On July 21, 2010, after several weeks of deliberations in the Senate and the House of Representatives, President Obama signed HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Of most importance to surplus line insurers and reinsurers, HR 4173 does not alter the current state-based insurance regulatory scheme. However, it: (1) creates the Federal Insurance Office within the Treasury Department; (2) streamlines regulation of surplus lines insurance and reinsurance; and (3) directs the preparation of studies on three topics: (a) the current state regulatory system; (b) the viability and utility of federal regulatory intervention as an alternative or adjunct to the current state-based system; and (c) the state of the surplus lines marketplace. Other insurance-related provisions or exclusions relate to the Consumer Financial Protection Bureau, Financial Stability Oversight Council, Orderly Liquidation Authority, Rule 151A elimination and Corporate Governance and Executive Compensation requirements for publicly traded insurance companies.
Most of the insurance provisions are located in Title V on pages 209-225 of the Financial Regulatory Reform Conference Report. The provisions relating to surplus lines are found on pages 218-224, and the provisions relating to reinsurance are found on pages 224-225.
Key Components of the Financial Regulatory Reform Law Affecting Surplus Lines Insurance
The key components of HR 4173 relating to surplus lines insurance include:
- Creating the Federal Insurance Office ("FIO") - the first-ever office in the Federal government focused on insurance. The FIO, established within the Treasury Department, will gather information about the insurance industry and provide informational expertise to Congress as it considers public policy issues affecting the industry. The FIO also will monitor the insurance industry for systemic risk purposes. In addition to its informational duties, the FIO will serve as the federal negotiator on international insurance treaties for the U.S.
- Making it easier for large commercial insureds to access a broader spectrum of insurers. In most states, even large sophisticated purchasers of coverage are limited to buying insurance from admitted carriers in their state or demonstrating that such carriers will not provide the coverage before they can access nonadmitted carriers. Under HR 4173, large commercial insureds can go straight to nonadmitted carriers at the same time as, or instead of, going to the admitted market.
- Simplifying the payment of premium taxes for multi-state risks for brokers and for insureds directly acquiring coverage from nonadmitted insurers. Such taxes currently are allocated to the states based on a percentage of the risk located in each state, and no clear mechanism for payment exists in many states. Under HR 4173, taxes would be paid only in one state -- the insured's home state.
- Shifting the responsibility for the allocation of taxes for multi-state risks to the states. Currently, the state that receives the premium tax could retain 100 percent of the taxes regardless of the percentage of the risk located in that state. Under HR 4173, the states may, but are not required to, establish procedures to allocate the premium taxes paid to an insured's home state. This has already become a hotly discussed item at the quarterly meetings of the NAIC, and the NAIC is open to assistance and comments from the industry.
- Streamlining the surplus lines broker licensing process by effectively forcing states to participate in the NAIC electronic national insurance producer database and requiring uniform licensure criteria.
- Prohibiting any state other than an insured's home state from requiring a surplus lines broker to be licensed in order to sell, solicit or negotiate nonadmitted insurance with respect to an insured.
- Within two years from the date of enactment, prohibiting a state from collecting any fees relating to licensing of an individual or entity as a surplus lines broker in the state unless the state has in effect at such time laws or regulations that provide for participation by the state 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.
- Excluding Risk Retention Groups from the definition of nonadmitted insurer, potentially making these groups a more flexible alternative to traditional insurance products.
Key Components of the Financial Regulatory Reform Law Affecting Reinsurance
The key components of HR 4173 relating to reinsurance include:
- Prohibiting states from denying credit for reinsurance if the domiciliary state of a ceding insurer: (1) recognizes credit for reinsurance for the insurer's ceded risk; and (2)(a) is a NAIC-accredited state, or (b) has financial solvency requirements substantially similar to NAIC accreditation requirements.
- Mandating sole responsibility for regulating the reinsurer's financial solvency resides with the reinsurer's state of domicile, if such state: (1) is NAIC-accredited; or (2) has financial solvency requirements substantially similar to the NAIC-accredited state.
- Prohibiting states from requiring a reinsurer to provide financial information other than that required to be filed with its NAIC-compliant domiciliary state.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
