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NONADMITTED AND REINSURANCE REFORM ACT CIWA SUMMER FORUM 2011

NONADMITTED AND REINSURANCE REFORM ACT CIWA SUMMER FORUM 2011. www.InsuRegulatory.com. UNCHARTED WATERS. NRRA – Unprecedented express federal preemption of state insurance regulatory and taxation authority

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NONADMITTED AND REINSURANCE REFORM ACT CIWA SUMMER FORUM 2011

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  1. NONADMITTED AND REINSURANCE REFORM ACT CIWA SUMMER FORUM 2011 www.InsuRegulatory.com

  2. UNCHARTED WATERS • NRRA – Unprecedented express federal preemption of state insurance regulatory and taxation authority • Home State Taxation – Unprecedented regulatory and taxation paradigm for surplus lines • State Implementing Legislation – Imminently pending and recently enacted inconsistent state legislation remains to be interpreted and applied consistent with the NRRA • NIMA and SLIMPACT – Adoption of NIMA by some states and SLIMPACT-Lite by other states will create additional complications for Home State taxation www.InsuRegulatory.com

  3. NRRA Home State: For surplus lines policies incepting or renewing on or after July 21, 2011, only the “Home State” may tax or regulate the placement of a surplus lines policy. Home State is generally defined as the state of the insured’s principal place of business or residence The broker must be licensed by and comply with Home State taxation and regulatory requirements, including diligent search Transition Rule -- For CA and NY, policies incepting prior to 7/21/2011 are governed by pre-NRRA law through expiration, including endorsements and cancellations Surplus Lines Insurer Eligibility: The NRRA establishes uniform national standards for surplus lines insurer eligibility www.InsuRegulatory.com

  4. NRRA (Con’t) Exempt Commercial Purchaser (ECP): For large accounts that meet the NRRA definition of “exempt commercial purchaser,” surplus lines brokers are relieved of state law diligent search requirements. A specific statutory disclosure to the insured is required plus subsequent written request by insured to broker to place the risk with a nonadmitted insurer (email should suffice) Tax Allocation Reports: The Home State may require surplus lines brokers to file an annual tax allocation report showing the percentage of premium attributable to exposures outside the Home State www.InsuRegulatory.com

  5. Compliance • Correctly identify the Home State at the outset • Be licensed by the Home State • Determine whether the insured is an Exempt Commercial Purchaser, therefore exempt from diligent search requirements, and provide insured with required NRRA disclosures • Verify surplus lines insurer eligibility • Comply with Home State surplus lines filing and premium tax requirements • Anticipate future premium tax audits www.InsuRegulatory.com

  6. Implementation • • Designate a single point of contact internally for NRRA questions • • Update accounting and IT systems and procedures to meet requirements of Home State taxation • • Create Home State verification form to document policy file • Create Exempt Commercial Purchaser (ECP) verification form with NRRA disclosures signed by the insured to document policy file • • Train broker teams on Home State definition • • Anticipate future premium tax audits www.InsuRegulatory.com

  7. Home State [NRRA Section 527(6)] (A) IN GENERAL.—Except as provided in subparagraph (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 insurance contract. www.InsuRegulatory.com

  8. Affiliated Groups -- NRRA • Determine the insured member of the affiliated group to which the largest portion of the premium is allocable. • 2. Determine the principal place of business for that insured. • 3. If any portion of the premium is allocable to that insured’s principal place of business state, that state is the Home State for the policy. • 4. If 100% of the policy premium is attributable to exposures outside the insured’s principal place of business state, the state of the exposures to which the largest percentage of premium is attributable is the Home State for the entire policy. www.InsuRegulatory.com

  9. NRRA Affiliated Groups -- Example • Corporation A is headquartered in New Jersey, all operations worldwide are directed from New Jersey, subs X, Y, & Z are insured on same policy • 2. The largest percentage of the premium is attributable to Sub X’s exposures (i.e. outside the headquarters/nerve center state) • 3. Sub X is a Nevada holding company for all of Corporation A’s operations and properties in Nevada. Sub X’s executive officers are located at the New Jersey headquarters and all of its business activities are directed from New Jersey www.InsuRegulatory.com

  10. NRRA Affiliated Groups -- Example • No portion of the premium is attributable to New Jersey • 5. Nevada is the Home State for the entire policy • 6. If any portion of Sub X’s premium was attributable to New Jersey, New Jersey would be the Home State www.InsuRegulatory.com

  11. Principal Place of Business [NIMA] • Nonadmitted Insurance Multistate Agreement (NIMA) defines Principal Place of Business • NRRA does not define Principal Place of Business • California (AB 315) and a few other states adopt the NIMA definition • Under AB 315 and NIMA, Home State would appear to always be the state to which largest portion of premium is allocable www.InsuRegulatory.com

  12. Other AB 315 Issues • Group Insurance – Eliminated • Nonadmitted insurance (no NIMA qualifications) -- § 1760.1(m) • SLB responsible for verifying home state insured -- § 1760.2 • Commercial Insured (ECP) Defined -- § 1760.1(b) • Commercial Insured (ECP) disclosures -- § 1763(h) www.InsuRegulatory.com

  13. Other AB 315 Issues (Con’t) • Surplus Lines Insurer Eligibility -- § 1765.1 • GAP coverage -- § 1765.1(h) • LESLI insurers grandfathered until expiration of policies in force as of July 21, 2011 -- § 1765.1(i). • LASLI (same as LESLI but “voluntary”) -- § 1765.2 www.InsuRegulatory.com

  14. Other AB 315 Issues (Con’t) • Verifications (commercial insured, home state insured, single-state/multistate policy) -- § 1768 • Annual statement, data reporting -- § 1774 • NRRA Transition Rule -- § 1774(3) www.InsuRegulatory.com

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