The Nonadmitted and Reinsurance Reform Act (“NRRA”) came into effect on July 21, 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the NRRA was to create a more simplified and efficient surplus lines tax payment and regulatory system by limiting regulatory authority of surplus lines transactions to the home state of the insured and by establishing federal standards for the collection of surplus lines premium taxes, insurer eligibility, and commercial purchaser exemptions. The surplus lines industry has closely followed attempts to repeal provisions of Dodd-Frank, including provisions in the Financial CHOICE Act, a bill introduced in Congress in 2017. Although the Financial CHOICE Act passed the Republican-led House in June 2017, it did not progress through the Senate and died at the end of the Congressional session in 2018.
To date, all states except Michigan and Washington DC, have enacted legislation to implement the NRRA although both jurisdictions continue to comply with the NRRA’s home state tax approach. These state laws focus on surplus lines premium taxation, which is the most challenging compliance issue for both brokers and state regulators. In addition to the tax issue, most of the states have attempted to conform their laws to the other issues addressed by the NRRA, including the exempt commercial purchaser exemption and surplus lines insurer eligibility standards. However, even if a state has not taken appropriate action, the NRRA standards still apply. Therefore, surplus lines brokers must look to both the NRRA and the laws of the home state of the insured to determine what they need to do to comply with all applicable rules under NRRA.
During the 2016 presidential campaign, President Trump pledged to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act if elected, criticizing the regulatory burdens it imposed and contending that it was impairing U.S. economic growth and discouraging lending by banks. However, neither the President nor his advisors have directed much specific criticism at Dodd-Frank’s impact on the insurance industry, other than rules proposed to help stabilize the health insurance markets.
The House of Representatives did take action in 2017 to repeal and replace parts of Dodd-Frank in H.R. 10 the Financial CHOICE Act. The surplus lines industry is closely monitoring this bill and all other initiatives aimed at repealing Dodd-Frank, since it was under this vehicle that the NRRA was passed. As drafted, the Financial CHOICE Act does not repeal or revise the NRRA and, if it progresses, is unlikely to impact the NRRA.
What follows is a summary of the key provisions of the NRRA and its impact on the current regulation of surplus lines insurance in the United States.
The NRRA grants the insured’s home state with exclusive authority to regulate placement of nonadmitted insurance. The federal act states that no state, other than an insured’s home state, may require a surplus lines broker to be licensed in order to sell, solicit, or negotiate non-admitted insurance with respect to such insured. In addition, the NRRA explicitly provides for the preemption of laws, regulations, provisions, or actions of any state that applies to nonadmitted insurance sold, solicited by, or negotiated with an insured whose home state is another state. This preemption, however, does not extend to workers’ compensation insurance and any law, rule or regulation that prohibits placement of workers’ compensation or excess insurance for self-funded workers’ compensation plans with a nonadmitted insurer.
Under the federal act, only the insured’s home state is permitted to collect premium taxes for nonadmitted insurance. All other states are preempted from applying their surplus lines laws to such transactions. As defined in the NRRA, ‘‘home state’’ means: (i) the state in which an insured maintains its principal place of business or in the case of an individual, the individual’s principal residence; or (ii) if 100 percent of the insured risk is located out of the state referred to in clause (i), the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is allocated.
To facilitate the payment of premium taxes among the states, the NRRA also allows an insured’s home state to require surplus lines brokers as well as insureds who have independently procured insurance to file annual tax allocation reports with the insured’s home state detailing the portion of the nonadmitted insurance policy premium or premiums attributable to properties, risks, or exposures located in each state.
Uniform Standards for Surplus Lines Eligibility
The NRRA empowers the states to create uniform national requirements, forms and procedures for insurer eligibility for U.S. domiciled (foreign) surplus lines insurers. As the states have yet to adopt a nationwide eligibility standard, the default standards established under NRRA are now in effect in all states. Specifically, a U.S. domiciled surplus lines insurer needs to meet two substantive requirements under the NAIC Non-admitted Insurance Model Act, i.e., 1) maintain capital and surplus of at least $15 million (or the minimum capital and surplus requirement under the law of the insured’s home state if higher); and 2) be “authorized to write in its domiciliary jurisdiction.”
With respect to alien (non-U.S.) surplus lines insurers, states may not prohibit a surplus lines broker from placing non-admitted insurance with, or procuring non-admitted insurance from, a non-U.S., non-admitted insurer that is listed on the Quarterly Listing of Alien Insurers maintained by the NAIC’s International Insurer’s Department (“IID List”).
While most states have now amended their surplus lines laws to incorporate the NRRA requirements, a number of state regulators are continuing to request financial and/or premium information as well as a fee in order to include that company on their state’s eligibility list. While these lists are “voluntary”, many surplus lines carriers have opted to participate as they believe their absence from an eligibility list places them at a commercial disadvantage in the market. We expect the states requiring these additional submissions will diminish in time as they begin to rely more on the financial information that is now available for reference and download from the NAIC website.
Exempt Commercial Purchasers (ECP’s)
The NRRA preempts any state laws or regulations requiring a surplus lines broker seeking to procure or place nonadmitted insurance for certain sophisticated commercial purchasers1 to satisfy diligent search requirements if the broker: (1) has disclosed to the purchaser that such insurance may be available from the admitted market which may provide greater protection with more regulatory oversight; and (2) the purchaser has subsequently requested in writing the broker to procure from or place such insurance with a nonadmitted insurer. States which have export lists will likely treat ECP’s as an additional category of the export list. These transactions will still have to be reported in the home state of the insured as only the diligent effort requirement is waived.
States’ Participation in National Producer Database
The NRRA encourages states to participate in the national insurance producer database of the NAIC, or any other equivalent uniform national database, for the licensure of surplus lines brokers and the renewal of such licenses. Any state that did not participate in such system by July 21, 2012 is prohibited from collecting any fees relating to licensing of an individual or entity as a surplus lines broker in the applicable state.
Calculation of Surplus Lines Taxes Under NRRA
Virtually all of the states’ surplus lines codes have been amended to incorporate many of the terms of the NRRA. While the NRRA recognized that the states may enter tax-sharing arrangements for surplus lines premium tax, the states have yet to agree on a consistent tax-sharing arrangement or clearinghouse model. As a practical matter, tax-sharing for surplus lines would only impact a small number of transactions since it applies only to risks having multi-state exposures which comprise approximately 5% of all surplus lines transactions.
The two principal tax compact models are the Non-admitted Insurance Multi-State Agreement (NIMA), and the Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT). On May 2, 2016, the Nonadmitted Insurance Multistate Agreement (NIMA) was dissolved after its two largest members, Florida and Louisiana, withdrew from the tax-sharing system. The dissolution was effective October 1, 2016 and included a 12 month run-off period that ended September 30, 2017 to allow endorsements on policies effective prior to October 1, 2016 to be filed through the Surplus Lines Clearinghouse (SLC). Similarly, SLIMPACT never went into full effect as an insufficient number of states enacted the legislation.
With the dissolution of NIMA and the inability of the states to implement SLIMPACT, surplus lines premium taxes in 51 jurisdictions (49 states, the District of Columbia, and Puerto Rico) are now calculated based on the insured’s home state’s tax rate and retained 100% by the home state, regardless of where the risks are located. Three states (Hawaii, New Hampshire, and Vermont) passed laws during the 2019 legislative sessions to become part of this majority. The only state that continues to require the submission of taxes with multi-state allocations of risk is Florida.
Domestic Surplus Lines Insurance Companies (DSLIs)
While a surplus lines carrier is generally not able to write surplus lines insurance in its state of domicile, many states are changing their laws to allow surplus lines carriers to issue policies in their state of domicile as Domestic Surplus Lines Insurers (DSLI), for which a carrier would be approved or admitted in that state as a DSLI.
In 2019, Iowa, Nebraska, Nevada, Ohio and Vermont all passed DSLI legislation. With these new states, a total of 21 states now allow DSLI companies including: Arizona, Arkansas, Connecticut, Delaware, Georgia, Illinois, Iowa, Louisiana, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Texas, Vermont, Virginia and Wisconsin. While there exists variances in the states’ legislative language, the qualifying criteria for a DSLI generally includes that (1) the insurer possess policyholder surplus of at least $15 million; (2) the insurer is an eligible surplus lines insurer in at least one jurisdiction other than its state of domicile; (3) the insurer’s board of directors has passed a resolution seeking to be a domestic surplus lines insurer in the domicile state; and (4) the insurance commissioner has approved the insurance company and issued a certificate of authority or other written approval of same.
Since 2011, the number of domestic surplus lines insurers has grown from 15 to over 70, with the majority domiciled in Illinois and Delaware.
1 Under the NRRA, an exempt commercial purchaser is any person purchasing commercial insurance that, at the time of placement, meets the following requirements: (A) The person employs or retains a qualified risk manager (as defined in the NRRA) to negotiate insurance coverage; (B) The person has paid aggregate nationwide commercial property and casualty insurance premiums in excess of $100,000 in the immediately preceding twelve months; and (C) The person meets at least one of the five following criteria: (I) the person possesses a net worth in excess of $22,040,000, (II) the person generates annual revenues in excess of $55,100,000, (III) the person employs more than five hundred 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) the person is a not-for-profit organization or public entity generating annual budgeted expenditures of at least $33,060,000 or (V) the person is a municipality with a population in excess of fifty thousand persons. Currently, there are 20 U.S. jurisdictions which exempt non-admitted insurers from surplus lines regulation insurance procured by “industrial insureds” and an additional 12 states where an “industrial insured” exemption is recognized with respect to captive insurers or workers’ compensation insurance only. A complete list of these states and the relevant exemptions can be found in Appendix C.