Implementation of Federal Non-admitted and Reinsurance Reform Act in Connecticut

Connecticut State Seal STATE OF CONNECTICUT INSURANCE DEPARTMENT BULLETIN SL-2 JULY 18,2011 TO: All insurers eligible to write nonadmitted insurance in Connecticut, all licensed surplus lines brokers, and all insureds who independently procure insurance with a nonadmitted insurer RE: Implementation of federal Nonadmitted and Reinsurance Reform Act in Connecticut The purpose of this bulletin is to outline nationwide regulatory changes that will affect the placement of nonadmitted insurance in Connecticut. The Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA") I, establishes federal standards for surplus lines coverage and other nonadmitted insurance. The NRRA becomes effective on July 21,2011. For nonadmitted insurance business placed on or after July 21, 2011, the following information is provided for the benefit of insurers, brokers, and insureds: The NRRA provides that only an insured's "Home State" n1ay requirethe payment of premium tax for nonadmitted insurance.2 Moreover, the NRRA subjects the placement of nonadmitted insurance solely to the statutory and regulatory requirements of the insured's Home State, and provides that only the insured's Home State may require a surplus lines broker to be licensed to sell, solicit or negotiate nonadmitted insurance with respect to such insured3. What is the scope of the NRRA? "Nonadmitted insurance," as defined in 15 U.S.C. § 8206(9), includes both surplus lines and independently procured insurance, but is restricted to property and casualty insurance.4 In addition, the NRRA does not preempt state laws requiring primary or excess workers' compensation insurance to be placed in the admitted market.5 The NRRA states that "the placement of nonadmitted insurance is subject to the statutory and regulatory requirements solely of the insured's home state" but that the NRRA "may not be I Congress enacted the NRRA last year as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (Title V. Subtitle B, §§ 511 et seq.) The provisions regulating the nonadmitted insurance market, NRRA §§ 521-525 & 527, are codified at 15 U.S.c. 8201-8206. 2 NRRA § 521(a) (15 U.S.c. § 8201(a). 3 NRRA §§ 522(a), (b) (15 U.S.c. § 8202(a), (b)). 4 NRRA § 527(9) (15 U.S.C. § 8206(9)). 5 NRRA § 522(d) (15 U.S.c. 8202(d)). www.ct.gov/cid P.O. Box 816 • Hartford, CT 06142-0816 An Equal Opportunity Employer construed to preempt any State law, rule, or regulation that restricts the placement of workers' compensation insurance or excess insurance for self-funded workers' compensation plans with a nonadmitted insurer.,,6 The NRRA does not expand the scope of the kinds of insurance that an insurer may write in the nonadmitted insurance market and each state continues to determine which kinds of insurance an insurer may write in that state. Although the NRRA preempts certain state laws with respect to nonadmitted insurance, it does not have any impact on insurance on Connecticut risks offered by insurers licensed or authorized in this state. When is Connecticut the insured's Home State for purposes of a particular placement? Connecticut is the insured's Home State if the insured maintains its principal place of business here; or in the case of an individual, the individual's principal residence is here. 7 If Connecticut is considered the insured's Home State, only Connecticut's requirements regarding the placement of such business will apply. If 100% of the insured risk is located outside of Connecticut, then the insured's Home State is the state to which the greatest percentage of the insured's taxable premium for that insurance contract is allocated. If more than one insured from an affiliate group are named insureds on a single nonadmitted insurance placement, and the insureds have different Home States, Connecticut will be considered the Home State for that placement if Connecticut is the Home State of the member of the affiliated group that has the largest percentage of premium attributed to it under the insurance contract. How will these rules be applied? New and renewal policies with an effective date prior to July 21,2011 will be subject to the laws and regulations of Connecticut and other jurisdictions, as applicable, as of the policy effective date. The laws and regulations of Connecticut and other jurisdictions, as applicable, as of the effective date of such a policy will also apply to any modification to that policy during the policy period, such as all endorsements (including risk- and premium-bearing endorsements), installment payments and premium audits. New and renewal policies with an effective date on or after July 6 NRRA § 522 (15 U.S.C. § 8202). 7 Pursuant to 2011 Conn. Pub. Acts No. 11-61, §§ 33, 34, Connecticut entered into the National Association of Insurance Commissioners' Nonadmitted Insurance Multistate Agreement ("NIMA"). An insured's principal place of business, pursuant to NIMA, means: (a) the state where the insured maintains its headquarters and where the insured's high level officers direct, control and coordinate business activities; or (b) if the insured's high level officers direct, control and coordinate the business activities in more than one state, the state in which the greatest percentage of the insured's taxable premium for that insurance contract is allocated; or (c) if the insured maintains its headquarters or the insured's high level officers direct, control and coordinate the business activities outside any state, the state to which the greatest percentage of the insured's taxable premium for that insurance contract are located. An insured's 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 income for that insurance contract is allocated 2 21, 2011, and any modifications thereto, will be subject only to the laws and regulations of Connecticut if Connecticut is the Home State of the insured. What are the requirements for premium tax allocation and payment in Connecticut? As of July 21,2011, the NRRA permits only the insured's Home State to require the payment of premium tax for nonadmitted insurance. Until July 21, 2011, the laws and regulations of Connecticut and other jurisdictions, as applicable, will continue to apply to premium tax due on multi-state placements. Until additional bulletin(s) are issued, the Connecticut tax rate should be applied to new and renewal policies with an effective date on or after July 1,2011, when Connecticut is the insured's Home State.8 What are the license requirements for brokers? Only the insured's Home State may require a surplus lines broker to be licensed to sell, solicit or negotiate nonadmitted insurance with respect to a particular placement.9 If Connecticut is the insured's Home State, the surplus lines broker must be licensed in Connecticut. The NRRA provides that Connecticut may not collect licensing fees for surplus lines brokers as of July 21, 2012, unless Connecticut participates in the NAIC's national insurance producer database or any other equivalent uniform national database. 1O Connecticut participates in the National Insurance Producer Registry (NIPR), which provides such a database, thus satisfying the NRRA requirement. When are the requirements for a diligent search and when is a diligent search not required? The Insurance Department will continue to maintain a list of those lines of insurance or their components for which coverages are believed by the Commissioner to be generally unavailable from licensed insurers, commonly known as "the exportable list." The exportable list is found on the Insurance Department website at the following address: http://www.ct.gov/cid/cwp/view.asp?a=1261 &q=254412 Conn. Gen. Stat. §38a-741(b)(l) provides that when any insurance policy is procured under the authority of a surplus lines broker for a line of insurance or its component that does not appear on the exportable list, both the surplus lines broker and the insured are to execute an affidavit setting forth facts showing that the surplus lines broker and insured were unable, after diligent effort, to procure the full amount of insurance necessary to protect the interests of the insured from any authorized insurer or insurers. In the event that a portion of the coverage is obtained from an authorized insurer, such an affidavit is further required to show that the portion of insurance procured from unauthorized insurer(s) is excess over that procured from authorized insurer(s). 8 See Conn. Gen. Stat. §§ 38a-277 and 38a-743, as amended by 2011 Conn. Pub. Acts No. 11-61, §§ 33 and 34. 9 NRRA § 522(b) (15 U.S.C. § 8022(b). 10 NRRA § 523 (15 U.S.c. § 8203). 3 On or after July 21, 2011, the NRRA provides that a surplus lines broker seeking to procure or place nonadmitted insurance on behalf of an "exempt commercial purchaser" is not required to perform a diligent search if: 1) the broker has disclosed to the exempt comnlercial purchaser that insurance mayor may not be available from the admitted market that may provide greater protection with more regulatory oversight; and 2) the exempt commercial purchaser has subsequently requested in writing for the broker to procure or place such insurance from a nonadmitted insurer. 11 Public Act 11-61 adopts the NRRA definition of "Exempt commercial purchaser," which is set forth in the "key definitions" section of this bulletin below. What are the eligibility requirements for nonadmitted insurers? Under current Connecticut law, the Insurance Commissioner maintains a list of eligible surplus lines insurers,I2 and a surplus lines broker may not place Connecticut business with an insurer that is not listed. I3 The NRRA restricts the eligibility requirements a state may impose on nonadmitted insurers. 14 For nonadmitted insurers domiciled in a U.S. jurisdiction, a surplus lines broker is permitted to place nonadmitted insurance with such insurers provided they are authorized to write such business in their state of domicile and maintain minimum capital and surplus of $15 million or the minimum capital and surplus amount required in Conn. Gen. Stat. § 38a-72, whichever is greater. IS For nonadmitted insurers domiciled outside the U.S., a surplus lines broker may place business with such insurers provided the insurer is listed on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the National Association of Insurance Commissioners (NAIC). What are the key definitions from the NRRA? The NRRA includes several definitions relevant to Connecticut's implementation of its requirements. Key definitions include the following: - "Exempt commercial purchaser": The term "exempt commercial purchaser" means any person purchasing commercial insurance that, at the time of placement, meets the following requirenlents: (A) The person employs or retains a qualified risk manager to negotiate insurance coverage. (B) The person has paid aggregate nationwide commercial property and casualty insurance premiums in excess of$1 00,000 in the immediately preceding 12 mont~s. (C) (i) The person meets at least 1 of the following criteria: (I) The person possesses a net worth in excess of $20,000,000, as such amount is adjusted pursuant to clause (ii). 11 See also Conn. Gen. Stat. § 38a-741, as amended by 2011 Conn. Pub. Acts No. 11-61 § 36, effective June 21, 2011. 12 See Conn. Agencies Regs. § 38a-740-8. 13 See Conn. Agencies Regs. §§ 38a-740-2 and 38a-740-4. 14 See NRRA § 524 (15 U.S.c. § 8204), 15 NRRA § 524 (15 U.S.C. § 8204) references the financial criteria of the NAIC Nonadmitted Insurance Model Act, §§ 5A(2) and 5C(2)(a). 4 (II) The person generates annual revenues in excess of $50,000,000, as such amount is adjusted pursuant to clause (ii). (III) The person employs more than 500 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 $30,000,000, as such amount is adjusted pursuant to clause (ii). (V) The person is a municipality with a population in excess of 50,000 persons. (ii) Effective on the fifth January 1 occurring after the date of the enactment of this subtitle and each fifth January 1 occurring thereafter, the amounts in subclauses (I), (II), and (IV) of clause (i) shall be adjusted to reflect the percentage change for such 5-year period in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the Department ofLabor.15 U.S.C. § 8206(5). - "Home State": (A) In General.-Except as provided in sub-paragraph (B), the term' 'home State" means, with respect to an insured­ (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. (B) Affiliated Groups.-If more than 1 insured from an affiliated group are named insureds on a single nonadmitted insurance contract, the term "home State" means the home State, as determined pursuant to subparagraph(A), of the member of the affiliated group that has the largest percentage of premium attributed to it under such insurancecontract.15 U.S.C. § 8206(6). - "Independently procured insurance": The term "independently procured insurance" means insurance procured directly by an insured from a nonadmitted insurer. 15 U.S.C. § 8206(7). - "Nonadmitted insurance": The term "nonadmitted insurance" means any property and casualty insurance permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance. 15 U.S.C. § 8206(9). - "Nonadmitted insurer": The term' 'nonadmitted insurer' ,­ (A) means, with respect to a State, an insurer not licensed to engage in the business of insurance in such State; but (B) does not include a risk retention group, as that term is defined in section 2(a)(4) of the Liability Risk Retention Act of 1986 (15 U.S.C. 3901(a)(4)).15 U.S.C. § 8206(11). - "Premium tax": The term "premium tax" means, with respect to surplus lines or independently procured insurance coverage, any tax, fee, assessment, or other charge imposed by a government 5 entity directly or indirectly based on any payment made as consideration for an insurance contract for such insurance, including premium deposits, assessments, registration fees, and any other compensation given in consideration for a contract of insurance.15 U.S.C. § 8206(12). - "Qualified risk manager": The term' 'qualified risk manager" means, with respect to a policyholder of commercial insurance, a person who meets all of the following requirements: (A) The person is an employee of, or third-party consultant retained by, the commercial policyholder. (B) The person provides skilled services in loss prevention, loss reduction, or risk and insurance coverage analysis, and purchase of insurance. (C) The person­ (i) (I) has a bachelor's degree or higher from an accredited college or university in risk management, business administration, finance, economics, or any other field determined by a State insurance commissioner or other State regulatory official or entity to demonstrate minimum competence in risk management; and (II) (aa) has 3 years of experience in risk financing, claims administration, loss prevention, risk and insurance analysis, or purchasing commercial lines of insurance; or (bb) has­ (AA) a designation as a Chartered Property and Casualty Underwriter (in this subparagraph referred to as "CPCU' ') issued by the American Institute for CPCU/Insurance Institute of America; (BB) a designation as an Associate in Risk Management (ARM) issued by the American Institute for CPCU/Insurance Institute of America; (CC) a designation as Certified Risk Manager (CRM) issued by the National Alliance for Insurance Education & Research; (DD) a designation as a RIMS Fellow (RF) issued by the Global Risk Management Institute; or (EE) any other designation, certification, or license determined by a State insurance commissioner or other State insurance regulatory official or entity to demonstrate minimum competency in risk management; (ii) (I) has at least 7 years of experience in risk financing ,claims administration, loss prevention, risk and insurance coverage analysis, or purchasing commercial lines of insurance; and (II) has any 1 of the designations specified in sub items (AA) through (EE) of clause (i)(II)(bb); (iii) has at least 10 years of experience in risk financing, claims administration, loss prevention, risk and insurance coverage analysis, or purchasing con1merciallines of Insurance; or (iv) has a graduate degree from an accredited college or university in risk management, business administration, finance, economics, or any other field 6 determined by a State insurance commissioner or other State regulatory official or entity to demonstrate minimum competence in risk management. 15 U.S.C. § 8206(13). - "Surplus lines broker": The term "surplus lines broker" means an individual, firm, or corporation which is licensed in a State to sell, solicit, or negotiate insurance on properties, risks, or exposures located or to be performed in a State with nonadmitted insurers. 15 U.S.C. § 8206(15). - "State": The term "State" includes any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Northern Mariana Islands, the Virgin Islands, and American Samoa.15 U.S.C. § 8206(16). Conclusion Please note that Bulletin SL-l remains in full force and effect to the extent it is not inconsistent with the NRRA, Conn. Gen. Stat. § 38a-741 as amended by 2011 Conn. Pub. Acts No. 11-61 and this bulletin. Please contact the Connecticut Insurance Department Licensing Unit at cid.licensing((i)ct.gov with any questions regarding this bulletin. 7