NAIC INTERNATIONAL INSURERS DEPARTMENT (IID) PLAN OF OPERATION 

(Approved by Executive/Plenary on December 16, 2022)

NOTE

At December 2022 National Association of Insurance Commissioners’ (“NAIC”) Fall National Meeting, the Surplus Lines Working Group adopted changes to the International Insurers Department’s (“IID”) Plan of Operation.

Highlights of the proposed changes include: (1) An increase to the required minimum shareholders’ equity amount from $45 million to $50 million required to apply and stay on the Quarterly Listing; (2) Increases to the minimum U.S. Trust Fund balance to $6.5 million (from $5.4 million) and to the maximum Trust Fund balance required to $300 million (from $250 million); (3) Clarifies that the required Trust Fund may consist of cash, securities, or an acceptable evergreen letter of credit, or combination, at an appropriate level, deposited with a trustee for the benefit of U.S. policyholders; (4) Clarifies that the Trust Fund minimum amount is based on the U.S. gross surplus lines liabilities (i.e., gross reserve for unpaid losses for case and IBNR + gross reserve for unpaid loss adjustment expenses) excluding liabilities arising from aviation, ocean marine, and transportation insurance, and direct procurement; (5) Clarifies how the Trust Fund balance is to be computed. The calculation of the required Trust Fund minimum balance will be listed as follows: (i) 30% of U.S. gross liabilities amount up to $200 million, plus; (ii) 25% of U.S. gross liabilities greater than $200 million and up to $500 million, plus; (iii) 20% of U.S. gross liabilities greater than $500 million and up to $1 billion, plus; and (iv) 15% of U.S. gross liabilities in excess of $1.0 billion; and (6) Provides a new section regarding voluntary termination from the Quarterly Listing and provides that an insurer that wishes to voluntarily terminate may do so by sending a letter to the IID and that, following termination, the insurer must continue to comply with the requirements of the Trust Agreement for Alien Excess or Surplus Lines Insurers.

Background
The NAIC has a long history of supporting state insurance departments’ regulatory efforts regarding insurers domiciled outside of the United States (alien) participating in the U.S. non-admitted market. Initially acting only as a repository for alien insurer financial records, the NAIC has transitioned over the years to its present role as the recognized authority for alien insurers (hereafter, Insurer(s) refers to alien domiciled companies and Lloyd’s syndicates) seeking approval to write surplus lines business in all U.S. states and territories. The NAIC International Insurers Department Plan of Operation (Plan) details the standards and processes which Insurers must meet in order to gain and maintain inclusion on the Quarterly Listing of Alien Insurers (Quarterly Listing). The Plan that follows provides a description of the roles NAIC staff and selected state regulators perform in the oversight of alien surplus lines insurers.

Introduction
The Plan describes how the NAIC’s IID will operate and how Insurers obtain inclusion on the Quarterly Listing. The IID is composed of experienced financial analysts who review applications and renewal filing documents, prepare written analyses, and provide support to NAIC surplus lines committees and working groups. The IID also includes an Internal Review Committee (Internal Committee) that consists of NAIC directors, managers, attorneys, and analysts. The Internal Committee reviews IID analyses and provides a report of recommendation to the Surplus Lines (C) Working Group (Working Group). The Property and Casualty Insurance (C) Committee has no direct involvement in making or approving recommendations regarding alien surplus lines insurers and is designated the “Appeal Committee” for decisions made by the Working Group.

The IID functions on behalf of state departments of insurance by maintaining qualifying standards for Insurers domiciled outside of the U.S. seeking eligibility to write direct surplus lines. Section 524(2)[1] of the 2010 Dodd-Frank Wall Street and Consumer Protection Act recognizes the Quarterly Listing as identifying Insurers for which states may not prohibit brokers from placing or procuring non-admitted insurance in the U.S. The Quarterly Listing is a public document that is posted on the Publications page of the NAIC website. This list includes Insurers that qualify for listing as outlined in Section II – Core Requirements and Guidelines for Inclusion on the Quarterly Listing. Modifications to listed companies are summarized within each Quarterly Listing. The Working Group will make the final determination of all Insurer eligibility.

The Working Group provides oversight to the IID and reports to the Surplus Lines (C) Task Force (Task Force), which functions under the NAIC Property and Casualty Insurance (C) Committee. The Working Group is composed of state regulators with experience in financial analysis and surplus lines regulation. The Working Group provides the IID with guidance and expertise relative to applications and renewals as well as regulatory policy and practices with respect to Insurers listed on or seeking inclusion on the Quarterly Listing.

I.  Application Process

An Insurer planning to write U.S. surplus lines via admittance to the Quarterly Listing will first register with OPTins®. OPTins® is an electronic filing and payment system utilized for filing alien surplus lines applications. Through OPTins®, the applicant will remit all required filings along with a non-refundable electronic payment in the amount indicated in the Application Filing Memo & Instructions. The application fee covers the cost of processing and evaluating the Insurer’s application. A comprehensive list of required filings can be found within the Application Filing Memo & Instructions document located within the “Documents” tab available on the Working Group webpage. Other resources can also be found within the “Documents” tab on the Working Group webpage.

The Quarterly Listing is published on January 1st, April 1st, July 1st, and October 1st. A complete application must be received no fewer than 90 days in advance of the publication date in which the Insurer applies to be listed. If the application is received fewer than 90 days prior to the intended publication date, it will not be considered until the following quarterly publication release.

The IID will review and evaluate the information submitted by Insurers seeking admittance to the Quarterly Listing. The IID evaluates whether the Insurer meets or does not meet the standards set forth in Section II – Core Requirements and Guidelines for Inclusion on the Quarterly Listing. The IID may contact the Insurer for additional information or to seek clarification of any concerns during its review of the application. If all questions and/or concerns (e.g., receipt of required documents and IID requested explanations and supporting documentation) are not resolved within a six-month period of the initial application submission date, the application may be rejected and a letter informing the Insurer of the decision will be issued. Refer to Section III – Process for Reconsideration of an Application Rejection. Following completion of the review, the IID will meet with the Internal Committee to discuss the evaluation and determine a recommendation. The Internal Committee will present its recommendation to the Working Group for consideration. Following determination by the Working Group, a letter detailing approval or denial will be sent to the Insurer by the IID.

If the Insurer is approved, an approval letter will be sent a minimum of ten calendar days in advance of the listing date and the Insurer will be included in the next Quarterly Listing. The Insurer must establish the required trust fund (See Section II.B – U.S. Trust Fund) prior to being admitted to the Quarterly Listing. Further, the IID must receive the trust balance report detailing the trust fund holdings..

The IID reserves the right to ask questions, make comments, or seek clarification of any concerns during its review of Insurer applications. If all questions and/or concerns (e.g., receipt of required documents and IID requested explanations and supporting documentation) are not resolved within a six-month period of the initial application submission date, the application will be rejected and a letter informing the Insurer of the decision will be issued. Refer to Section III – Process for Reconsideration of an Application Rejection. All application fees are non-refundable.

II.  Core Requirements and Guidelines for Inclusion on the Quarterly Listing

A.    Shareholders’ Equity Funds (See Lloyd’s Notation below)

A minimum shareholders’ equity amount of $50.0 million must be maintained on a continuous basis. During the course of an IID analysis, it will be evaluated whether shareholders’ equity is adequate given the risk profile. In the evaluation of the adequacy of shareholders’ equity, the following key factors may be considered by the IID:

  • Operating history and trends;
  • Quality and diversification of assets;
  • Mix of business and geographic diversification;
  • Gross insurance leverage;
  • Reinsurance program and quality of reinsurers;
  • Gross reserve leverage;
  • Cash flow and liquidity;
  • Access to capital;
  • Dividend and/or upstream funding history; and
  • Other relevant factors deemed relevant to the review.

If there is a determination that shareholders’ equity is inadequate based on the analysis of the Insurer’s risk profile, an equity requirement above the minimum amount of Or, the Insurer may be subject to additional ongoing reporting (e.g., monthly and/or quarterly reporting).

Lloyd’s Notation
In lieu of individual shareholders’ equity, Lloyd’s syndicates are required to report a U.S. trust fund of not less than $100.0 million available for the benefit of all Lloyd’s U.S. surplus lines policyholders. In addition, a review of the funds at Lloyd’s (member assets) is considered.

B.     U.S. Trust Fund

The purpose for establishing a trust fund is to provide additional assurance that U.S. policyholders are secure. The trust fund must consist of cash deposited with the trustee, securities, or an acceptable evergreen letter of credit, or combination at an appropriate level, deposited with a trustee for the benefit of U.S. policyholders. With regard to the composition of the trust fund, credit will be allowed only for: (i) securities readily marketable on a regulated U.S. securities exchange; (ii) those securities designated by the NAIC’s Securities Valuation Office; or (iii) investments of substantially the same character and quality as those which are eligible investments for the capital and statutory reserves of admitted insurers to write like kinds of insurance in the state where the trust is principally administered. An acceptable letter of credit is defined as unconditional, irrevocable, evergreen, and issued or confirmed by a qualified U.S. financial institution.

In establishing its trust fund, an Insurer must maintain such fund at, and enter into an agreement with, a qualified U.S. financial institution. The agreement must contain provisions consistent with the IID model document, Trust Agreement for Alien Excess or Surplus Lines Insurers. For purposes of complying with the trust fund requirement as well as the Lloyd’s United States Situs Excess or Surplus Lines Trust Deed, a qualified U.S. financial institution:

  • Is organized or (in the case of a U.S. office of a foreign banking organization) licensed under the laws of the U.S. or any state thereof;
  • A national bank, state bank, or trust company which is adequately capitalized and qualified to accept securities as determined by the standards adopted by the U.S. banking regulators and regulated by state banking laws or a member of the Federal Reserve system; and
  • Has been granted authority to operate with trust powers, if such qualified U.S. financial institution is to act as the fiduciary of the trust fund.

Determining the Trust Fund Level
The trust fund minimum amount will be based on the U.S. gross surplus lines liabilities (i.e., gross reserve for unpaid losses for case and IBNR + gross reserves for unpaid loss adjustment expenses) excluding liabilities arising from aviation, ocean marine, and transportation insurance (NAIC Nonadmitted Insurance Model Act (#870), Section 3 – Definitions, Wet Marine and Transportation Insurance, provides an illustrative example), and direct procurement as follows:

Trust Fund Calculation

  • 30% of U.S. gross liabilities up to $200 million, plus
  • 25% of U.S. gross liabilities greater than $200 million and up to $500 million, plus
  • 20% of U.S. gross liabilities greater than $500 million and up to $1.0 billion, plus
  • 15% of U.S. gross liabilities in excess of $1.0 billion

In no event will the required trust fund minimum ‎amount, despite the calculation above, be less than $6.5 ‎million or in excess of $250 million.‎

The trust fund minimum will be verified annually ‎through the review of the U.S. gross liabilities reported ‎within the loss reserve certification no later than June ‎‎30th of each year. The actuary who opines on the ‎liabilities must be a member of a recognized ‎professional actuarial body. In addition, pursuant to ‎Section 2.13b of the Trust Agreement for Alien Excess ‎or Surplus Lines Insurers, the trustee shall, no later than ‎‎30 days post quarter end, report a trust balance to the IID. ‎Such report should include sufficient details on the ‎assets held in trust and meet the required minimum ‎balance. Any shortage in the balance must be remedied ‎within 15 days of notification to the Insurer.‎

In the case of Lloyd’s syndicates, for the total of all ‎years of account, the trust fund minimum amount for ‎each syndicate will be based on the syndicate’s gross ‎U.S. surplus lines liabilities using the trust fund ‎calculation above.‎

In extenuating situations (e.g., potential legal action on exposures not yet included within gross loss reserves) there may be a need to require a trust fund balance that is greater than the normal trust fund calculation based on the Insurer’s risk profile. The IID will consider the following factors in determining an appropriate trust fund level:

  • The types and amounts of premiums that the Insurer writes or proposes to write in the U.S.;
  • The  type and valuation  of  the  assets  that  compose  the  trust  fund  may  be  adjusted  for  any questionable balances; and,
  • The terms and conditions as outlined within the trust agreement.

Process for Reconsideration of a Trust Fund Level
In the event of a determination that a trust fund balance greater than the calculated minimum level is appropriate, a written request for reconsideration may be submitted if the Insurer objects to the determination. In order to request reconsideration, all the following criteria must be met:

  • The request must be received by the IID within 30 days of the date on the trust fund adjustment letter;
  • The request must be in letter format and signed by an officer of the Insurer; and,
  • The request must include a comprehensive rationale for disagreement with regard to the determined trust fund level.

The IID will evaluate the appeal with consideration given to the information provided within the request letter and all such information will be presented to the Working Group to determine a recommendation. The Working Group’s recommendation will then be presented at a regulator-only Appeal Committee meeting for consideration. A representative of the Working Group and the Insurer will be allowed to present. Following review and a determination by the Appeal Committee, the IID will be instructed to send to the Insured a letter detailing approval or denial of the request.

C.     Ethics and Integrity

Insurer management will have a proven and demonstrable track record of relevant experience, competence, and integrity. Biographical affidavits will be considered as one source for assessing the presence of these attributes. Following the original biographical affidavit, new or materially modified affidavits (e.g., change in the suitability of an officer) should be uploaded to OPTins® within 30 days of any known amendments, or, where applicable, within 30 days of approval of any new key director or officer by the Insurer’s domestic regulator.

D.    U.S. Branch Office

An Insurer formed with an existing U.S. branch office is prohibited from applying for inclusion on the Quarterly Listing, and Insurers currently included on the Quarterly Listing will be de- listed if a U.S. branch office is established.

E.    Lloyd’s Incidental Syndicates

A Lloyd’s incidental syndicate is formed as a portion of the host syndicate. The incidental syndicate is subject to the same capital setting and business plan as the host syndicate. Lloyd’s incidental syndicates are permitted to apply for inclusion on the Quarterly Listing under the condition that they establish a separate Lloyd’s U.S. Situs Excess or Surplus Lines Trust Deed and commit to annual reporting under its incidental syndicate number

F.    Insurers or Lloyd’s Sovereign Government Syndicate Ownership

An insurer or Lloyd’s syndicate (member or managing agent) that is partially or wholly owned (directly or indirectly) or controlled (financially or otherwise) by a sovereign government that applies for inclusion on the Quarterly Listing, must sign and attest to various conditions as outlined within a set of required supplemental filings. The sovereign ownership may no encompass a U.S. sanctioned county per the U.S. Department of Treasury’s Office of Foreign Asset Control.

III.  Process for Reconsideration of an Application Rejection

In the event of rejection, a written request for reconsideration may be submitted if the Insurer objects to the determination. In order to request reconsideration, all the following criteria must be met:

  • The request must be received by the IID within 30 days of the date on the rejection letter;
  • The request must be in letter format and signed by an officer of the Insurer; and,
  • Each  of  the  rejection  letter  issues  must  be  addressed  with  detailed  explanations  and supporting documentation.

The IID will re-evaluate the application with consideration given to the information provided within the request letter and all such information will be presented to the Working Group to determine a recommendation. The Working Group’s recommendation will be presented at a regulator-only Appeal Committee meeting for consideration. A representative of the Working Group and the rejected applicant will be allowed to present. Following review and a determination by the Appeal Committee, the IID will be instructed to send to the Insurer a letter detailing approval or denial of the request.

If an Insurer does not submit a reconsideration letter within 30 days of the date on the rejection letter, any request for reconsideration is considered waived and the Insurer will be required to submit a new application along with the appropriate fee and all required supporting documentation.

IV.  Ongoing Quarterly Listing Eligibility

Insurers included on the Quarterly Listing are subject to ongoing review, which includes annual and interim compliance and qualitative and quantitative analysis.

A.        Core Areas of Insurer Compliance

Annual Renewal Filing
All listed Insurers/syndicates listed within the Quarterly Listing on June 30th of the renewal year are required to remit an annual fee, file an annual renewal package, and upload all required renewal filing documents to OPTins® by June 30th. A comprehensive list of required filings can be found within the Renewal Filing Memo & Instructions document within the “Documents” tab available on the Working Group webpage. Filings submitted subsequent to June 30th will be subject to late fees as defined within the Renewal Filing Memo & Instructions. If an Insurer fails to submit its annual renewal filing by July 31st, it may be subject to de-listing.

Notification of Change in Control and Re-Application
Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of any other person. In the event of a change of control and/or merger, the Insurer shall provide notice 30 days prior to the effective date of the transaction. Additionally, the Insurer shall reapply within 45 days following the effective date of the change of control and/or merger of the Insurer in order to maintain its listing. Failure to provide timely notice and/or re-application may result in de-listing.

Notification of Decline in Equity (Does not apply to Lloyd’s Syndicates)
If the Quarterly Listed Insurer’s equity has declined or is expected to decline by 10% or greater compared to the most recent year-end or dropped below the minimum standard described in Section II.A – Shareholders’ Equity Funds, the Insurer must immediately inform the IID with a detailed explanation of the decline and a plan describing the resolution. Failure to provide timely notice may result in delisting as described in Section V – De-Listing. If an Insurer is unable to increase equity to the required level within 15 business days, it may be subject to de-listing.

Trust Fund Monitoring
The Quarterly Listed Insurer is required to monitor the trust fund balance to ensure that it meets the minimum amount and takes market fluctuations into consideration. The IID performs a quarterly review of the market value of each Insurer’s U.S. trust fund, based on the filing of the trust fund balance report from the trustee, in order to ensure that it continues to meet the required minimum balance.

B.       IID Annual and Ongoing Analysis of Quarterly Listed Insurers

The IID analyzes annual renewal and interim Insurer documentation and may request additional information as a result of the analysis. If an Insurer fails to file all additional requested information within the specified timeframe, it may be subject to de-listing. Following the overall analysis process, the Insurer will be recommended to the Working Group for renewal or de-listing. Following review and a determination by the Working Group, a letter will be sent to the Insurer.

C.       Examination of Insurer

The IID may recommend that an Insurer submit to a special examination of its affairs to verify continuing compliance. If the Working Group approves the recommendation, the Insurer will agree to submit to a special examination and pay all expenses or will be de-listed.

V.  De-listing

When the IID determines an Insurer is not in compliance with the Plan and/or the trust fund requirements or poses solvency concerns, the IID may present an analysis of the Insurer to the Internal Committee to determine a recommendation for consideration by the Working Group. Upon determination of non-compliance and/or solvency concerns by the Working Group, the Insurer will be de-listed and notified via letter.

VI.  Process for Reconsideration of De-listing

In the event of de-listing, a written request for reconsideration may be submitted if the Insurer elects to challenge the determination. In order to request reconsideration, all the following criteria must be met:

  • The request must be received by the IID within 30 days of the date on the de-listing letter;
  • The request must be in letter format and signed by an officer of the Insurer; and,
  • Each of the de-listing letter issues must be addressed with detailed explanations and supporting documentation.

The IID will review the letter response and will present its evaluation to the Working Group for its recommendation. The Working Group’s recommendation will be presented at a regulator-only Appeal Committee meeting for consideration. A representative of the Working Group and the de-listed Insurer will be allowed to present. Following review and a determination by the Appeal Committee, the IID will be instructed to send to the Insurer a letter detailing approval or denial of the request.

If an Insurer does not submit a reconsideration letter within 30 days of the date on the de-listing letter, any request for reconsideration is considered waived and the Insurer will be required to submit a new application along with the appropriate fee and all required supporting documentation.

VII.  Communication

All communication and information, including financial statements, audit reports, trust fund documents, and other supporting documentation must be submitted in English and uploaded to OPTins®.

VIII.  Voluntary Termination from the Quarterly Listing

An Insurer that wishes to voluntarily terminate from the Quarterly Listing may do so by sending a letter to the IID that requests termination along with the effective date of termination. Following termination from the Quarterly Listing, the Insurer shall continue to comply with the requirements outlined within the Trust Agreement for Alien Excess or Surplus Lines Insurers.

IX. Confidentiality

The IID will treat as confidential any non-public information submitted by an Insurer and for which confidential treatment is clearly requested. The IID is not aware of any state or federal statutes that provide additional protection for information submitted to it. By submitting information to the IID, the Insurer acknowledges that the IID may share any such information with any state insurance department as well as other NAIC staff members who participate in the review of applications and renewals. Additionally, in the event the IID or NAIC is served with a subpoena, motion, order, or other legal process requiring the production of such information or testimony related thereto, the NAIC will make best efforts to inform the Insurer of such third-party request in order to afford the Insurer an opportunity to take whatever action it deems appropriate to protect the confidentiality of its information. The Insurer acknowledges the NAIC may comply with the request and any order compelling compliance with such request.

X.  Amendment to the Plan

The Working Group will consider relevant proposals submitted to IID for modifications to the Plan. All proposals will be considered during open conference calls or meetings of the Working Group throughout the year. The proposal must be complete and concise and include any relevant supporting documents. Proposals exposed and adopted by the Working Group would become effective following adoption by the Surplus Lines (C) Task Force and the Property and Casualty Insurance (C) Committee.

[1] 15 U.S.C. § 8204(2).