurance Commissioners (“NAIC”) and state regulators have drafted an agreement called NIMA. NIMA is an agreement, not a compact, and is limited to the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance.[18] There is no commission – all rule-making continues to reside with the states - and no authority for anyone to establish rules and operating procedures that are binding on participating states.[18]

In addition, NIMA explicitly sets forth premium tax allocation schedules and formulas.[18] Under NIMA, each participating state agrees to use a designated clearinghouse to facilitate the payment and distribution of nonadmitted insurance premium taxes.[18] The clearinghouse has ministerial functions with respect to the receipt and distribution of nonadmitted insurance premium taxes on behalf of the participating states in accordance with allocation formulas that have already been agreed upon by the states and are already set forth in NIMA.[18] NIMA does not provide for the establishment of committees, but rather, the clearinghouse (which will be selected by participating states by a competitive bid) will be directed by the participating states as to its duties on their behalf.[18] NIMA prohibits the clearinghouse from accepting any gifts or donations.[18]

NIMA generally applies to property and casualty insurance, consistent with the NRRA, but allows a state to utilize the clearinghouse for non-property and casualty insurance too.[18] NIMA also defines "principal place of business" and "principal residence" for the purpose of the definition of an insured’s "home state", and provides that if the insured’s principal place of business or principal residence is located outside the United States, then the insured’s home state is the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated.[18] NIMA further states that when the group policyholder pays 100% of the premium from its own funds, the term "home state" means the home state of the group policyholder.[18] When the group policyholder does not pay 100% of the premium from its own funds, the term "home state" means the home state of the group member.[18]

A state may withdraw from NIMA by providing 60 days written notice.[18]

The following states have joined NIMA: Alaska, Connecticut, Florida, Hawaii, Louisiana, Mississippi, Nevada, Puerto Rico, South Dakota, Utah, and Wyoming.[19] These states currently represent 21.6% of the surplus lines market based on 2009 data.[19]

National Producer Database

After July 21, 2012, a state may not collect any fees relating to the licensing of an individual or entity as a surplus line broker unless the state has in effect laws or regulations that provide for participation by the state in the NAIC's national insurance producer database, or any equivalent uniform national database.[20]

Eligibility requirements

A state may not impose eligibility requirements on, or otherwise establish eligibility criteria for, nonadmitted insurers domiciled in a United States jurisdiction, except in conformance with sections 5(A)(2) and 5(C)(2)(a) of the NAIC's Non-Admitted Insurance Model Act, unless the state has adopted nationwide uniform requirements, forms, and procedures that include alternative nationwide uniform eligibility requirements.[21] In addition, a state may not prohibit a surplus line broker from placing nonadmitted insurance with, or procuring nonadmitted insurance from, a nonadmitted insurer domiciled outside the United States that is listed on the quarterly listing of alien insurers maintained by the NAIC's International Insurers Department ("IID").[22]

Exempt Commercial Purchaser

A surplus lines broker seeking to procure or place nonadmitted insurance in a state for an exempt commercial purchaser (“ECP”) is not required to satisfy any state requirement to a make a due diligence search to determine whether the full amount or type of insurance sought by the ECP may be obtained from admitted insurers if: (1) the broker procuring or placing the insurance has disclosed to the ECP that the insurance may or may not be available from the admitted market, which may provide greater protection with more regulatory oversight; and (2) the ECP has subsequently requested, in writing, that the broker procure or place the insurance with a nonadmitted insurer.[23]

An “exempt commercial purchaser” is defined in to mean: any person purchasing commercial insurance that, at the time of placement, meets the following requirements: (A) the person employs or retains a qualified risk manager to negotiate insurance coverage; (B) the person has paid aggregate nationwide commercial property and casualty insurance premiums in excess of $100,000 in the immediately preceding 12 months; and(C)(i) the person meets at least 1 of the following criteria: (I) The person possesses a net worth in excess of $20,000,000, as such amount is adjusted pursuant to clause (ii); (II) the person generates annual revenues in excess of $50,000,000, as such amount is adjusted pursuant to clause (ii); (III) the person employs more than 500 full-time or full-time equivalent employees per individual insured or is a member of an affiliated group employing more than 1,000 employees in the aggregate; (IV) the person is a not-for-profit organization or public entity generating annual budgeted expenditures of at least $30,000,000, as such amount is adjusted pursuant to clause (ii); or (V) the person is a municipality with a population in excess of 50,000 persons.[24]

15 U.S.C. § 8206(13) defines “qualified risk manager.” Clause (ii) in the definition of “exempt commercial purchaser” requires the amounts set forth in (C) to be adjusted annually to reflect the percentage change in the five-year period in the Consumer Price Index for All Urban Consumers published by the United States Department of Labor’s Bureau of Labor Statistics.[24]

Reinsurance

The NRRA provides that if the ceding insurer’s state of domicile is an NAIC-accredited state, or has financial solvency requirements substantially similar thereto, and the state of domicile recognizes credit for reinsurance, then no other state may deny such credit for reinsurance. In addition, a state that is not the ceding insurer’s domiciliary state is preempted to the extent that any of its laws or regulations: restrict or eliminate the rights of ceding and assuming insurers to resolve disputes pursuant to contractual arbitration; require that a certain state’s laws govern a reinsurance contract, disputes arising from such contract, or requirements of the contract; attempt to enforce a reinsurance contract on terms different from those set forth in the reinsurance contract; or otherwise apply the laws of the state to reinsurance agreements of ceding insurers not domiciled in the state.

Where a reinsurer's state of domicile is NAIC-accredited or has substantially similar financial requirements, and the state of domicile determines that the reinsurer predominately engages in a reinsurance business and does not regularly sell direct insurance, the domiciliary state is the state solely responsible for regulating the reinsurer’s financial solvency. A non-domiciliary state is precluded from requiring the reinsurer to provide any additional financial information other than the information the reinsurer is required to file with the domiciliary state.

References

  1. ↑ 15 U.S.C. § 8202
  2. ↑ 15 U.S.C. § 8206(9)
  3. ↑ 15 U.S.C. § 8206(11)
  4. ↑ 15 U.S.C. § 8202(d)
  5. ↑ 15 U.S.C. § 8206(11)(B)
  6. ↑ 15 U.S.C. § 8206(6)(A)
  7. ↑ 15 U.S.C. § 8206(6)(B)
  8. ↑ 15 U.S.C. § 8206(16)
  9. ↑ 15 U.S.C. § 8201(a)
  10. ↑ 15 U.S.C. § 8201(b)(1)
  11. ↑ 15 U.S.C. § 8201(b)(4)
  12. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  13. ↑ 13.0 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 Lua error in package.lua at line 80: module 'strict' not found.
  14. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  15. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  16. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  17. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  18. ↑ 18.00 18.01 18.02 18.03 18.04 18.05 18.06 18.07 18.08 18.09 18.10 18.11 Lua error in package.lua at line 80: module 'strict' not found.
  19. ↑ 19.0 19.1 Lua error in package.lua at line 80: module 'strict' not found.
  20. ↑ 15 U.S.C. § 8203
  21. ↑ 15 U.S.C. § 8204(1)
  22. ↑ 15 U.S.C. § 8204(2)
  23. ↑ 15 U.S.C. § 8205
  24. ↑ 24.0 24.1 15 U.S.C. § 8206(5)
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