The NRRA _ Surplus Lines by chenmeixiu


									  The NRRA and Surplus Lines
     Reforms - An Update:
Will You and the States Be Ready
        on July 21, 2011?

            April 19, 2011

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       Webinar Information
• Nearly 1,000 signed up and if you are logged
  via GoToWebinar you can listen to the audio
  and see the PowerPoint presentations.
• You can also watch a live video stream
  through NAPSLO‟s website (
• Click on the “Webinar link” photo on
  NAPSLO‟s home page or go direct to

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           Webinar Panelists
• Libby Baney, Esq.
   – Vice President, B&D Consulting
• H. Michael Byrne, Esq.
   – Partner, Dewey & LeBoeuf LLP
• Daniel F. Maher, Esq.
   – Executive Director, Excess Line Association of New York
• Steve Stephan, Esq., ASLI
   – Director of Government Relations, NAPSLO
• Richard Bouhan, Esq.
   – Executive Director, NAPSLO

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       Webinar Information
• This is a follow-up to our August 2010
  webinar, available on NAPSLO‟s website
• A copy of this webinar will be posted on
  NAPSLO‟s website in the next few days
• The first hour will be presentations followed
  by a 30 minute Q&A session
• Have a question? Post on GoToWebinar or
  email to

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        NRRA Information
• Information on the NRRA and various
  State actions is available on NAPSLO‟s
  website under “New Surplus Lines Law”
  – NRRA News
  – New Statutes
  – Compacts
  – State Bulletins

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      NRRA Information
• News & information also posted on
  NAPSLO‟s blog
• NAPSLO‟s Twitter feed

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  NRRA Changes for Brokers & Insurers
    - H. Michael Byrne, Esq., Dewey & LeBoeuf LLP
• NRRA reforms – simple, yet sweeping change on July 21, 2011

• What changes for brokers on July 21, 2011?
      State law implementation

      Potential pitfalls

• What changes for insurers on July 21, 2011?
      State law implementation and regulatory practice

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       Key Provisions of the NRRA (abridged):
Exclusive home state regulation and taxation and ECPs

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Key Provisions of the NRRA (abridged): Definition of “home state”
 and an ECP and nationwide uniform insurer eligibility standards

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  What changes for brokers on July 21, 2011:
  State implementation
• NRRA reforms – long-needed clarification and simplicity
     Home state exclusive regulation and taxation
         —     Home state is the insured’s principal place of business unless 100% of risk is elsewhere,
               in which case the home state is the state with the greatest % of taxable premium

     ECP exemption – nationwide, automatic export for qualified insureds

     Insurer eligibility – nationwide uniform requirements

         —     U.S. domestic insurers

         —     Non-U.S. insurers

     Tax sharing

         —     NRRA acknowledges states can enter into an interstate compact or otherwise establish
               procedures to share taxes

         —     Competing proposals and uncertainty

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What changes for brokers on July 21, 2011:
State implementation
•   NRRA reforms are self-executing
      No state action required

      No state action required

      The states cannot prevent, or forestall, preemption (other than U.S. domestic
     insurer eligibility requirements and producer licensing fees)

      Effective July 21, 2011

•  No federal agency to enforce or implement the NRRA (or to prevent from
being created)
• Conforming state insurance laws – effectively requires recognition of
federal preemption and understanding of nonadmitted/surplus lines insurance
regulation and the NRRA

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What changes for brokers on July 21, 2011:
Potential pitfalls
•   SLB licensing/home state exclusive regulation

         Additional conditions beyond home state trigger

       Home state definition, e.g., non-U.S. placements and group insurance

•   Exemptions

         Replacing longstanding exemptions with ECP criteria

       Other exemptions

            —     SLIMPACT, NIMA, Either/Both (?), Other (multiple?), Neither, multiple allocation

            —     Compliance/administrative burden and costs: quarterly allocation reports, applying
                  other states’ rates, complex allocation formulas

            —     Timing, state fiscal studies

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What changes for insurers on July 21, 2011:
State implementation - eligibility and approval

• U.S. domestic insurers
    Applications/renewals, white lists, ability to de-list (e.g., for unsound
   financial condition or bad claims practices)
    “A” and “B” lists
    Broker requirements
      Information and data requests

• Non-U.S. insurers
      IID list – automatic eligibility

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Thank You

                  Michael Byrne, Esq.
                  Dewey & LeBoeuf LLP
                  1301 Avenue of the Americas
                  New York, NY 10019
                  Direct: 212 259 8440
                  Fax: 212 649 0483

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Differences in States Code Amendments
        Implementing the NRRA
    - Steven Stephan, Esq., ASLI, NAPSLO
• Home state definition
• Single-state tax rate
• Annual allocation report
• Rules for non-affiliated groups
• Exempt commercial purchaser and qualified
  risk manager definitions
• NRRA insurer eligibility criteria

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      NAPSLO Calls on States to
       Conform Codes to NRRA
• Aug 2010 - NAPSLO starts meeting with DOI‟s; amend their
  codes to conform to the NRRA
• Sept 2010 - NAPSLO works with industry coalitions and
  insurance departments for upcoming legislative sessions
• Oct 2010 - NAPSLO distributes written explanation of NRRA
  changes that could be incorporated in codes
• Jan 2011 -Many state legislatures open session and draft
  revisions to conform code to NRRA but differ on tax allocation
• Jan 2011 - NAPSLO offers draft legislation to conform individual
  state codes to the NRRA; submits comments on legislation,
  works with state DOI‟s, SLA‟s and industry coalitions
• Jan 2011 to present - NAPSLO lobbies against legislation that
  contravenes NRRA or authorizes states to enter into NIMA

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               Industry Trades
                Opposed NIMA
• No structure to create uniformity NRRA envisioned
• Burdensome reporting of allocation data
• Novel allocation of all casualty lines – even if data is
  unavailable – D&O, umbrella, excess
• No commission to uniformly resolve the many issues
• No authority to set insurer eligibility requirements
• Legislation is not complete or transparent –delegation
  of legislative authority

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         13 States Enact Laws; 3 Awaiting
               Governor’s Signature
• States that enacted laws: AR, ID, KY, MS, NM, NY, OH,
  SD, UT, VA, WA, WV, WY
• Bills waiting on Governor‟s signature: AZ, MD, ND
• States that authorize Commissioner to join: AR, AZ, MS,
  SD, UT
• States that authorized SLIMPACT: KY, NM, ND, OH
• States adopt NRRA legislation but no tax allocation ID,
  MD, NY, WA, VA
• States requiring fiscal analysis, etc prior to entering into
  tax sharing agreement: AZ, OH, GA
• States requiring legislative reporting or approval prior to
  entering agreement: i.e. AR, OH (NIMA) UT (report)
• All states that have passed laws tax gross premium
  instead of allocated share
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Blended Tax Rate if No Compact
• WV –home state - if insurance covers exposures in more than
  one state tax is computed on that portion of premiums allocated
  to this state
• Plus an amount equal to the portion allocated to other state on
  the bases of tax rates and fees applicable to exposures outside
  of this state
• If other states have failed to enter into allocation system, net tax
  shall be “retained” by this state
• If it would have said “deemed allocated” instead of „retained” it
  would have taxed at the home state rate
• Other states make it clear they apply the blended rate only with
  reciprocal states that also join an allocation system
• WV could clarify this with a bulletin

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   Scorecard – Bills Pending
• Bills authorizing Commissioner to enter into
  an agreement or compact: AK, CT, GA, HI,
• SLIMPACT bill states: AL, CT, IN, KS, RI,
  TN, TX, VT
• State NRRA conforming bills silent on
  allocation: CA, IL, MN, MO, OR

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    Some States Propose to Amend
     NRRA Home State Definition
•   If the insured maintains its headquarters or the insured's high-level
    officers control the business activities outside any state, the state to
    which the greatest percentage of the insured's taxable premium for that
    insurance contract is allocated.

•   (3) "Principal residence means . . . (A) the state where the insured
    resides for the greatest number of days during a calendar year; or (B) if
    the insured's principal residence is located outside any state, the state
    to which the greatest percentage of the insured's taxable premium for
    that insurance contract is allocated.

•   (5) Group Insurance. When the group policyholder pays 100 percent of
    the premium from its own funds, the term "home state" means the
    home state, as determined pursuant to subparagraph (A) of paragraph
    (1), of the group policyholder. When the group policyholder does not
    pay 100 percent of the premium from its own funds, the term "home
    state" means the home state, as determined pursuant to subparagraph
    (A) of paragraph (1), of the group member.

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        Definition of Home State
• State addition to definition of home state could be misleading;
  state generally cannot alter federal law.
• Home state: “High level officers control corporation:” (HERTZ V.
  UT, VA, WA
• If the corporation is controlled in more than one state or outside
  of any state – the state where the largest percentage of
  premium allocated: i.e. CA, HI, NV, OK, NY, UT
• Principal residence – where individual resides for greatest
  number of days – i.e. CA, NY, NV, MS, MT, RI, UT
• If the insured's principal residence is located outside any state,
  the state to which the greatest percentage of the insured's
  taxable premium . . . is allocated. i.e. CA, NY
• AR "the state in which the insured maintains its headquarters
  and coordinate the business activities of the insured."
• ME bill contains no definition of home state

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 Rules for Non-Affiliated Groups
• States alter the definition of groups: i.e. CA, HI, KS, MT, NV,
  NY, OK, UT, RI
• Amended definition: 100% paid from its own money – then
  home state is principal place of business of group
• Amended definition: If not paid by group, then home state is the
  home state of group member
• Is this consistent with NRRA home state rules? (placement
  subject to statutory requirements solely of insured‟s home state)
• What if home state rules allow group policy, but certificate
  holder is in state that amended the definition?

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        Single-State Tax Rate
• States tax at blended rate only if they
  participate in tax sharing agreement – i.e. CT,
  OH, UT, MS, SD, WY
• Language could be construed to mean the
  blended rate is applied even if there is no
  compact: i.e. GA, HI, KS, NE, OK, RI, WV
• State bulletins may be necessary to clarify
  their intent
• ID, WA –P&C collect 100% - other lines –
  state collects an allocated share

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        Allocation Reports

• NRRA: home state may require brokers
  to annually file tax allocation reports
• Quarterly reporting of allocation info–i.e.
  AK, AZ, AR, CT, FL, GA, HI, KS, MT,
  NE, OK, NC, NV

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   Exempt Commercial Purchaser,
      Qualified Risk Manager
• Not all states will have NRRA ECP definition
• States could have more liberal definitions but not
  more restrictive definition.
• SLIMPACT does not contain ECP QRM exemptions:
  KY, AL
• NRRA legislation that does not include NRRA ECP
  definition: i.e. AL, FL, IN, KS, KY, MN, NH, VA, UT,
• ECP existing state definition: i.e. AL IN MN NH SD

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 California Eligibility – Creates
  Two Categories of Insurers:
 Eligible and Approved (LASLI)
• Eligible insurers must meet NRRA eligibility
• Numerous documents must be filed
• Broker still has duty to safeguard insured's‟
  interest for “Eligible” insurers
• LASLI is similar to current eligibility standards
  in state
• LASLI Does not include broker duty to
  safeguard insured's‟ interest
• New disclosure regarding LASLI
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 How can Broker Know What to
  do Between Now and NRRA
        Effective Date?
• It is unlikely that a tax sharing system can be
  functional by NRRA effective date
• NAPSLO web site has copy of statute, bills,
  bulletins, broker protocol
• Some states will go to a single-state tax
  system on effective date
• On June 16, 2011 brokers determine home
  state and follow home state rules for premium
  tax requirements

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 A Comparison of Key
   Provisions Which
 NAIC’s NIMA Proposal
      - Daniel F. Maher, Esq.,
Excess Line Association of New York

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   SLIMPACT-LITE                                   NIMA
Is an interstate compact.         Is a proposed contract
Compacts provide a legal          not a compact among
means for states to               the states. It is intended
jointly regulate in a             that state legislatures
uniform manner. The               will authorize states to
NRRA expressly                    enter the agreement
references the use of a           with other states or a
compact.                          clearinghouse that has
                                  yet to be created.

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   SLIMPACT-LITE                                  NIMA
SLIMPACT-Lite was                The drafting of this
drafted by 60+ industry          proposal began in the
representatives, brokers         Fall of 2010 by an NAIC
and trade associations           working group of 12,
with input from                  comprised mostly of
regulators and                   Insurance Department
legislators. The                 staff.
Compact was drafted
over an 18 month

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   SLIMPACT-LITE                                   NIMA
While some state                   The Council of State
regulators have                    Governments (CSG)
asserted their state               has issued an expert
cannot legally enter into          legal opinion asserting
a compact those very               NIMA is an invalid
states participate in              delegation of
numerous such                      legislative authority to
compacts.                          the executive branch.

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    SLIMPACT-LITE                                   NIMA
SLIMPACT was drafted                NIMA does not
to create an efficient tax          address uniform
allocation system for               standards at all. The
brokers and develop                 proposal is rigid and
uniform standards so                will require brokers to
that legal requirements             report significantly
would not vary so much              more data than
state by state.                     SLIMPACT.

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    SLIMPACT-LITE                                     NIMA
SLIMPACT-Lite includes              NIMA has no similar
authority to set national           provisions. States will
insurer solvency/eligibility        therefore have very limited
standards. The NRRA                 authority to impose
prohibits most state                solvency oversight on
specific eligibility                insurers writing surplus
standards. The NRRA                 lines business.
authorizes the adoption of
national uniform eligibility
standards through a
compact or similar
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    SLIMPACT-LITE                                    NIMA
SLIMPACT-Lite‟s structure          At present, NIMA has no
includes a Commission              governing structure in
whose members are                  place to respond to
chosen by the States, an           inquiries and guide the tax
Executive Committee as a           allocation process.
governing board, and an
Operations Committee to
report to the Executive
Committee and provide
technical expertise and
guidance. It is patterned
after the IIPRC.
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   SLIMPACT-LITE                                    NIMA
SLIMPACT-Lite has a               NIMA includes a
structure to create a             provision to create a
clearinghouse and                 clearinghouse entity
equal voting rights for           and a plan of
each state that adopts            operations agreed upon
it.                               by a majority of
                                  participating states.

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   SLIMPACT-LITE                                  NIMA
Ten states or states             Two states can agree
which process more               by contract and
than 40% of all surplus          establish the
lines transactions must          clearinghouse and plan
enact the Compact                of operations.
before it can create a
clearinghouse and adopt
uniform rules.

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   SLIMPACT-LITE                                    NIMA
Each state will be                 Current draft of NIMA
permitted to establish             appears substantially
one single rate of                 similar to SLIMPACT-
taxation to apply to non           Lite in this regard,
admitted insurance                 although this could
transactions.                      change.

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   SLIMPACT-LITE                                    NIMA
Each state must limit     NIMA requires all states
tax collection to no      to convert to quarterly
more than four specific tax returns.
dates a year. States
have the option of
annual, semiannual or
quarterly tax collection.

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   SLIMPACT-LITE                                  NIMA
Is endorsed by AAMGA,           Was adopted by the
NAPSLO, CIAB, RIMS,             NAIC. It is widely
PCI, NCOIL, NCSL,               opposed by the
CSG, numerous state             industry.
stamping offices and
other insurance trade

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• Uniformity is the overarching goal of the
  NRRA so says House Sponsor,
  Representative Dennis Moore.
• Multiple approaches to tax allocation is
  a worse case scenario and must be
  avoided if the NRRA is to be
  successfully implemented.

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Update from Washington D.C.
       - Libby Baney, J.D., B&D Consulting

• Congressional Intent
  – Simplicity, efficiency, uniformity
  – Breaking down Congress‟s intent

• Washington is Watching
  – Congressional oversight of implementation of the Dodd-
    Frank Act, including the NRRA
  – Forthcoming Federal studies and reports to Congress

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       Congressional Intent for the NRRA

 SIMPLICITY – One state – the “Home State” – governs the
  multi-state transaction

 UNIFORMITY– Nationwide uniform requirements, forms, and

 EFFICIENCY – Leads to improved broker compliance,
  streamlined processes for exempt commercial purchasers

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          Congressional Intent for the NRRA
              July 22, 2010 – Statement in the Congressional Record
                  by Rep. Dennis Moore (D-KS), sponsor of the NRRA

   Brokers to pay or remit all tax in a surplus lines transaction to the ‘‘Home State’’ of the
    insured as defined in the Act and to no other state or political subdivision of any state;

   States may – but do not have to – enter into a compact or otherwise establish procedures
    to allocate among the states the premium taxes paid to an insured‟s „Home State;

   Each state adopt nationwide uniform requirements, forms, and procedures to provide for
    the reporting, payment, collection and allocation of all premium taxes;

   Only the Home State’s statutes and regulations govern the placement of nonadmitted
    insurance; and

   Nonadmitted insurance transactions are within the sole province of the insured’s Home

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         Washington is Watching
Congressional Oversight of Implementation of the Dodd Frank
   Act…Insurance Issues
   House and Senate letters to President Obama and
    Treasury urging appointment of the voting
    insurance representative on the Financial
    Stability Oversight Counsel (“FSOC”)
   House Financial Services Committee Oversight Plan:
    Federal Insurance Office establishment;
    implementation of the NRRA; FSOC; and overall
    impact of Dodd-Frank on the insurance sector
   Senate Banking Committee Agenda: Federal Insurance Office (FIO) establishment; FIO
    report when considering federal legislation; and review of the FSOC‟s study on nonbank
    financial firms
   House Financial Services Committee Hearings on the Dodd-Frank – so far in 2011:
    Derivatives title, FSOC, risk retention, Consumer Financial Protection Bureau, and Dodd-Frank
    impact on the economy and small businesses
   Senate Banking Committee Hearings on the Dodd-Frank – so far in 2011:
    Derivatives title
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         Washington is Watching
Congressional Oversight of Implementation of the Dodd Frank Act…
   including the NRRA
   Senate Banking Committee Staff meetings with the NAIC to discuss state
    implementation of the NRRA

   House Financial Services Committee Staff is also well-aware of the current
    implementation landscape

   Congress is watching

   RECALL: There is no federal regulator to implement the NRRA
      No express federal penalty for failing to comply with the intent of the NRRA…
      But Congress could always propose additional legislation should states fail to
       properly implement the NRRA consistent with Congress‟s intent…
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              Washington is Watching
Forthcoming Federal Studies and Reports to Congress
   GAO Study of Nonadmitted Insurance Market
           Report to Congress January 21, 2014
           Study will determine the effect the NRRA has on the
        –         Size and market share of the surplus lines market for providing coverage typically provided by the admitted insurance market;
        –         Extent to which insurance coverage typically provided in the admitted market has shifted to the nonadmitted market;
        –         Consequences of any chance in the size and market share of the nonadmitted market, including price and availability of coverage;
        –         Extent to which companies that provided both admitted and nonadmitted insurance policies have experienced shifts in volumes of business between the
                  coverage types; and
        –         Extent to which there has been a change in the number of individuals who have nonadmitted insurance policies, the type of coverage under such policies,
                  and whether such coverage is available in the admitted market

   Federal Insurance Office Study on Insurance Modernization
           Report to Congress due January 21, 2012
           Report will include examination of potential Federal regulation of insurance
   Optional – NAIC Report to Congress
           May submit a report after June 16, 2011
           Report would describe any compact or other procedures that have been adopted for allocation of
            premium taxes

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          Thank You!

          Libby Baney, Esq.

    B&D Consulting / Baker & Daniels LLP
           Phone: 202-312-7434


      Video feed -
The NRRA and Surplus Lines Reforms - An
Update: Will You and the States Be Ready
            on July 21, 2011?

               April 19, 2011

           Video feed -

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