The long-pending Nonadmitted and Reinsurance Reform Act (NRRA or Act) has been enacted as Subtitle B of Title V in the Dodd-Frank Act. Subtitle B, titled “State-Based Insurance Reform,” will become effective on July 21, 2011, 12 months from the date of Dodd-Frank’s enactment. The 12-month incubation period is designed to allow states sufficient time to enact legislation responsive to the NRRA’s provisions. Notably, the NRRA relies on the National Association of Insurance Commissioners (NAIC)-established standards, further enhancing the role that the private association of insurance commissioners plays in national insurance regulation.
Originally proposed as H.R. 5637 in the 109th Congress in 2006, the NRRA was reintroduced in the 110th Congress and then again in the 111th Congress by Rep. Dennis Moore (D-KS), before finally securing passage as part of the Dodd-Frank Act this past July. The little bill that could, the NRRA represents an important step in the move towards national uniformity of state insurance regulation on a significant component of the insurance makers through federal legislation, if not outright regulation. The NRRA is designed to simplify surplus lines and reinsurance regulation by empowering state regulators to exercise their existing authority with a somewhat broader, though defined, scope.
Surplus Lines Regulatory Reform
The Dodd-Frank Act enacted surplus lines regulatory reform in Title V, Subtitle B, Part I, which grants the home state of a policyholder the exclusive authority to require payment of premium taxes and placement regulation by nonadmitted insurers. The Act provides that the states may establish how to allocate surplus lines premium taxes by entering into a national compact, likely within 330 days of the Act’s enactment. The Act is designed to establish a uniform mechanism for payment and allocation of nonadmitted insurance and regulation of surplus lines brokers.
The NRRA authorizes states to enter into a compact or other arrangement to establish a uniform procedure for reporting, collecting, allocating and paying premium taxes for nonadmitted insurers. The Act permits a policyholder’s home state to require surplus lines brokers and insureds who have independently procured insurance to file tax allocation reports specifying the portion of the nonadmitted insurance policy premiums for properties, risks or exposures in each state. The allocation reports will be used to distribute premium taxes pursuant to the compact.
The surplus lines regulatory reform provisions lean on the NAIC in several respects. First, state participation in the NAIC national producer database or an equivalent uniform national database (though no such equivalent database likely exists), is a requirement for collecting fees on surplus lines brokers. Second, the Act requires uniform standards for surplus lines eligibility that, absent a compact with uniform requirements, forms and procedures, must conform to certain provisions in the NAIC Nonadmitted Insurance Model Act. Third, the Act authorizes the NAIC to report to Congress regarding the establishment of any compact or procedures regarding the allocation of premium taxes between the states. Finally, the Government Accountability Office is directed to study the effects of the NRRA on the surplus lines insurance market in consultation with the NAIC.
The NRRA also should streamline the process for exempt commercial purchasers to obtain insurance from surplus lines carriers. The Act defines “exempt commercial purchaser” as any person that, at the time of placement, satisfies the following requirements:
- Employs or retains a qualified risk manager to negotiate insurance coverage;
- Has paid aggregate nationwide commercial property and casualty insurance premiums in excess of $100,000 in the immediately preceding 12 months; and
- The person meets at least one of the following criteria: (i) possesses a net worth in excess of $20M (as adjusted in accordance with the Act’s requirements); (ii) generates annual revenues in excess of $50M (as adjusted in accordance with the Act’s requirements); (iii) 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) is a not-for-profit organization or public entity generating annual budgeted expenditures in excess of $30M (as adjusted in accordance with the Act’s requirements); or (v) is a municipality with a population in excess of 50,000 persons.
If the commercial purchaser satisfies these requirements, then the surplus lines broker will be exempt from state law requirements to determine whether the amount or type of coverage sought is available from admitted insurers. This exemption arises if the surplus lines broker discloses that the requested coverage may or may not be available from admitted insurers and the commercial policyholder submits a written request that the broker obtain coverage from a nonadmitted insurer.
Finally, the Act preempts state law applying to nonadmitted insurance other than laws from the policyholder’s home state. Preemption does not apply to workers’ compensation. By allowing the policyholder’s home state to regulate nonadmitted insurance matters, the NRRA cuts through the Byzantine state regulatory and premium tax remittance regulations, benefiting brokers, insurers and policyholders alike. Moreover, the NRRA’s definition of an “exempt commercial purchaser” may pave the way for additional national regulatory reform measures directed at sophisticated purchasers.
Reinsurance Credit Reform
Part II of the NRRA, “Reinsurance,” grants the domiciliary state of the ceding insurer exclusive authority over the ceding insurer regarding credit for reinsurance. The NRRA’s grant of authority to domiciliary states is contingent on the state being an NAIC-accredited state or having equivalent financial solvency requirements substantially similar to the requirements needed for NAIC accreditation. Part II preempts extraterritorial application of another state’s laws and regulations that: (1) limit the insurer’s right to arbitrate—so long as the arbitration is consistent with the Federal Arbitration Act; (2) mandate the insurer’s choice of law; (3) impose terms on the insurer beyond those in the reinsurance contract; and (4) otherwise attempt to apply the laws of the state to reinsurance agreements of ceding insurers not domiciled in that state.
Part II also grants a reinsurer’s domiciliary state exclusive authority to regulate the reinsurer’s financial solvency. A reinsurer would be required to provide to a non-domiciliary state only the amount of financial information required by its domiciliary state. Non-domiciliary states would be authorized to receive copies of the information submitted to the domiciliary state.