Guidelines for Texas Surplus Lines Agents – Compliance with the NRRA

This information is provided by the Surplus Lines Stamping Office of Texas to provide general guidance on the changes resulting from the Nonadmitted and Reinsurance Reform Act (“NRRA”). It is not being provided on behalf of the Texas Department of Insurance (“TDI”) or the Texas Comptroller’s Office and should not be considered legal or tax advice. For further guidance on issues arising from the NRRA, surplus lines licensees should contact the appropriate state agencies directly and/or seek professional legal and tax advice.

The provisions of the federal Nonadmitted and Reinsurance Reform Act become effective July 21, 2011. This bulletin provides you with information necessary to bind business and report policies. Future bulletins from Texas insurance regulators and tax officials will provide a broader summary of all aspects of the NRRA.

SLSOT has delayed issuing this bulletin, pending the passage of legislation affecting NRRA implementation in Texas. A bill (SB 1) amending premium tax laws is currently pending in the 82nd Legislature’s special session. After July 21, any sections of the Texas surplus lines laws that conflict with the NRRA are preempted.

The following apply to a policy with an effective date on or after July 21, 2011.

The importance of “home state of the insured.”

Under the NRRA, the insured’s home state assumes sole authority for the regulation of surplus lines transactions. This becomes critical in a placement insuring risks located in multiple states.

1) A surplus lines placement is subject solely to the statutory and regulatory requirements of the insured’s home state. The NRRA specifically preempts any state that is not the home state from attempting to apply its laws or regulations.

2) No state other than the insured’s home state may require a surplus lines agent to be licensed in order to sell, solicit, or negotiate surplus lines coverage. You must be licensed in each home state in which you write a policy.

3) Only the home state can require a premium tax payment.

“Home state” is defined as:

1) For a business, the state in which the insured maintains its principal place of business is the home state.

2) For an individual, the state in which the insured maintains its principal residence is the home state.

3) If 100% of the insured risk is located outside of the state identified in numbers (1) or (2) above, the state to which the greatest percentage of the insured’s taxable premium is allocated becomes the home state for that policy. However, if a tiny portion of the insured risk is located in the state identified in numbers (1) or (2) above, that state is the home state – even if another state has the vast majority of the risk insured.

4) If more than one insured from an affiliated group are named insureds on a single policy, the home state of the member of the group that has the largest percentage of premium attributed to it is the home state for that policy.

Some other important definitions found in the NRRA helpful in determining the home state are:

“Affiliate” means, with respect to an insured, an entity that controls, is controlled by, or is under common control with the insured.

“Affiliated group” means any group of entities that are all affiliated.

“Control” – an entity has “control” over another entity if:

1) the entity directly or indirectly or acting through one or more other persons owns, controls, or has the power to vote 25% or more of any class of voting securities of the other entity, or

2) the entity controls in any manner the election of a majority of the directors or trustees of the other entity.

Is Texas the “home state?”

Because of the NRRA provisions, it is imperative that a surplus lines agent determine the “home state” for each placement. A policy should only be reported to the Stamping Office and tax paid to Texas when Texas is the home state of the insured. On a multi-state procurement, even if 90% of the premium on the policy is allocable to risks located in Texas, but another state with insured risks is the home state, you should not report that policy to the Stamping Office.

The NRRA provides that the states may enter into an interstate premium tax-sharing agreement/compact to distribute the taxes paid to the home state on a multi-state placement. Texas has not elected to participate in such an agreement at this time. Therefore, when Texas is the home state, 100% of the taxable premium under the policy, regardless of location of the risk, should be charged the Texas tax rate of 4.85%. The entirety of that premium would be reported to the Stamping Office and all of the tax paid to Texas. Also, the stamping fee would be applicable on 100% of the taxable premium.

Is the buyer an “exempt commercial purchaser?”

A surplus lines agent is not required to meet the Texas diligent effort law if the buyer qualifies as an exempt commercial purchaser under the NRRA. To be eligible for this exemption, the agent must first disclose to the purchaser that the coverage may or may not be available from the admitted market that may provide greater protection with more regulatory oversight. After receiving this disclosure, the exempt commercial purchaser must request in writing that the agent procure the coverage in the surplus lines market. Under the NRRA, a buyer must also meet the following requirements to qualify as an exempt commercial purchaser:

1) Employ or retain a qualified risk manager. (The NRRA requirements for a qualified risk manager are listed at the end of this bulletin.)

2) Pay aggregate nationwide commercial property and casualty insurance premium in excess of $100,000 in the immediately preceding 12 months.

3) Satisfy at least one of the following:

a. Possess a net worth in excess of $20 million;

b. Generate annual revenues in excess of $50 million;

c. Employ more than 500 full-time employees per individual insured or be a member of an affiliated group employing more than 1,000 employees in the aggregate;

d. Be a not-for-profit organization or public entity generating annual expenses of at least $30 million; or

e. Be a municipality with a population in excess of 50,000 persons.

TDI may adopt regulations to impose reporting and record-keeping requirements on an agent for exempt commercial purchaser procurements. SLSOT will notify you of any necessary procedures resulting from the future adoption of new TDI regulations relating to exempt commercial purchasers.

Does the NRRA affect surplus lines insurer eligibility?

You should still refer to TDI’s Surplus Lines Insurers List to determine if a nonadmitted insurer is eligible in Texas. However, the NRRA restricts the ability of any state to apply its own insurer eligibility standards. For US insurers, a state may only (1) confirm that the insurer is licensed in its state of domicile to write the same kinds of insurance it intends to write in the surplus lines state, and (2) impose a minimum capital and surplus standard (in Texas, $15 million). Also, a state may not prevent an agent from using a non-US (alien) insurer appearing on the NAIC’s International Insurers Department Quarterly Listing of Alien Insurers. Accordingly, virtually all alien insurer eligibility in Texas will be based on that NAIC list.

No other eligibility standards are permissible, unless the states adopt nationwide uniform requirements, forms, and procedures as envisioned by the NRRA. Despite these limitations on TDI’s ability to determine insurer eligibility, for the benefit of agents, the Stamping Office plans to continue publishing on its website a 5-year Financial Summary for each eligible insurer.

To help you understand the changes brought about by the NRRA when filing with the Stamping Office, here is an example of a policy with multi-state exposure.

Policy effective 07/22/10 – 07/22/11 (prior to NRRA)

Premium breakdown
Texas – $10,000.00
Louisiana – $2,500.00
Oklahoma – $1,000.00

Report to SLSOT
TX premium – $10,000.00
Tax (4.85%) – $485.00
S Fee (.06%) – $6.00
Total – $10,491.00

Other States  – $3,500.00

 

Policy effective 07/22/11 – 07/22/12 (after NRRA)
Texas is the Home State

Premium breakdown
Texas – $10,000.00
Louisiana – $2,500.00
Oklahoma – $1,000.00

Report to SLSOT
TX premium – $13,500.00
Tax (4.85%) – $654.75
S Fee (.06%) – $8.10
Total – $14,162.85

Breakdown of States Summary – $3,500.00 (new category)

For multi-state policies for which Texas is the home state and which have an effective date on or after 07/21/11, you should report the total policy premium as Texas premium, but also continue to show the amount of the policy premium that is applied to risks located outside Texas, by using the new category “Breakdown of States Summary.” This will ensure the Texas tax is charged on 100% of the policy premium, but also still allow state officials to monitor the amount of non-Texas premium written on policies when Texas is the home state. For policies effective prior to July 21, continue to report under the “Texas” category only Texas premium and report the premium allocable outside Texas under the “Other States” category. If you are among the dwindling number of agents continuing to file paper copies of policies, a revised form for reporting the allocation of premium on a multi-state policy to the Stamping Office will soon be available on SLSOT’s website, along with instructions.

For a multi-year or continuous-until-cancelled policy, these rules/requirements should be applied on the policy’s first anniversary date effective on or after July 21, 2011.

Premium that is covered by a statutory tax exemption or federal preemption should still be reported using the “Exempt” category. This applies to all policies, regardless of effective date.

In the event that Texas joins an agreement or compact with other states to allocate premium taxes on multi-state policies, agents will be required to report the allocation of premium for each state covered under the policy, by individual state name, when Texas is the home state on a multi-state policy. This change may have very little lead time for implementation. We are in the process of updating our systems to capture this data. Agents should also begin to make plans for programming changes if filing programmatically using our Electronic Filing System (EFS). Filing procedures, data rules, and file formats will be available on the EFS website shortly.

Please refer questions regarding these important market changes to SLSOT, at (512) 531-1880.

NRRA Qualified Risk Manager Requirements

Under the NRRA, a qualified risk manager with respect to a policyholder of commercial insurance means 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 (CPCU) issued by the American Institute for CPCU / Insurance Institute of America (now known as The Institutes);

(BB) a designation as an Associate in Risk Management (ARM) issued by The Institutes;

(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 subitems (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 commercial lines 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 determined by a State insurance commissioner or other State regulatory official or entity to demonstrate minimum competence in risk management.