Dodd-Frank Nonadmitted and Reinsurance Reform Act becomes effective

On 21 July 2011, the Nonadmitted and Reinsurance Reform Act of 2010 (the “NRRA”), which is Subtitle B of Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act, became effective. The NRRA addresses, among other things, (i) the ability of states to impose premium tax on nonadmitted insurance, and (ii) the preemption of state credit for reinsurance credit rules with respect to nondomestic ceding insurers.

Premium Tax on Nonadmitted Insurance

Section 521(a) of the NRRA provides that no state other than the “home state” of an insured may impose a premium tax on nonadmitted insurance. “Home state” is generally defined in Section 527(6) of the NRRA as (i) 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 (ii) if 100% of the insured risk is located outside of that state, the state to which the greatest percentage of the taxable premium for that insurance contract is allocated. The NRRA streamlines the obligations of insureds to pay, and surplus lines brokers to collect, premium taxes on transactions where the insured risk is located in a different state than the insured’s home state. Section 522(a) of the NRRA further provides that except as otherwise provided in the statute, the placement of nonadmitted insurance is only subject to the statutory and regulatory requirements of the insured’s home state. Section 521(b) of the NRRA expresses an intent of Congress that each state adopt nationwide uniform procedures, such as an interstate compact, for reporting and paying premium taxes on nonadmitted insurance for allocating among the states the premium taxes paid to an insured’s home state. States have been revising their statutes and regulations to conform their laws to the NRRA and have provided guidance to excess and surplus line brokers and insurers with respect to the implementation of the NRRA in their states. For example, New York released Circular Letter No. 9 (2011) on 22 July 2011 (available at http://www.ins.state.ny.us/circltr/2011/cl2011_09.pdf) for this purpose. By contrast, the process for establishing a uniform interstate compact for the allocation of premium taxes among the states is still far from complete. For more information on state responses to the NRRA regarding premium taxes, please see our article from the March 2011 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, States Address Nonadmitted Insurance Premium Taxes in Light of Dodd-Frank Act.

Credit for Reinsurance

Section 531(a) of the NRRA provides that if a state of domicile of a ceding insurer is a NAIC-accredited state, or has solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and permits the ceding insurer to take credit for reinsurance on a ceded risk, then no other state in which the ceding insurer is licensed may refuse to recognize that credit for reinsurance. As all fifty states are currently NAIC-accredited, Section 531(a) of the NRRA effectively preempts all nondomestic state credit for reinsurance rules for all reinsurance agreements involving a ceding insurer based in the U.S.

The NAIC is in the process of evaluating proposed amendments to its Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786), which if adopted will provide for reduced collateral requirements for credit for reinsurance. Many states base their credit for reinsurance statutes and regulations directly on the NAIC models or have a framework in place that is substantially similar to that of the NAIC models. NAIC models are not recognized as law in any of the states, but the models are influential as accreditation standards. If the proposed amendments are adopted by the NAIC, states may choose to amend their laws and regulations to conform to the models. However, since the proposed amendments to the NAIC models establish a floor for collateral requirements, states that choose to maintain their current stricter requirements will meet the accreditation standard. For more information on the proposed amendments, please see the below article, NAIC Reinsurance (E) Task Force Continues to Take Steps to Amend Credit for Reinsurance Model Law and Regulation.

State Actions

Both California and New York have taken measures that recognize the consequences of the preemption by the NRRA of state credit for reinsurance statutes and regulations. On 11 April 2011, the California Department of Insurance released Bulletin No. 2011-2, Implementation of Reinsurance Provision of the Federal Nonadmitted and Reinsurance Reform Act, in part, to explain how the California Department of Insurance will exercise its regulatory powers in light of the credit for reinsurance provisions of the NRRA. Bulletin No. 2011-2 states that the California Department of Insurance will not deny financial statement credit for reinsurance that has been recognized by the domiciliary state of a ceding insurer. For more information on the response of California to the NRRA and its effect on California statutes and regulations, please see our article from the April 2011 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, California issues bulletin for guidance on implementation of reinsurance provisions of Dodd-Frank Act.

The New York State Insurance Department made a series of changes to its credit for reinsurance regulation, Regulation 20, that became effective on 1 January 2011. One such change was a provision stating that New York’s credit for reinsurance regulation would no longer apply to a non-New York ceding company if its state of domicile is an NAIC-accredited state, or has financial solvency requirements that are substantially similar to the requirements for NAIC accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk. In addition to such language acknowledging the preemptive effects of the NRRA, the changes to Regulation 20 allow for reduced collateral requirements for credit for reinsurance obtained from unauthorized reinsurers. For more information on New York’s credit for reinsurance regulation, please see our article from the December 2010 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, New York’s Changes to Credit for Reinsurance Regulations.