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					    The Nonadmitted &
  Reinsurance Reform Act:

Improved Efficiency?

            Phil Ballinger, CPCU, ASLI
            Executive Director
            Surplus Lines Stamping Office of Texas
What’s the Problem?
         What’s the Problem?

 State laws little changed since first surplus
lines laws in New York in 1890

 Evolution of US commerce and insurance

 Gramm-Leach-Bliley Act (1999) unintended

 Conflicting, overlapping state laws impose
compliance barriers for licensing, regulation,
and taxation on multi-state transactions
History of Surplus
  Lines Reform
History of Surplus Lines Reform

Mid ’90s    NAIC NITCH proposal

 2004       State Modernization & Regulatory
           Transparency (SMART) Act
            • Introduced in US House; 17 separate titles
            • Addressed full range of regulatory issues,
            including licensing, market conduct, receiverships,
            & surplus lines/independently procured insurance
            • Intent – leave state-based regulation in place while
            overhauling/modernizing system
            • Failed to advance – concerns over rate
            de-regulation & federal preemption of state
            insurance laws
History of Surplus Lines Reform

2007   Nonadmitted & Reinsurance
2008   Reform Act (NRRA)
2009    • Surplus lines & reinsurance concepts from
        SMART Act
        • Passed US House each year; failed to advance
        in Senate
History of Surplus Lines Reform

 2009    Dodd-Frank Wall Street Reform &
          Consumer Protection Act (HR 4173)
        • NRRA incorporated into major financial reform bill
        arising from 2008 financial sector meltdown

2010    • Signed by Obama July 21, 2010

2011    • Effective 12 months after date of enactment
          (July 21, 2011)
Key Provisions of NRRA
  Part I – Nonadmitted Insurance
                     Key Provisions of NRRA

Sec. 521. Reporting, Payment, and
  Allocation of Premium Taxes.

 Only home state of insured may require premium tax payment

 States may enter into a compact or otherwise establish
procedures to allocate among the states taxes paid to home state

 Compact applies to taxes:

 - on or after date compact adopted if done within 330 days of
 NRRA enactment

 - on or after January 1 of first year after compact adopted, if
 adopted after 330 day period
            Key Provisions of NRRA

Sec. 521. Reporting, Payment, and
  Allocation of Premium Taxes.

         Congress intends for each state to adopt
        nationwide uniform requirements, forms, &
        procedures, such as an interstate compact,
        providing for the reporting, payment, collection,
        and allocation of taxes

         Insured’s home state may require brokers and
        insureds who have independently procured
        insurance to annually file tax allocation reports
        with the home state. Filing of tax allocation
        report and payment of tax may be made by an
        agent of the insured
                      Key Provisions of NRRA
    Sec. 522. Regulation of Nonadmitted
    Insurance by Insured’s Home State.

 Placement of nonadmitted insurance is subject to statutory and
regulatory requirements solely of insured’s home state

 Only insured’s home state may require a surplus lines broker to be
licensed in order to sell, solicit, or negotiate nonadmitted insurance

 Any law, regulation, provision, or action of any state applying to
nonadmitted insurance sold to, solicited by, or negotiated with an
insured whose home state is another state is preempted

 State laws restricting placement of worker’s compensation
insurance with a nonadmitted insurer are not preempted
                     Key Provisions of NRRA
       Sec. 523. Participation in
      National Producer Database.

 Two years after enactment of
NRRA, a state may not collect
fees relating to licensing of
surplus lines brokers unless the
state has laws or regulations
providing for participation by the
state in the national producer
database of the NAIC, or other
equivalent uniform national
database, for the licensing of
surplus lines brokers
                    Key Provisions of NRRA
  Sec. 524. Uniform Standards for
     Surplus Lines Eligibility.
 A state may not impose eligibility requirements on a US
nonadmitted insurer, except in conformance with the
requirements of sections 5A(2) [insurer authorized to write the
type of insurance in its domiciliary state] and 5C(2)(a) [capital &
surplus the greater of minimum requirements in the state or
$15 million] of the NAIC Non-Admitted Insurance Model Act,
unless the state has adopted nationwide uniform requirements,
forms, and procedures in accordance with the tax allocation
provisions of Sec. 521 that include alternative nationwide
uniform eligibility requirements

 A state may not prohibit a surplus lines broker from
procuring nonadmitted insurance from a non-US insurer
listed on the Quarterly Listing of Alien Insurers maintained by
the NAIC
                     Key Provisions of NRRA
Sec. 525. Streamlined Application
  for Commercial Purchasers.
 A surplus lines broker
procuring nonadmitted
insurance for an exempt
commercial purchaser is not
required to satisfy state
diligent effort requirements if
the broker has disclosed to
the purchaser that the
coverage may or may not be
available from the admitted
market and the purchaser
requests in writing that the
broker place the insurance
with a nonadmitted insurer
“Exempt Commercial Purchaser”

 Employs/retains a qualified risk manager to negotiate insurance
 Has paid aggregate nationwide commercial P&C insurance
premiums in excess of $100,000 in the preceding 12 months
 Meets at least one of the following:
 - possesses net worth in excess of $20 million
 - generates annual revenues in excess of $50 million

 - employs more than 500 full-time employees per individual insured or is a
 member of an affiliated group employing more than 1,000 employees in the

 - is a not-for-profit organization or public entity generating annual budgeted
 expenditures of at least $30 million

 - is a municipality with a population in excess of 50,000 persons
                     Key Provisions of NRRA
      Sec. 526. GAO Study of
   Nonadmitted Insurance Market.

 Requires US Comptroller
General to submit a report
to Congress within 30
months after the effective
date of the NRRA describing
effect of the bill on the size
and market share of
coverage in the nonadmitted
market typically provided by
admitted insurers
Key Provisions of NRRA
     Part II – Reinsurance
                          Key Provisions of NRRA
    Sec. 531. Regulation of Credit for
Reinsurance and Reinsurance Agreements.

  If the state of domicile of a ceding insurer is an NAIC-accredited
 state and recognizes credit for reinsurance for the insurer’s ceded
 risk, no other state may deny such credit
  All laws, regulations, provisions, or other actions of a state that is
 not the domiciliary state of the ceding insurer, except those with
 respect to taxes and assessments on insurance companies or
 insurance income, are preempted to the extent that they:
   1. restrict or eliminate the rights of the ceding insurer or assuming insurer to
   resolve disputes pursuant to contractual arbitration;

   2. require that a certain state’s law shall govern the reinsurance contract, disputes
   arising from the reinsurance contract, or requirements of the reinsurance contract;

   3. attempt to enforce a reinsurance contact on terms different that those set forth
   in the contract; or

   4. otherwise apply the laws of the state to reinsurance agreements of ceding
   insurers not domiciled in that state.
                     Key Provisions of NRRA
Sec. 532. Regulation of Reinsurer Solvency.

  If the state of domicile of a reinsurer is an NAIC-accredited state,
 that state shall be solely responsible for regulating the financial
 solvency of the reinsurer

  No other state may require the reinsurer to provide any additional
 financial information other than the information the reinsurer is
 required to file with its domiciliary state
How Will States Respond?
     How Will States Respond?

 Failure to act on taxes – system reverts to 100% single
situs (home state of the insured)

 Consumer protection
concerns over insurer
eligibility restrictions
     How Will States Respond?

 NAIC Nonadmitted Insurance Multi-State Agreement (NIMA)

    - Tax-only agreement

    - Establishes clearinghouse for collection & allocation of tax

    - “Bare bones” approach – does not address issue of
    regulatory uniformity

    - Opposed by industry
     How Will States Respond?

 Surplus Lines Insurance Multi-State Compliance Compact
    - Adopted by NCOIL, endorsed by CSG & NCSL
    - Supported by industry

    - Establishes commission & various committees
    - Creates tax clearinghouse

    - Authorizes commission to adopt mandatory rules for uniform:
       - Tax allocation formulas
       - Tax data reporting & payment dates
       - US insurer eligibility requirements
       - Policyholder notice requirements
Dodd-Frank Wall Street Reform
 & Consumer Protection Act
         (HR 4173)

              Federal Insurance Office
    Dodd-Frank Wall Street Reform &
   Consumer Protection Act (HR 4173)
            Federal Insurance Office (FIO)

Established in US Department of the Treasury to:
 Monitor all aspects of the insurance industry, including identifying
 issues or gaps in the regulation of insurers that could contribute to
 systemic crisis in the insurance industry or US financial system

 Monitor extent to which traditionally underserved communities and
 consumers, minorities, and low- and moderate-income persons
 have access to affordable insurance products

 Recommend to the Financial Stability Oversight Council that it
 designate an insurer, including the affiliates of the insurer, as an
 entity subject to regulation as a nonbank financial company
 supervised by the Federal Reserve Board of Governors
     Dodd-Frank Wall Street Reform &
    Consumer Protection Act (HR 4173)
           Federal Insurance Office (FIO)

Established in US Department of the Treasury to:

 Assist in administering the Terrorism Insurance Program

 Coordinate federal efforts and develop federal policy on prudential
 aspects of international insurance matters

 Consult with the states regarding insurance matters of national
 importance and prudential insurance matters of international
    Dodd-Frank Wall Street Reform &
   Consumer Protection Act (HR 4173)
          Federal Insurance Office (FIO)

FIO is provided a limited preemption of a state insurance law only if
the measure 1) results in less favorable treatment of a non-US
insurer domiciled in a foreign jurisdiction that is subject to a
covered agreement than a US insurer domiciled, licensed, or
otherwise admitted in that state, and 2) is inconsistent with a
covered agreement
FIO is explicitly not provided with general supervisory or regulatory
authority over the business of insurance

Not later that January 2013, FIO shall submit a report to Congress
on how to modernize and improve the US system of insurance
regulation, including costs and benefits of potential federal
regulation of insurance across various lines of insurance (except
heath insurance)

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