National Association of Professional Surplus Lines Offices, Ltd. 200 N.E. 54th St. • Suite 200 • Kansas City, MO 64118 • 816/741-3910 • Fax 816/741-5409
www.napslo.org
Richard M. Bouhan Executive Director
June 12, 2008 Karen Schutter NAIC Working Group Staff Support National Association of Insurance Commissioners 2301 McGee, Suite 800 Kansas City, Mo 64108 RE: NARAB Working Group Dear Ms. Schutter: The National Association of Professional Surplus Lines Offices, Ltd (NAPSLO) would like to comment about the practice of requiring an underlying non-resident P&C license as an additional requirement to issue a non-resident Surplus Lines license. NAPSLO previously sent written comments on this issue and we will not duplicate those comments in this letter. Preliminarily, I would like to note that in nearly identical circumstances the NAIC concluded that requiring an underlying life insurance agent’s license to obtain a license to write variable annuities constituted a violation of Gramm Leach Bliley (GLB). For the same reasons, requiring underlying non-resident P&C licenses as a prerequisite for a non-resident Surplus Lines License violates GLB. The GLB requirements for administrative licensing requirements are: At least a majority of states permit a producer that has a resident license for selling or soliciting the purchase of insurance in its home to state to receive a license to sell or solicit the purchase of insurance in such majority of states as a non resident to the same extent that such producer is permitted to sell or solicit the purchase of insurance in its state . . . without satisfying any additional requirements other than submitting: A) B) C) D) A request for licensure; The application for licensure that the producer submitted to its home state; Proof that the producer is licensed and in good standing in its home state; and The payment of any requisite fee to the appropriate authority.
By the explicit terms of GLB, any state requiring a non-resident P&C license to issue a non-resident surplus lines license cannot be certified as reciprocal under GLB. The four requirements in GLB to receive a non-resident surplus lines license would be met by a surplus lines broker filing a request for such a license, the application, proof of licensing in the home state and payment of the fee. The four criteria are clear and there is nothing in the criteria that could be construed to allow a state to also impose the “additional
requirement” of a non-resident P&C license. GLB is clear that no “additional requirements” can be imposed. The GLB savings provision would not be implicated because the underlying non-resident P&C license additional requirement is directly contrary to GLB. The NAIC should not certify those states with such an additional requirement as meeting the reciprocity requirements of GLB. NAPSLO contends that GLB is clear and unambiguous. There is no reason for further analysis because the practice of imposing an additional requirement of a non-resident P&C license in order to issue a non-resident surplus lines license violates the explicit terms of GLB. The language “without . . . additional requirements” is clear. There is no reason to discuss the rationale for additional requirement of the non-resident P&C licenses because the rationale is not relevant. GLB provided that no “additional requirements” could be imposed and GLB cannot be read to provide that no “additional requirements” can be imposed unless a rationale is developed. Under this clear guidance the rationale for such non-resident P&C licenses is fatally flawed. The stated rationale provided for requiring an underlying non-resident P&C license requirement is that “both general lines and surplus lines authority are required in order to operate as a surplus lines producer” . . . because “surplus lines producers must first search the admitted market as a prerequisite to searching the non-admitted market.” Preliminarily, there is nothing in GLB that allows for such “additional requirements” because it simply indicates no “additional requirements” can be imposed. Beyond that, the reasoning completely misconstrues the way the surplus lines market functions. NAPSLO’s 800 plus member companies (representing approximately 20,000 employees) function as wholesale brokers or insurance carriers that sell insurance through the wholesale distribution system. In the wholesale market, by the time the surplus lines wholesaler becomes involved, the retail insurance agent has already concluded there is no admitted market. The retail agent must split a commission with the wholesaler so the retailer will not contact the wholesaler if they can locate an admitted market. The retailers in the wholesale distribution system are not surplus lines licensees. The wholesaler does not conduct the diligent search of the admitted markets because the retailer has already done so. The conclusion that a property and casualty license is needed for a surplus lines broker to conduct a diligent search is simply incorrect in this wholesale market system. There are retail agents who also act as surplus lines agents and in this latter capacity make placements directly with surplus lines companies. If the retailer completes the diligent search he or she may need a P&C license to do so under applicable state law. But, retailers generally do not act as wholesalers and wholesalers do not act as retailers because they would be competing with their customers – the retail agent. The NAIC analysis is flawed in that it fails to recognize that the wholesale production model would not require a non-resident P&C license because wholesalers do not conduct a diligent search. The additional requirement imposed on all surplus lines brokers to obtain a nonresident P&C license because some subset may use it is flawed logic and contrary to GLB.
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The A.M. Best Surplus Lines Market Review explains the distribution system as follows: “Retail producers, surplus lines intermediaries and program managers are the primary distributors for surplus lines insurers…Retail producers can be either retail agents which ultimately represent the insurer, or they can be brokers which ultimately represent the insured…Surplus lines intermediaries can operate as wholesale brokers, managing general agents, underwriting managers or Lloyds correspondents through Lloyd’s brokers. Program managers are managers of specialty or niche programs that market to either retailers or wholesalers. Surplus lines intermediaries, licensed in the states where the insured or risk is located, act as intermediaries between retail agents or brokers and surplus lines insurers. Typically, a surplus lines intermediary provides the retail producer and the insured with access to the surplus lines market when the admitted market cannot provide coverage or the risk otherwise qualifies for export. “ The point is that among the categories of surplus lines producers, neither a wholesaler (intermediary), nor an MGA, nor a program manager, nor an underwriting manager, nor a Lloyd’s broker would conduct a diligent search. A retailer may or may not conduct a diligent search, depending on their production model. There is no reason to impose the “additional requirement” of a non-resident P&C license on the entire group of surplus lines producers when the P&C license might be used by some subset. The rationale is faulty. The laws in many states require that a diligent search be completed, but they do not specify whether the retailer or the wholesaler must conduct the diligent search. We believe the laws intentionally failed to specify who must conduct the diligent because of the need to accommodate the variety of production models that exist, including the wholesale distribution system. Although the laws typically do not indicate who must complete the diligent search, they do routinely acknowledge that the wholesale production system exists. In Virginia the diligent search requirement has been abolished so the rationale would not hold true in Virginia. In many other states the laws specifically allow the producing agent to conduct the diligent search so the rationale would not apply in these states. Many other states laws are worded to require the diligent search without specifying whether the retailer or wholesalers are to conduct the diligent search so the rationale would not apply in these states. Below are but a few examples of statutes recognizing that the wholesaler need not conduct a diligent search: 215 Illinois Statues 5/445 (1) Surplus line defined; surplus line insurer requirements. "Surplus line insurance" means insurance on an Illinois risk of the kinds specified in Classes 2 and 3 of Section 4 of this Code procured from an unauthorized insurer after the insurance producer representing the insured or the surplus line producer is unable, after diligent effort, to procure said insurance from authorized insurers.
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K.S.A. § 40-246b KANSAS STATUTES ANNOTATED CHAPTER 40.--INSURANCE ARTICLE 2.--GENERAL PROVISIONS 40-246b. Excess coverage license to effect insurance or reinsurance in nonadmitted companies; application; fee; affidavit; records; revocation or suspension of license; agent authorized to place business with excess coverage licensees; required information. The licensed excess coverage agent must, prior to placing insurance with an insurer not authorized to do business in this state, obtain the written consent of the prospective named insured and provide such insured the following information in a form promulgated by the commissioner: (a) A statement that the coverage will be obtained from an insurer not authorized to do business in this state; (b) a statement that the insurer's name appears on the list of companies maintained by the commissioner . . .; (c) a notice that the insurer's financial condition, policy forms, rates and trade practices are not subject to the review or jurisdiction of the commissioner; (d) a statement that the protection of the guaranty associations is not afforded to policyholders of the insurer; and (e) a statement or notice with respect to any other information deemed necessary by the commissioner pertinent to insuring with an insurer not authorized to do business in this state. When business comes to a licensed excess lines agent for placement with an insurer not authorized to do business in this state from an agent not licensed as an excess lines agent, it shall be the responsibility of the licensed excess lines agent to ascertain that the insured has been provided the preceding information and has consented to being insured with an insurer not authorized to do business in this state. … Alaska Statutes Annotated § 21.34.020. Placement of surplus lines insurance (a) Insurance other than reinsurance, wet marine and transportation insurance, insurance independently procured, life insurance, health insurance except as provided in AS 21.34.035 and annuity contracts may be procured through a surplus lines broker licensed under AS 21.27 from nonadmitted insurers if
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(1) The insurer is an eligible surplus lines insurer; (2) The full amount, kind, or class of insurance cannot be obtained from insurers who are admitted to do business in this state; (3) The producing broker has conducted and documented a diligent search among insurers who are admitted to transact business in this state and are actually writing the particular kind or class of insurance required by the client in this state; (4) The director authorizes an exception to (2) of this section by regulation or by written authorization for an individual placement upon written request by the broker; and (5) All other requirements of this chapter are met. Florida Statutes Annotated 626.916. Eligibility for export (1) No insurance coverage shall be eligible for export unless it meets all of the following conditions: (a) The full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state, and the amount of insurance exported shall be only the excess over the amount so procurable from authorized insurers. Surplus lines agents must verify that a diligent effort has been made by requiring a properly documented statement of diligent effort from the retail or producing agent. However, to be in compliance with the diligent effort requirement, the surplus lines agent's reliance must be reasonable under the particular circumstances surrounding the export of that particular risk. Reasonableness shall be assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by-risk basis. If it is not possible to obtain the full amount of insurance required by layering the risk, it is permissible to export the full amount. New Mexico Statutes § 59A-14-11. Duty to file reports and affidavits A. The producing broker shall complete, execute and provide to the surplus lines broker an affidavit in substantially the form required by the superintendent, as to the diligent efforts to place the coverage with authorized insurers and the results thereof. The affidavit shall affirm that the insured was expressly advised prior to placement of the insurance and in the insurance policy that:
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(1) The surplus lines insurer with which the insurance was to be placed is not an authorized insurer in this state and is not subject to the superintendent's supervision; and (2) In the event the surplus lines insurer becomes insolvent, claims will not be paid nor will unearned premiums be returned by any New Mexico insurance guaranty fund. B. Within sixty days after the end of each calendar quarter, the surplus lines broker shall file with the superintendent a copy of each of the producing broker affidavits required by Subsection A of this section and a copy of the policy declarations page of all surplus lines insurance business transacted during the calendar quarter. The surplus lines broker shall preserve the original producing broker affidavits in compliance with Section 59A-14-10 and declaration pages shall be confidential and shall not be subject to public inspection. The superintendent's copy of the affidavits shall be open to public inspection. If the producing broker has failed to provide the producing broker affidavit, the surplus lines broker shall at the time of quarterly filing, notify the superintendent of the producing broker's failure to comply. Because the laws do not mandate that the surplus lines broker conduct a diligent search, the requirement of a non-resident license is simply an “additional requirement.” Any state with such “additional requirements” should not be certified under GLB. The other critical flaw in the rationale is that the licensing laws must enforce the diligent search laws. This is simply not the case. The diligent search laws are clear and unambiguous. The diligent search laws are enforced by the terms of the diligent search laws, not the licensing laws. The producer conducting the diligent search may need a license under applicable state law to conduct the diligent search and obtain the declination. However, to simply require all surplus lines brokers to obtain a license that may be used by some subset is simply imposing an “additional requirement” upon nonresident surplus lines licensing. Even if there was a state that mandated that the surplus lines licensee conduct a diligent search, then there is still no reason for the licensing laws to enforce compliance and no reason for the states to require a non-resident P&C license. This would be like requiring each P&C agent to obtain a life agent’s license because some subset might also sell life insurance. There is simply no reason that something extraneous to the diligent search laws be implemented to enforce compliance with the diligent search laws. Any surplus lines licensee that actually conduct a diligent search can obtain whatever license is needed under applicable state law. It is clearly an “additional requirement” for to impose the non-resident P&C license on all non-resident surplus lines licensees and thus contrary to GLB. The risk is that the GLB certifications are faulty because the underlying non-resident P&C license requirement violates GLB reciprocity standards. If the certifications are faulty then the risk is that some party will seek to bring NARAB into existence. Surely the risk outweighs any perceived benefit in requiring an underlying non-resident P&C license as an additional requirement to obtain a non-resident surplus lines license. The 6
surplus lines licensee already has a non-resident surplus lines license and the additional requirement of another license for each licensee is simply bureaucratic. Any surplus lines licensee that actually does a diligent search can obtain whatever licenses are necessary under applicable state law without the state imposing additional requirements as a prerequisite to non-resident surplus lines licensing. Such “additional requirements” were specifically prohibited by GLB reciprocity standards. Thank you for the opportunity to comment. Yours truly,
Steven P. Stephan, J.D., CPCU, Are Director of Government Relations
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