DFS-29-13-00002-P Excess Line Placements Governing Standards

7/17/13 N.Y. St. Reg. DFS-29-13-00002-P

NEW YORK STATE REGISTER

VOLUME XXXV, ISSUE 29

July 17, 2013

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-29-13-00002-P

Excess Line Placements Governing Standards

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of Part 27 (Regulation 41) of Title 11 NYCRR.

Statutory authority:

Insurance Law, sections 301, 316, 2101, 2104, 2105, 2110, 2116, 2117, 2118, 2121, 2122, 2130, 3103, 5907, 5909, 5911 and 9102; and arts. 21 and 59; and Financial Services Law, sections 202 and 302; and L. 1997, ch. 225; L. 2002, ch. 587; L. 2011, ch. 61

Subject:

Excess Line Placements Governing Standards.

Purpose:

To implement chapter 61 of the Laws of 2011, conforming to the federal Nonadmitted and Reinsurance Reform Act of 2010.

Substance of proposed rule (Full text is posted at the following State website:http://dfs.ny.gov):

On July 21, 2010, President Obama signed into law the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which contains the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”). The NRRA prohibits any state, other than the home state of an insured, from requiring a premium tax payment for excess (or “surplus”) line insurance. The NRRA also subjects the placement of excess line insurance solely to the statutory and regulatory requirements of the insured’s home state, and declares that only an insured’s home state may require an excess line broker to be licensed to sell, solicit, or negotiate excess line insurance with respect to such insured.

In addition, the NRRA provides that an excess line broker seeking to procure or place excess line insurance for an exempt commercial purchaser (“ECP”) need not satisfy any state requirement to make a due diligence search to determine whether the full amount or type of insurance sought by the ECP may be obtained from admitted insurers if: (1) the broker procuring or placing the excess line insurance has disclosed to the ECP that the insurance may be available from the admitted market, which may provide greater protection with more regulatory oversight; and (2) the ECP has subsequently requested in writing that the broker procure the insurance from or place the insurance with an excess line insurer.

On March 31, 2011, Governor Andrew M. Cuomo signed into law Chapter 61 of the Laws of 2011, Part I of which amended the Insurance Law to conform to the NRRA.

Insurance Regulation 41 (11 NYCRR Part 27) currently consists of 24 sections and one appendix addressing the regulation of excess line insurance placements.

The Department of Financial Services (“Department”) amended Section 27.0 to discuss the NRRA and Chapter 61 of the Laws of 2011.

The Department amended Section 27.1 to delete language in the definition of “eligible”, delete “qualified United States financial institution” and “letter of credit” as defined terms, and to add three new defined terms: “exempt commercial purchaser,” “insured’s home state,” and “United States.”

The Department amended Section 27.2(a) to change a reference from “Insurance Department” to “Department of Financial Services.”

The Department amended Section 27.3 to provide an exception for an ECP consistent with Insurance Law Section 2118(b)(3)(F), clarify that the requirements set forth in this section apply when the insured’s home state is New York, and change a reference from “Insurance Department” to “Department of Financial Services.”

The Department amended Section 27.4 to clarify that the requirements set forth in this section apply when the insured’s home state is New York.

The Department amended Section 27.5 to: (1) clarify that the requirements set forth in this section apply when the insured’s home state is New York; (2) with regard to an ECP, require an excess line broker or the producing broker to affirm in part A or part C of the affidavit that the ECP was specifically advised in writing, prior to placement, that insurance may or may not be available from the authorized market that may provide greater protection with more regulatory oversight; (3) require an excess line broker to identify the insured’s home state in part A of the affidavit; and (4) clarify that the premium tax is to be allocated in accordance with Section 27.9 of Insurance Regulation 41 for insurance contracts that have an effective date prior to July 21, 2011.

The Department amended Section 27.6 to clarify that the requirements set forth in this section apply when the insured’s home state is New York.

The Department amended Section 27.7(b) to revise the address to which reports required by Section 27.7 should be submitted and to change a reference from “Insurance Department” to “Department of Financial Services.”

The Department amended Section 27.8 to: (1) require a licensed excess line broker to file electronically an annual premium tax statement, unless the Superintendent of Financial Services (the “Superintendent”) grants the broker an exemption pursuant to Section 27.21 of Insurance Regulation 41; (2) acknowledge that payment of the premium tax may be made electronically; and (3) change a reference to “Superintendent of Insurance” to “Superintendent of Financial Services.”

The Department amended Section 27.9 to clarify how an excess line broker must calculate the taxable portion of the premium for: (1) insurance contracts that have an effective date prior to July 21, 2011; and (2) insurance contracts that have an effective date on or after July 21, 2011 and that cover property or risks located both inside and outside the United States.

The Department amended Sections 27.10, 27.11, and 27.12 to clarify that the requirements set forth in these sections apply when the insured’s home state is New York. The Department also amended Section 27.11 to prohibit an unauthorized insurer from providing coverage if the coverage is prohibited by law, when the insured’s home state is New York.

The Department amended Section 27.13 to: (1) clarify that the requirements set forth in this section apply when the insured’s home state is New York; (2) remove certain information from the list of information that an excess line broker must obtain and review prior to placing insurance with an unauthorized insurer; and (3) delete the prohibition against an excess line broker placing business with an excess line insurer unless the insurer has filed with the Superintendent a current listing that sets forth certain individual policy details.

The Department repealed current Section 27.14 and added a new Section 27.14 entitled, “Duty of Unauthorized Insurers,” which would affirmatively require an excess line insurer to file electronically with the Superintendent a current listing that sets forth certain individual policy details.

The Department repealed Sections 27.15 and 27.16.

The Department renumbered Sections 27.17, 27.18, 27.19, 27.20, and 27.21 as Sections 27.15, 27.16, 27.17, 27.18, and 27.19, and amended these sections to clarify that the requirements set forth in this section apply when the insured’s home state is New York.

The Department renumbered Section 27.22 as Section 27.20.

The Department repealed current Section 27.23 and added a new Section 27.21 entitled, “Exemptions from electronic filing and submission requirements.”

The Department renumbered Section 27.24 as Section 27.22.

The Department amended the excess line premium tax allocation schedule set forth in appendix four to apply to insurance contracts that have an effective date prior to July 21, 2011.

The Department added a new appendix five, which sets forth an excess line premium tax allocation schedule to apply to insurance contracts that have an effective date on or after July 21, 2011 and that cover property and risks located both inside and outside the United States.

Text of proposed rule and any required statements and analyses may be obtained from:

Sally Geisel, New York State Department of Financial Services, One State Street, New York, NY 10004, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Joana Lucashuk, New York State Department of Financial Services, One State Street, New York, NY 10004, [phone], email: [e-mail]

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory authority: The Superintendent’s authority for the promulgation of the Fourteenth Amendment to Insurance Regulation 41 (11 NYCRR Part 27) derives from Sections 301, 316, 2101, 2104, 2105, 2110, 2116, 2117, 2118, 2121, 2122, 2130, 9102, and Article 21 of the Insurance Law, Sections 202 and 302 of the Financial Services Law, Chapter 225 of the Laws of 1997, Chapter 587 of the Laws of 2002, and Chapter 61 of the Laws of 2011.

The federal Nonadmitted and Reinsurance Reform Act of 2010 (the “NRRA”) significantly changed the paradigm for excess line insurance placements in the United States. Chapter 61 of the Laws of 2011 amended the Insurance Law and the Tax Law to conform to the NRRA.

Insurance Law Section 301 and Financial Services Law Sections 202 and 302 authorize the Superintendent of Financial Services (the “Superintendent”) to prescribe regulations interpreting the provisions of the Insurance Law, and effectuate any power granted to the Superintendent under the Insurance Law. Insurance Law Section 316 authorizes the Superintendent to promulgate regulations to require an insurer or other person or entity making a filing or submission with the Superintendent to submit the filing or submission to the Superintendent by electronic means, provided that the insurer or other person or entity affected thereby may submit a request to the Superintendent for an exemption from the electronic filing requirement upon a demonstration of undue hardship, impracticability, or good cause, subject to the Superintendent’s approval.

Insurance Law Article 21 sets forth the duties and obligations of insurance brokers and excess line brokers. Insurance Law Section 2101 sets forth relevant definitions. Insurance Law Section 2104 governs the licensing of insurance brokers. Insurance Law Section 2105 sets forth licensing requirements for excess line brokers. Insurance Law Section 2110 provides grounds for the Superintendent to discipline licensees by revoking or suspending licenses or, pursuant to Insurance Law Section 2127, imposing a monetary penalty in lieu of revocation or suspension. Insurance Law Section 2116 permits payment of commissions to brokers and prohibits compensation to unlicensed persons. Insurance Law Section 2117 prohibits the aiding of an unauthorized insurer, with exceptions. Insurance Law Section 2118 sets forth the duties of excess line brokers, with regard to the placement of insurance with eligible foreign and alien excess line insurers, including the responsibility to ascertain and verify the financial condition of an unauthorized insurer before placing business with that insurer. Insurance Law Section 2121 provides that brokers have an agency relationship with insurers for the collection of premiums. Insurance Law Section 2122 imposes limitations on advertising by producers. Insurance Law Section 2130 establishes the Excess Line Association of New York (“ELANY”).

Insurance Law Section 9102 establishes rules regarding the allocation of direct premiums taxable in New York, where insurance covers risks located both in and out of New York.

2. Legislative objectives: Generally, unauthorized insurers may not do an insurance business in New York. In permitting a limited exception for licensed excess line brokers to procure insurance policies in New York from excess line insurers, the Legislature established statutory requirements to protect persons seeking insurance in New York. The NRRA significantly changed the paradigm for excess (or “surplus”) line insurance placements in the United States. The NRRA prohibits any state, other than the insured’s home state, from requiring a premium tax payment for excess line insurance. Further, the NRRA subjects the placement of excess line insurance solely to the statutory and regulatory requirements of the insured’s home state and declares that only an insured’s home state may require an excess line broker to be licensed to sell, solicit, or negotiate excess line insurance with respect to the insured. In addition, the NRRA establishes uniform eligibility standards for excess line insurers. A state may not impose additional eligibility conditions.

Under the new NRRA paradigm, an excess line broker now must ascertain an insured’s home state before placing any property/casualty excess line business. Thus, if the insured’s home state is not New York, even though the insured goes to the broker’s office in New York, the excess line broker must be licensed in the insured’s home state in order for the broker to procure the excess line coverage for that insured. Conversely, a person who is approached by an insured outside of New York must be licensed as an excess line broker in New York in order to procure excess line coverage for an insured whose home state is New York.

On March 31, 2011, Governor Andrew M. Cuomo signed into law Chapter 61 of the Laws of 2011, Part I of which amended the Insurance Law to conform to the NRRA. This rule accords with the public policy objectives Congress and the Legislature sought to advance in enacting the NRRA and Chapter 61 by making conforming changes so that the rule does not conflict with them.

3. Needs and benefits: Insurance Regulation 41 governs the placement of excess line insurance. The purpose of the excess line law is to enable consumers who are unable to obtain insurance from authorized insurers to obtain coverage from eligible excess line insurers. This rule implements the provisions and purposes of Chapter 61 of the Laws of 2011, which amended the Insurance Law to conform to the NRRA. The NRRA and Chapter 61 took effect on July 21, 2011 and have been impacting excess line placements since that date.

Prior to the enactment of the NRRA, Insurance Regulation 41 prohibited an excess line broker from placing coverage with an excess line insurer unless the insurer had established and maintained a trust fund. However, the new NRRA eligibility requirements do not include a trust fund with respect to foreign insurers (alien insurers, however, must maintain a trust fund that satisfies the International Insurers Department (“IID”) of the National Association of Insurance Commissioners (“NAIC”)). As such, New York no longer is requiring a trust fund with respect to foreign insurers.

In addition, Insurance Regulation 41 currently states that when the insured’s home state is New York, an excess line broker may not place coverage with an unauthorized insurer unless the insurer has filed with the Superintendent a current listing that sets forth certain individual policy details. Such a requirement could be construed as an eligibility requirement not permitted under the NRRA. Accordingly, Insurance Regulation 41 is being amended to instead impose an affirmative requirement on an excess line insurer to file certain individual policy details when the insured’s home state is New York, rather than prohibiting an excess line broker from placing coverage if the insurer has not filed these details.

Insurance Regulation 41 also currently requires an excess line broker to obtain and review certain information before placing insurance with an unauthorized insurer. The Department recognizes that certain of the required information is not publicly available and that as a result of the NRRA, an unauthorized insurer may not provide the information voluntarily to an excess line broker. Therefore, the Department is amending Insurance Regulation 41 to remove from the list certain information that an excess line broker must obtain and review.

Insurance Law Section 316 authorizes the Superintendent to promulgate regulations to require an insurer or other person or entity making a filing or submission with the Superintendent to submit the filing or submission to the Superintendent by electronic means, provided that the insurer or other person or entity affected thereby may submit a request to the Superintendent for an exemption from the electronic filing requirement upon a demonstration of undue hardship, impracticability, or good cause, subject to the approval of the Superintendent. The amendment requires excess line brokers to file annual premium tax statements electronically, and requires excess line insurers to file electronically listings that set forth certain individual policy details. In addition, the Department is amending Insurance Regulation 41 to allow excess line brokers or insurers to apply for a “hardship” exception to any electronic filing or submission requirement.

4. Costs: The rule is not expected to impose costs on excess line brokers, and it merely conforms the requirements regarding placement of coverage with excess line insurers to the requirements in Chapter 61 of the Laws of 2011, which amended the Insurance Law to conform to the NRRA. While new Section 27.14 imposes an affirmative requirement on an excess line insurer to file certain individual policy details when the insured’s home state is New York, this section should not impose any additional costs on excess line insurers, because excess line insurers have already been filing this information. Although the amended rule will require excess line brokers to file annual premium tax statements and will require excess line insurers to file listings that set forth certain individual policy details electronically, most brokers and insurers already do business electronically. In fact, ELANY already requires documents to be filed electronically. Moreover, the regulation also provides a method whereby excess line brokers and insurers may apply for an exemption from any electronic filing or submission requirement.

Costs to the Department also should be minimal, as existing personnel are available to review any modified filings necessitated by the rule. In fact, filing forms electronically may produce a cost savings for the Department.

This rule does not impose compliance costs on any state or local governments.

5. Local government mandates: This rule does not impose any program, service, duty, or responsibility upon any county, city, town, village, school district, fire district, or other special district.

6. Paperwork: The rule does not impose any new reporting requirements on regulated parties. While new Section 27.14 imposes an affirmative requirement on an excess line insurer to file certain individual policy details when the insured’s home state is New York, this section does not impose any new reporting requirements on excess line insurers, because excess line insurers already are filing this information.

7. Duplication: The regulation will not duplicate any existing state or federal rule, but rather will implement and conform to the federal requirements.

8. Alternatives: Originally, when the Department promulgated this amendment on an emergency basis, it made an excess line insurer subject to Insurance Law Section 1213 (service of process on Superintendent as attorney for unauthorized insurers) if the insurer chooses not to maintain a trust fund. However, after further discussion with industry representatives, the Department has decided to eliminate the trust fund section altogether in order to achieve uniformity with other states in a manner consistent with the goals of the NRRA.

In addition, the Department considered continuing the requirement that when the insured’s home state is New York, an excess line broker may not place coverage with an unauthorized insurer unless the insurer had filed with the Superintendent a current listing that sets forth certain individual policy details. However, after discussion with industry representatives, the Department decided to instead impose an affirmative requirement on an excess line insurer to file certain individual policy details when the insured’s home state is New York.

The Department also considered continuing the requirement that an excess line broker obtain and review certain information before placing insurance with an unauthorized insurer. However, after discussion with ELANY, the Department decided to remove from the list certain information that an excess line broker must obtain and review because the Department recognized that certain information is not publicly available and that an excess line broker likely could not otherwise obtain it from an unauthorized insurer.

9. Federal standards: This regulation does not exceed any minimum standards of the federal government for the same or similar subject areas. Rather, the rule implements the provisions and purposes of Chapter 61 of the Laws of 2011, which amended the Insurance Law to conform to the NRRA.

10. Compliance schedule: Pursuant to Chapter 61 of the Laws of 2011, this amendment, which has been previously promulgated on an emergency basis, impacts excess line insurance placements effective on and after July 21, 2011 and thus the permanent adoption will take effect upon publication of the rule in the State Register.

Regulatory Flexibility Analysis

This rule is directed at excess line brokers and excess line insurers.

Many excess line brokers are independently owned and have fewer than 100 employees, and therefore are small businesses as defined in State Administrative Procedure Act Section 102(8). However, the rule is not expected to have an adverse impact on these small businesses because it conforms the requirements regarding placement of coverage with excess line insurers to Chapter 61 of the Laws of 2011, which amended the Insurance Law to conform to the federal Nonadmitted and Reinsurance Reform Act of 2010.

In addition, the Insurance Law and Insurance Regulation 41 already require excess line brokers to file annual premium tax statements. The rule merely requires that such filings be made electronically, and thus does not establish any new reporting or compliance requirements on them. However, an excess line broker may submit a request to the Superintendent of Financial Services (“Superintendent”) for an exemption from the electronic filing requirement upon a demonstration of undue hardship, impracticability, or good cause, subject to the Superintendent’s approval.

Further, the Department of Financial Services (“Department”) has monitored annual statements of excess line insurers subject to this rule, and believes that none of them fall within the definition of “small business,” because there are none that are both independently owned and have fewer than 100 employees.

Accordingly, the Department finds that this rule will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping, or other compliance requirements on small businesses.

The rule does not impose any impacts, including any adverse impacts, or reporting, recordkeeping, or other compliance requirements, on any local governments.

Rural Area Flexibility Analysis

The Department of Financial Services (“Department”) finds that this rule does not impose any additional burden on persons located in rural areas, and the Department finds that it will not have an adverse impact on rural areas. This rule applies uniformly to regulated parties that do business in both rural and non-rural areas of New York State.

Job Impact Statement

The Department of Financial Services finds that this rule should not have any impact on jobs and employment opportunities. The rule conforms the requirements regarding placement of coverage with excess line insurers to Chapter 61 of the Laws of 2011, which amended the Insurance Law to conform to the federal Nonadmitted and Reinsurance Reform Act of 2010.