Industry Issues | Surplus Lines Reform

NAIC Surplus Lines Task Force Meeting Summary


The NAIC Surplus Lines Task Force met on March 24, during the NAIC spring national meeting in Milwaukee. The Task Force adopted the minutes from its February 21, conference call during which it discussed and voted to expose draft Guidelines on Nonadmitted Accident & Health Coverages for a 20-day public comment period ending March 14. 

The Task Force also adopted the report of the Surplus Lines Working Group that included the minutes of the working group's February 27 and January 30 conference calls during which it heard comments on a revised draft update to the International Insurers Department (IID) Plan of Operation. This includes a set of guidelines for alien insurers and Lloyd's syndicates seeking to become eligible to write surplus lines business in the United States. The Task Force then reviewed the draft and voted to approve the IID Plan of Operation as revised by the Working Group. The document was subsequently approved by the parent (C) Committee and then adopted by Executive/Plenary.

As additional background, the IID Plan of Operation covers the alien insurer or Lloyd's syndicate application process and includes core requirements and guidelines that must be met, such as minimum equity amounts and the establishment of a U.S. trust fund. In response to comments letters, including from PCI, the approved edits to the IID Plan of Operation now includes modifications such as clarified and updated language throughout, a clear and documented application timeline and process flow, and an increased trust level ceiling.

Task Force Chair, Commissioner Donelon (LA), next raised the draft Guidelines on Nonadmitted Accident & Health Coverages for further discussion. The Task Force received further comment from regulators and industry interested parties. Issues raised included:

  • Limited consumer protections available and the lack of regulatory oversight of health insurance coverages sold on a surplus lines basis;
  • Existing discussion that the export to surplus lines not include federal Affordable Care Act qualified health plans and other major medical coverage, or closely related lines such as employee benefits stop-loss and short-term health plans;
  • Careful financial review necessary when considering expanding nonadmitted A&H coverages, and the different financial requirements for A&H carriers;
  • Importance of consumer disclosures;
  • Need for legal review of "complicated" state-specific laws applicable to health insurance coverage and employee benefits stop-loss;
  • Potential difficulty with regard to required declinations from the admitted market;
  • Recognition that coverage for residents traveling outside of the U.S. are subject to the laws of the jurisdiction where the coverage will be effective;
  • Exemption from rate and form filing is fundamental to surplus lines business and should not be required for the types of unique A&H insurance being addressed;
  • Support/Concern for use of broad definitions (e.g. Nevada) that provide broad discretion to the state insurance department to allow all risks not available or that cannot be covered in the admitted market to be written as surplus lines business; and,
  • Recognition that situations exist where short-term medical coverages is not adequately covered by the admitted market. 

Commissioner Donelon directed the Drafting Group to consider each of the comments in assembling a second draft that will be presented to the Task Force during an interim conference call or during the Summer National Meeting.

A summary was also provided of Louisiana's pending legislation, HB 247, which would adapt its statutes to accommodate the writing of certain A&H coverages. Additionally, the bill would remove the names of different coverage types from the definition of "surplus lines broker" so as to not restrict writings simply to P/C lines. Louisiana commented that for a surplus lines broker writing A&H coverages, the broker should be required to have an A&H license, though this is not reflected in the pending bill.

The Task Force further received reports on federal activities related to the Flood Insurance Market Parity and Modernization Act (H.R. 1422/S. 563). NAIC staff summarized that the U.S. Congress continues to struggle to finalize a long-term reauthorization and reform of the National Flood Insurance Program (NFIP) and instead has passed multiple short-term extensions, with the latest going through July 31. Key areas of debate include, what the role of the private flood insurance market should be; various concerns regarding private carriers taking the most profitable policies away from the NFIP; as well as, consumer and financial protections within the surplus lines market. The NAIC and the PCI continue to underscore the important oversight authorities state insurance regulators have over this market.

The Task Force was reminded that the U.S. House of Representatives included the Flood Insurance Market Parity and Modernization Act (H.R. 1422) in its five-year NFIP reauthorization bill that passed in November 2017. One of the provisions in H.R. 1422 clarifies that the surplus lines market is an eligible market from which to accept a private flood insurance policy. The U.S. Senate, on the other hand, continues to grapple with whether reauthorization should encourage any expansion of the private flood market. It is such a contentious issue that U.S. Senate Banking, Housing, and Urban Affairs Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) did not include the private flood bill in their NFIP reform legislation. To date, the U.S. Senate has not passed a reauthorization bill. There is hope that the July 31 deadline will jump start congressional action and provide the opportunity to push for inclusion of legislation to facilitate the growth of the private market.

NAIC staff also gave an update on the emergence of domestic surplus lines insurers (DSLI), indicating that as of 2017, DSLIs are allowed by legislation in 13 states. It was further reported that beginning with the first quarter 2017 financial filing, the status code "D" for DSLI was implemented within Schedule T - Exhibit of Premiums Written. At year-end 2017, 66 authorized DSLI companies were identified by database queries, searches of the state insurance department websites and inquiries of the state insurance departments. It was indicated that the percentage of correctly reported DSLIs to total DSLIs was only 55%. NAIC staff reported that the 66 DSLI companies represented 31.9% of the total number of reporting P/C insurers that wrote any surplus lines premium in 2017, or a total of $15.7 billion in surplus lines premium.

In regards to the incorrect DSLI "D" reporting, NAIC quality assurance staff has contacted all 30 companies to ensure that corrected filings are submitted in future.

David Kodama (PCI) reported that Virginia and Georgia had just passed DSLI legislation in March, 2018, bringing the number of DSLI states to 15.

Lastly, the Task Force received a summary report of 2016 alien nonadmitted insurer premium writings related to cybersecurity. NAIC staff stated that the IID first collected alien excess and surplus cyber data in 2017 for the year ended Dec. 31, 2016. Out of 150 IID quarterly listed alien insurers surveyed, 60 reported writing cybersecurity policies during 2016 on either a stand-alone or package policy basis. It was indicated that direct cybersecurity premium generated by alien nonadmitted insurers totaled $709 million, which represented approximately 36% of nearly $2 billion in total cyber insurance premium written within the U.S. in 2016. Further, of the total alien nonadmitted-derived premium, 78% (or $552 million) was written on a stand-alone basis, while 22% (or $156 million) was written as part of a policy package. Alien insurers were reported to write just over 110,000 cyber policies in-force, with stand-alone policies accounting for nearly 70% of total. Alien insurers writing stand-alone cybersecurity business in the U.S. additionally reported almost 5,000 claims for the year, while insurers writing package policy cybersecurity business reported 705 claims. NAIC staff concluded that aggregate direct loss ratio on stand-alone coverage was reported to be 12.8%, and 5.3% for package policy coverage.

Additional Background

IID Surplus Lines Industry Summary

A&H Survey Summary

2018 NAIC IID International Insurers Department Plan of Operation