Nearly a decade ago, states slowly began making progress in addressing the question of why an insurer that wanted to write surplus lines business in all 50 states had to create two companies.
Before the inception of domestic surplus lines insurer (DSLI) laws, an insurer that wanted to write in all states would have a primary company licensed in a state as an admitted insurer that could then be eligible to issue surplus lines policies in the other 49 states. Then, additional capital would be raised and a secondary admitted insurance company would be created and domiciled in a different state so that it could write surplus lines insurance in the state where the primary company was located.
In 1998, Illinois became the first state to enact a statutory provision that allowed an Illinois-domiciled insurer to be issued a certificate of authority that designates the carrier as a DSLI authorized to write insurance in the state in accordance with Illinois surplus lines law. A key distinction is that the DSLI is not authorized to transact insurance in the state, but is authorized to write insurance in the state as an eligible surplus lines insurer with which a licensed surplus lines producer or broker is authorized to place insurance.
10 years later …
It wasn't until 2009 before Oklahoma also enacted DSLI legislation. Although there were several Illinois domestic surplus lines insurers, there still was some hesitancy from the industry. That changed after the enactment of the federal Nonadmitted and Reinsurance Reform Act (NRRA) in 2010. As states modernized their surplus lines laws, trade associations like the Property Casualty Insurers Association of America (PCI) and interested insurers engaged state insurance departments and legislatures to consider the benefits and the sensible rationale for the DSLI charter.
During the 2011 state legislative sessions, DSLI legislation was enacted in Arkansas, Delaware, New Hampshire and New Jersey. North Dakota followed suit in 2013, as did Missouri the following year. The trend continued with the enactment of Louisiana HB 214 in 2015, and the passage of Arizona HB 2149 in 2016, which made Arizona the 10th DSLI state. This year, Texas signed into law HB 2492, which was then followed by the enactment of Wisconsin's SB 77 and Connecticut's HB 7013.
Thirteen states can now offer a domestic insurer a certificate of authority to write surplus lines insurance as a DSLI, and PCI expects that one or two more states may consider DSLI legislation during the 2018 legislative session. Since 2011, the number of domestic surplus lines insurers has grown from 15 to 56, a clear indication that these initiatives have garnered traction within the industry.
Diligence and education required
Getting to this point took diligence and deliberate educational and legislative engagement with stakeholder groups that not only included insurance companies, insurance regulators, legislators and their staff but at times the state licensing and taxation divisions and the state insurance trade associations. Specific effort was exerted to ensure that the new statutory language is clear in the DSLI’s authorized status for accepting and writing business.
As referenced by the NRRA, section 5.A.(2) of the NAIC Nonadmitted Insurance Model Act (the Model Act) states that insurance business may not be placed with an excess or surplus lines insurer unless the insurer is “authorized to write the type of insurance in its domiciliary jurisdiction.” For example, a company cannot write flood or cyber insurance on a surplus lines basis in states unless it is authorized to write that kind of insurance in its state of domicile. In the past, this would refer only to an admitted insurer authorized to write admitted insurance. To foster the surplus lines eligibility in other states, the certificate of authority for a domestic surplus lines insurer must clearly “authorize” the insurer to write the relevant type of insurance in its domiciliary state. Again, the key distinction is that the business is being written as surplus lines insurance in its domiciliary state.
Eight of the 13 DSLI states also address a potential conflict between the domestic surplus lines law and the Model Act as referenced under the NRRA and provide that the corresponding domiciliary state deems the DSLI to be a nonadmitted insurer as defined under federal law. Eleven of the states further address the taxation of surplus lines premium intending to ensure the reported premium is not exposed to double taxation and consistent with the Home State’s Exclusive Authority provision of the NRRA.
Looking forward, insurance companies and states are increasingly adopting the domestic surplus lines insurer as a viable solution to a longstanding inefficiency in the surplus lines laws that can benefit this specialized market and its insurance consumers. It will be important, however, that states continue to be vigilant in providing clear and consistent statutory language that addresses the DSLI's authority to write insurance, its operating status in relation to the NRRA, the applicable taxing statute, and the financial examination and solvency regulation as a domestic insurer.
David Kodama is assistant vice president, research and policy analysis for the Property Casualty Insurers Association of America where he is responsible for legislative and regulatory policy development related to various issues including surplus lines. Kodama has 16 years of experience in the property/casualty industry primarily as a pricing and reserving actuary.