Insurance Law

Impact of the New Federal Financial Regulatory Reform Law on Risk Managers and Insurance Brokers

By SNR Denton


On July 21, 2010, after several weeks of deliberations in the Senate and the House of Representatives, President Obama signed HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.


Of greatest importance to risk managers and their brokers, HR 4173: (1) creates the Federal Insurance Office within the Treasury Department; and (2) implements the Nonadmitted and Reinsurance Reform Act of 2010, which, in relevant part, streamlines the regulation of surplus lines insurance.


Most of the insurance provisions are located in Title V on pages 209-225 of the Financial Regulatory Reform Conference Report.  The provisions relating to surplus lines are found on pages 218-224.


Key Components of the Financial Regulatory Reform Law Affecting Surplus Lines Insurance


The key components of HR 4173 relating to surplus lines insurance include:


     Creating the Federal Insurance Office (“FIO”) - the first-ever office in the Federal government focused on insurance.  The FIO, established within the Treasury Department, will gather information about the insurance industry and provide informational expertise to Congress as it considers public policy issues affecting the industry.  The FIO also will monitor the insurance industry for systemic risk purposes.  In addition to its informational duties, the FIO will serve as the federal negotiator on international insurance treaties for the U.S.

     Making it easier for “exempt commercial purchasers” to access a broader spectrum of insurers.  In most states, even large sophisticated purchasers of coverage are limited to buying insurance from admitted carriers in their state, or demonstrating that such carriers will not provide the coverage before they can access nonadmitted carriers.  Under HR 4173, exempt commercial purchasers can go straight to nonadmitted carriers at the same time as, or instead of, going to the admitted market.  In summary, in order to qualify as an “exempt commercial purchaser,” the insured must meet at least the following requirements: (1)  employs or retains a qualified risk manager to negotiate insurance coverage; (2) pays annual aggregate premiums in excess of $100,000; and (3) meets at least one of the following criteria: (a) has a net worth in excess of $20M; (b) generates annual revenues in excess of $50M; (c) employs more than 500 full-time or full-time equivalent employees; (d) is a not-for-profit generating annual budgeted expenditures of at least $30M; or (e) is a municipality with a population in excess of 50,000 persons.

     Simplifying the payment of premium taxes for multi-state risks for brokers and for insureds directly acquiring coverage from nonadmitted insurers.  Such taxes currently are allocated to the states based on a percentage of the risk located in each state, and no clear mechanism for payment exists in many states.  Under HR 4173, taxes would be paid only in one state -- the insured's home state.

     Shifting the responsibility for the allocation of taxes for multi-state risks to the states.  Currently, the state that receives the premium tax could retain 100% of the taxes, regardless of the percentage of the risk located in that state.  Under HR 4173, the states may, but are not required to, establish procedures to allocate the premium taxes paid to an insured's home state.  This has already become a hotly discussed item at the quarterly meetings of the NAIC, and the NAIC is open to assistance and comments from the industry.

     Streamlining the surplus lines broker licensing process by effectively forcing states to participate in the NAIC electronic national insurance producer database and requiring uniform licensure criteria.

     Excluding Risk Retention Groups from the definition of non-admitted insurer, potentially making these groups a more flexible alternative to traditional insurance products.



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