The New York Department of Financial Services (Department) has finalized a Fourth Amendment to New York Insurance Regulation 86 (Regulation 86) that applies to the sale of Special Risk insurance. Special Risk insurance, or insurance written through the “Free Trade Zone”, refers to certain large or hard-to-place commercial risks that are permitted to be written in New York in order to foster increased market flexibility. This latest amendment comes on the heels of the final adoption of the Third Amendment to this regulation, which added large commercial insureds as a third risk classification and established rules for the sale of insurance to this new class of insureds.
The Fourth Amendment to Regulation 86 was developed following industry comment on suggested revisions to the regulation. Specifically, the Department was asked to consider (1) eliminating the premium-based cap on special risks, (2) increasing the amount of Special Risk premiums that can be written and (3) adding credit for reinsurance. While the Fourth Amendment does not eliminate the premium cap on Special Risk insurance, the limitations set forth in the regulation were revised to enable large insurers to write a significant number of risks without approaching the cap. The cap is calculated based upon a more generous ratio of special risk premiums to policyholder surplus. Additionally, the Fourth Amendment permits an insurer to seek prior approval from the Department to exceed the limitations set forth in the regulation. The Department kept limitations in place that would protect smaller insurers from taking on too many Special Risks, which may adversely impact solvency.
The Fourth Amendment to Regulation 86 also includes the following revisions:
- It eliminates the need for disclosure language on a rider or endorsement that is issued at the same time as the policy.
- It specifies that a license renewal application must be completed not less than thirty (30) days prior to the date that the license expires.
- It formally adds several risks to the list of Class 2 coverages that had previously been adopted by public notice.
For insurers who write this type of insurance in multiple jurisdictions, it is important to note that pursuant to the Department’s Office of General Counsel Opinion (OGC Opinion) dated June 7, 2007, an insurer may properly include only the premium attributable to New York risks in calculating whether the amount of premium written is within the New York restrictions. The credit for reinsurance was not included in the revised version of the regulation but the Department did allow for an insurer to seek an exemption from the limitations set forth in Regulation 86 relative to the amount of Special Risk insurance that can be written.
Insurers writing Special Risk insurance should be aware that although Article 63 and Regulation 86 exempt qualifying insurance from policy form and rate filing, such insurer is otherwise subject to all required terms, conditions and rates set forth in the New York Insurance Law. For example, in OGC Opinion 10-11-06, the Department stated that an insurer writing a Special Risk policy must provide the insured with the notice required for conditional renewal or non-renewal under New York Insurance Law section 3426. Additionally, an OGC Opinion dated July 28, 2005, makes clear that a Special Risk insurer who wishes to impose a percentage-based minimum earned premium must demonstrate that such premium equals the cost associated with issuing the policy. Finally, the statutory and regulatory prohibition regarding the sale of Special Risk insurance on a group basis applies equally to purchasing groups established under federal law as set forth in an OGC Opinion dated August 1, 2005.