Florida’s Approves NRRA Bill to Share Taxes With Other States; Requires Multi-State Policies to Use Each State's Tax Rate

The Florida Governor signed legislation late last week authorizing the Department of Financial Services and the Office of Insurance Regulation to enter into an agreement with other states to share taxes. The legislation also requires that taxes be calculated on a gross premium basis but at the individual states’ tax rates for which each portion of the risk is located.

Florida is the 23rd state to pass NonAdmitted and Reinsurance Reform Act related implementation legislation. During the session NAPSLO provided draft legislation, offered comments on legislation and testified during a hearing.

The NRRA mandates that beginning July 21, 2011 the insured's home state will be the only state with jurisdiction over surplus lines transactions and the only state that can require a tax be paid by the broker. As a result states are working to bring their laws into compliance.

Florida’s bill generally authorize the DFS and the OIR to enter into an agreement with other states to share taxes. The bill outlines the terms of such agreement and requires the Florida Surplus Lines Service Office to implement the agreement. The bill does not expressly limit the tax sharing agreement the DFS/OIR may enter into.

The bill requires that for multi-state policies filed in Florida effective July 21, 2011, taxes will now be calculated on a gross premium basis but at the individual states’ tax rates for which each portion of the risk is located.  The service fee and assessments will be calculated on a gross premium basis as well, but at Florida’s current rate schedule. 

The bill does not incorporate the NRRA's mandates for exclusive home state regulation, an exempt commercial purchaser (ECP) exemption or nationwide uniform insurer eligibility standards, although these are standard NRRA provisions. A Broker Protocol with additional information is available on the NAPSLO website.

The Florida Surplus Lines Service Office website provides additional information regarding the state's action on the NRRA, including links to a recent webinar and Frequently Asked Questions. 

Marriott sells out of sleeping rooms

The San Francisco Marriott is sold out of general sleeping rooms, however there are a limited number of suites available at the Marriott. Sleeping rooms are available at the Argent and Parc 55 hotels.

Meeting space is still available at the Marriott and Argent Hotels for day meetings and evening receptions.

More than 1,000 people have registered for the meeting in less than three weeks. Last year, approximately 2,700 attended the annual convention in Orlando.

HHS Issues Final Rule Regarding Federal Review of “Unreasonable” Health Insurance Premium Rate Increases Under PPACA

On May 19, 2011, the HHS issued the final rule establishing the process and standards by which the HHS will review increases in health insurance premium rates to determine whether such increases are “unreasonable” as required by PPACA.

As discussed in a previous article on the history of insurance regulation in the United States, the Patient Protection and Affordable Care Act ("PPACA") is one of several recent federal legislative efforts that encroaches into the traditionally state-run insurance regulatory scheme.

A number of the insurance regulatory provisions of PPACA are already in effect, such as the mandated minimum loss ratios: effective January 1, 2011, health insurers must spend at least 85% of large group and 80% of small group and individual plan premiums on healthcare and improving healthcare quality, or else rebate the overage to policyholders.[1]

The federal review of health insurance premium increases is another insurance regulatory provision of PPACA that will likely have significant repercussions in the health insurance industry, and may have a lasting impact on the future of insurance regulation as a whole.

The federal review of health insurance premium increases is an insurance regulatory provision of PPACA that will likely have significant repercussions in the health insurance industry.

PPACA authorizes and directs the United States Department of Health and Human Services (“HHS”) to establish a process for the annual review of “unreasonable” increases in premium rates for health insurance coverage. Additionally, health insurers must submit to the HHS a written justification for an “unreasonable” premium rate increase prior to the implementation of that increase, and must prominently post that information on their Internet websites.[2]

The HHS issued proposed regulations relative to health insurance premium rate increase disclosure and review on December 21, 2010. The Proposed Regulations were open for public comment until February 22, 2011. The final rule (the “Rule”), with a sixty (60) day comment period, was issued by the HHS on May 19, 2011, and published in the Federal Register on May 23, 2011.[3] The Rule becomes effective on July 18, 2011.

The Rule subjects any rate increase to review by the Centers for Medicare & Medicaid Service (“CMS”) if the average increase for all enrollees weighted by premium volume is ten percent (10%) or more, or if certain other standards apply.[4] However, the Rule is only applicable to individual and small group health insurance coverage, and it is not applicable to health plans that are grandfathered under PPACA or to certain excepted benefits such as dental or vision coverage.[5]

A health insurance rate increase is “unreasonable” if it is “an excessive rate increase, an unjustified rate increase, or an unfairly discriminatory rate increase.”

Under the Rule, a health insurance rate increase will be deemed “unreasonable” by CMS if the rate increase is “an excessive rate increase, an unjustified rate increase, or an unfairly discriminatory rate increase.”[6] An “excessive rate increase” is described as a rate increase that “causes the premium charged for the health insurance coverage to be unreasonably high in relation to the benefits provided under the coverage.” To make this determination, the Rule requires CMS to consider:

1. Whether the rate increase results in a projected medical loss ratio below the Federal medical loss ratio standard in the applicable market to which the rate increase applies, after accounting for any adjustments allowable under Federal law;
2. Whether one or more of the assumptions on which the rate increase is based is not supported by substantial evidence; and
3. Whether the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.”[7]

A rate increase will be deemed an “unjustified rate increase” if the insurer provides data or documentation to CMS regarding the rate increase that does not provide a basis upon which the reasonableness of the increase may be determined, or if the information provided is incomplete or inadequate to establish such reasonableness.[8]

Finally, the CMS will find a rate increase “unfairly discriminatory” if the increase “results in premium differences between insureds within similar risk categories that:

1. Are not permissible under applicable State law; or
2. In the absence of an applicable State law, do not reasonably correspond to differences in expected costs.”[9]

CMS will adopt a state regulator's review of a rate increase only if it determines that the regulator has an "Effective Rate Review Program" under the Rule.

Significantly, state insurance regulators are to submit their findings to CMS on any health insurance rate review they undertake. The Rule indicates that CMS will adopt the determination of a state regulator as to whether a rate increase is unreasonable if the state has “an Effective Rate Review Program” and if the state regulator provides a written explanation of its analysis of the relevant factors for “unreasonableness” under the Rule.[10]

Finally, the Rule also sets out lengthy considerations that CMS is to evaluate in determining whether a state rate review program qualifies as “Effective” under the Rule.[11]

1. PPACA, Pub L. No. 111-148 § 10101(f).
2. PPACA, Pub L. No. 11-148 § 1003.
3. 45 CFR Part 154; Rate Increase Disclosure and Review; Department of Health and Human Services; http://www.gpo.gov/fdsys/pkg/FR-2015-05-23/pdf/2015-12631.pdf.
4. 45 CFR § 154.200.
5. 45 CFR § 154.103.
6. 45 CFR § 154.205(a).
7. 45 CFR § 154.205(b).
8. 45 CFR § 154.205(c).
9. 45 CFR § 154.205(d).
10. 45 CFR § 154.210(b).
11. 45 CFR § 154.301(a). YVAFZ3Z94HDR

The Insurance Regulation Answer Book 2011

The law firm of Dewey & LeBoeuf LLP has issued a press release announcing its publication of the Insurance Regulation Answer Book 2011, calling it "a high-level overview of the legal and regulatory framework governing the insurance industry in the United States."

From the press release:

The Insurance Regulation Answer Book 2011 provides current and seamlessly integrated coverage of the Patient Protection and Affordable Care Act, the Dodd-Frank Act, Solvency II and other key recent legislative developments. It also provides the context and analysis to help navigate an increasingly complex regulatory landscape including:

• The definitions of – and distinctions between – different kinds of insurance and insurers
• An overview of state-based regulation including the role of the National Association of Insurance Commissioners (NAIC)
• The regulatory requirements for insurance company formation, licensing, investments, holding company systems, market conduct and financial condition
• The role of reinsurance in spreading financial risk and related rules regarding financial statement credit
• The impact of other regulators and recent federal and international reforms on state-based regulation

The Insurance Regulation Answer Book 2011 is available from the Practising Law Institute (PLI).

Insurance Regulatory Law intends to explore some of these same topics and subject matters in depth over the coming months.

Louisiana bill aims to increase conformity to the NRRA

Louisiana House Bill 543, a bill to increase conformity between Louisiana state law and the provisions of the NRRA, is on Governor Bobby Jindal’s desk awaiting his signature.  If the governor does not veto the bill in ten days it will become law, though it is anticipated he will sign it into law with the next round of bills.  HB 543 eliminates the diligent search affidavit for personal lines insurance and eliminates the requirement to be on an approved list maintained by the Department of Insurance.  The Department will continue to maintain a voluntary “approved list” of carriers who submit to the Department’s requirements.  NAPSLO members can access the full text of the bill using the StateNet portal on the NAPSLO website.

Washington Eases Requirements for Surplus Lines Broker Licensing

In a recent ruling, Revised WAC 284-15-010, the Washington State Office of the Insurance Commissioner streamlined licensing requirements for surplus lines brokers in that state.    Surplus lines brokers will no longer be required to hold a concurrent Washington insurance producer license in order to receive a surplus lines broker license.  The Commissioner will now be able to license both resident and non-resident surplus lines brokers without the concurrent licensing requirement.  This will make Washington reciprocal with other states.

Cavalcade of Risk No 158 - Nina Kallen Hosts

Nina Kallen hosts the 158th edition of the Cavalcade of Risk at her blog, Insurance Coverage Law in Massachusetts.

The Cavalcade of Risk is a biweekly rotating collection of articles and links (also known as a "blog carnival") from insurance and other risk-related sources that provides some great information and insight about risk and risk management.

Check out the latest edition of the Cavalcade of Risk here.

Congress introduces key legislative reform for definition of private flood insurance

NAPSLO is pleased to support the Flood Insurance Market Parity and Modernization Act of 2014 (HR 4558), sponsored by Rep. Dennis Ross (R-FL) and Rep. Patrick Murphy (D-FL) and S. 2381,sponsored by Sen. Dean Heller (R-NV) and Sen. Jon Tester (D-MT). If passed, this critical legislation revises the federal definition of private flood insurance to ensure surplus lines insurers are eligible to provide private market solutions to consumers in need of solutions to unique and complex flood risks.

Although nonadmitted insurance companies are currently allowed to provide private flood insurance, revising the definition of private flood insurance to clarify their eligibility to provide insurance in the insured’s home state, in accordance with the Nonadmitted and Reinsurance Reform Act of 2010, ensures policyholders access to high-quality nonadmitted market alternatives.

Earlier this year, Sen. Heller introduced a similar amendment during the flood debate of S. 1296, the Homeowner Flood Insurance Affordability Act. NAPSLO provided extensive input and education on that Amendment. Although it was narrowly defeated 50-49 in the Senate, and was not ultimately included in the final version of the House bill that passed as the same Act, an up swell of support for the Amendment developed in both Chambers, especially by the new stand-alone bills’ sponsors.

NAPSLO met with Representative Ross and Senator Heller, as well as Senator Tester’s office, in Washington, D.C. during our May Legislative Fly-In to urge support for this much needed legislation. We applaud all four Members of Congress on their introduction of this common-sense legislation and look forward to providing support as the bill moves through the legislative process.

Convention Registration Now Open

Registration for the NAPSLO Annual Convention, set for Sept. 30 - Oct. 3 in San Diego, opened on Wednesday, May 29th, and members can register online using their NAPSLO Member ID.

Convention registration fees are $825 for delegates and $395 for spouses until September 1.  After September 1 fees will increase to $925 and $425. Representatives of member firms may register on-line for the convention or download registration forms from the convention site.

The convention will take place at the Manchester Grand Hyatt San Diego and the San Diego Marriott Marquis & Marina, with the Opening Reception at the Marriott and all other NAPSLO programs at the Hyatt. Hotel rooms will be available at both hotels, and also at the Embassy Suites San Diego Bay.

The convention opens on Monday, Sept. 30. However, to assist delegates with Monday morning meetings, NAPSLO will offer early packet pickup from 6:00 – 8:00 p.m. on Sunday, Sept. 29.
The featured program of the convention will be an address by noted actor, political commentator and economist Ben Stein, on Wednesday, October 2.  Mr. Stein was selected to give the E.G. Lassiter Lecture Series, presented by the Derek Hughes/NAPSLO Educational Foundation.

Other programs include a Happy Hour in the Brokers’ Lounge from 3:00-4:00 p.m. on Monday, followed by the Opening Reception from 5:30-7:30 p.m.

NAPSLO’s Next Generation will host a panel discussion on Tuesday from 3:00-4:00 p.m., followed by a cocktail reception from 4:00-5:30 p.m. The Next Generation is also hosting leadership workshops on Monday.

The traditional awards and recognition programs, and the Association's Annual Business Meeting, will take place on Wednesday morning.

NAPSLO Convention registration tentatively to start June 9

Online registration for the 2008 NAPSLO Annual Convention is tentatively set to begin June 9. Members will receive information via e-mail and postal mail regarding how to access the registration system.

Members will be able to register for the convention through NAPSLO's online registration system and also reserve a hotel room.

The convention is set for September 10-13 in San Diego at the Manchester Grand Hyatt and hotel rooms will also be available at the San Diego Marriott Hotel & Marina. Convention programs begin on Wednesday, September 10 with the Opening Reception and the Brokers' Lounge opens at Noon on Wednesday.

There are a limited number of rooms available on Tuesday night for people wishing to arrive prior to the start of the convention.

NAPSLO Survey Finds Specialty Lines Capacity Unchanged and Submissions Up in 2009

Despite an economic slowdown, the majority of wholesale brokers and E&S carriers are not seeing a decline in capacity or a tightening of terms along specialty lines, but are seeing an increase in submission activity, according to the results of a recent survey of members of NAPSLO.

The survey, which was conducted in mid-May 2009, compared results of the first quarter in 2009 to the same period of 2008.

“NAPSLO members confirmed that pricing, capacity and terms in specialty lines remain relatively flat, but recognized that a major catastrophic event or changes in the economy could have a significant impact on capacity,” said John Wood, NAPSLO president. “During these uncertain times, wholesale brokers and surplus lines carriers remain strong with ample capacity to meet specialty lines needs in any market cycle.”

Nearly half of the respondents to the survey said that they were not seeing a change in the availability of specialty insurance coverage; 38% said they were seeing an increase in coverage availability and only 12% said they were seeing a decline in availability.

Regarding terms, 44% said the limitations on coverage were about the same as in the first quarter of 2008, while 31% said terms were loosening, and 22% said terms were either tightening or tightening slightly.

More than half of the respondents reported submission activity increasing, with 32% reporting a slight increase and 22% reporting consistent increases. Only 23% reported declining submissions and 22% reported submissions were about the same as in the first quarter of 2008. Specialty lines where respondents reported seeing the greatest increase in submission activity in 2009 were Property, General Liability, Casualty, and Cat Exposed Property.

When asked what factors would have the potential to have the greatest impact on availability and pricing on specialty lines in the remainder of 2009, respondents most frequently cited the economy, catastrophic losses and declining capacity among carriers and reinsurers.

Respondents were also asked about pricing and retention level changes along 10 specialty lines of business: Property, Cat Exposed Property, Casualty, Professional Liability, D&O-Private, D&O-Public, Healthcare and Medical Malpractice, Excess & Umbrella, Environmental, and Transportation. Of the 10 areas, Cat Exposed property was the main area where respondents consistently saw increases in pricing while respondents saw decreases in Property, Casualty, Professional Liability, Excess and Umbrella, and Transportation.

While availability, terms, pricing, and submission activity were comparable to 2008, respondents reported decreased retention levels in many of the 10 specialty lines surveyed, led by Casualty, Property, Excess & Umbrella and Transportation. While significant decreases were reported along these lines, the majority of respondents reported retention levels were about the same along all lines.

Results are available on the website.

Webinar on State of Industry Set for June 11

Industry leaders will review the state of the market for specialty insurance in light of a new survey conducted by NAPSLO. The special online live presentation is set for Thursday, June 11, at 11 a.m. EDT. The event is free, visit www.ambest.com/excess09 to register.

Participants in the one-hour discussion include:
--Paul Springman, President and Chief Operating Officer, Markel Corp.
--Marla Donovan, Vice President, Burns & Wilcox
--Kevin Westrope, President and CEO, Westrope
--Richard Kerr, Chairman and CEO, MarketScout Corporation
--A member of the A.M. Best Co.'s specialty lines rating group

The panel will examine today's market, including pricing and availability, for specialty insurance, known in various forms as surplus lines, excess & surplus or non-admitted coverage. They will also survey changes in the financial strength of the specialty insurance sector of the property/casualty industry. Specialty insurance includes coverages typically not available through standard commercial or personal insurance products. Best's Review, A.M. Best Co.'s monthly news magazine, will cover this topic in the September issue and will include content from the Webcast.

Topics to be covered in the panel discussion include:
--The state of insurance capacity and the availability of various lines of coverage
--How terms and limitations may be changing for various lines of specialty coverage
--How pricing, availability and retention experience have been affected for these lines of insurance coverage: property, catastrophe-exposed property, casualty, professional liability, directors and officers (both public and private), healthcare and medical liability, excess and umbrella, and environmental and transportation
--Financial strength of insurers serving the specialty lines industry

Registration for this event is free. Participants are encouraged to send in comments and questions for the discussion portion of the presentation. The Webcast will be available worldwide via a link provided upon registration.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers.

My Tree, Their Vehicle... Whose Insurance (Repost from 10/23/09)

About a year ago I received a call from my neighbor. He sounded as if something was wrong; “Where are you” he asked? I informed him that I was away from home at the moment but was there something I could help him with. “Yeah, you can come get your huge tree limb off my SUV!” I immediately turned around and headed home. Once I got there I saw what is pictured here in this blog post. Because of heavy winds my huge front yard tree had dropped a limb and totally smashed the top of my neighbor’s vehicle. He and I spent the whole next day cutting away at the tree limb so that we could eventually tow his car to a body shop.

Now my neighbor lives next door to an insurance man so he was already well versed in whose insurance takes care of the damages to his SUV but for those of you that are not as privileged to live next to an insurance man I thought I would explain. Even though it was my tree that caused the damage my homeowner policy would not be involved in paying for the damages. In order for me to be responsible I would have to be negligent in some way but since it was an “act of God” (wind) negligence could not be pointed at me. Therefore, the coverage for the damage to his vehicle would fall under his personal auto policy. More specifically it would be his comprehensive or “other than collision” coverage. Since this coverage usually has a deductible (the amount the policy holder has to pay out of pocket before the insurance company takes care of the rest) I offered to help pay the amount he would have to pay out of pocket. I was not required to do this but since I like my neighbor and it was my tree, I felt it was the right thing to do.

There is, however, one situation that could have made the tree limb fall my fault. If for some reason my neighbor felt that my tree was unhealthy and dangerous he could compose a letter and “send receipt” a letter to me (meaning upon delivery I would have to sign a document stating I had received the letter). In the letter he would have to state that he felt my tree was in danger of falling and causing damage to his property. If that had been the case and my neighbor had sent me the letter he could have had grounds that I was negligent. This in turn would cause my homeowner policy to pay out for his damages and not his personal auto policy.

By the way, my tree is very healthy so there is no need for my neighbor to write a letter.

Kentucky OKs Bill Regarding Tax Notice Placement & Payment

Kentucky has enacted a law (HB278) to clarify a 2008 law regarding placement of information regarding identification of the amount of local government tax charged and taxing jurisdiction and it requires surplus lines brokers to pay the local government premium tax.

Under the bill, effective July 15, 2010 if the local government premium tax is included in the premium charge to the policyholder, the amount of the local government tax charged for the period and the name of the taxing jurisdiction to which the local premium tax is due must be provided.

For new policies, the information must be on either the: policy, declaration sheet, or initial billing instruments. For renewals, the information must be on either the renewal certificate or the billing instrument for each period for which premium or additional premium is charged to a policyholder by the insurance company.

Mark Schug: Insurance Regulations Will Be Costly

Mark Schug opines that PPACA will inevitably increase the cost of health care insurance for the average consumer.

Mark Schug, professor emeritus at the University of Wisconsin-Milwaukee, has penned an opinion piece on the Patient Protection and Affordable Care Act, also known as PPACA or Obamacare. Schug suggests that PPACA will ultimately increase the costs of health care and health insurance, as well as increase the cost to consumers in the form of increased taxes.

Schug asks some interesting questions, such as "Why does the government want single males to purchase insurance that covers pregnancy, or childless couples to purchase pediatric coverage?"

"Why does the government want single males to purchase insurance that covers pregnancy, or childless couples to purchase pediatric coverage?"

PPACA mandates that certain "essential health benefits" must be provided by a health insurance policy in order for that policy to be a "qualified health plan" under the law. These "essential" benefits do include maternity and newborn coverage, as well as coverage for pediatric services. Thus, in order to buy coverage through the health insurance exchanges, also mandated by PPACA, all health insurance consumers will be required to purchase plans with these "essential" benefits, even if the benefits are fundamentally inapplicable.

Schug points out what many have cited as a fundamental flaw of the "essential health benefits" package: the prohibition against imposing preexisting condition exclusions on group health plans under certain circumstances. This, according to Schug, will allow healthy people to "game the system by waiting to buy insurance until after they get sick."

PPACA's looming tax increases on pharmaceutical companies, medical-device companies and insurance companies, suggests Schug, could increase health insurance premiums significantly. In fact, Schug cites the "federal government's chief Medicare actuary" regarding an estimated $107 billion in taxes that could be passed on to the consumer.

Read the full article:

Mark Schug: Insurance Regulations Will be Costly
Mark Schug | Wisconsin State Journal
May 22, 2011  YVAFZ3Z94HDR

A Brief Chronicle of Insurance Regulation in the United States, Part II: From McCarran-Ferguson to Dodd-Frank

Although the insurance industry remains substantially regulated by the state government, federal regulation continues to encroach on the state regulatory system in spite of efforts by organizations such as the National Association of Insurance Commissioners, and other cooperative endeavors, to increase the uniformity of insurance regulation across the United States.

As previously discussed, the U.S. Supreme Court overturned the seminal case of Paul v. Virginia in 1944 in United States v. South-Eastern Underwriters Association, holding that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution. Many, including Chief Justice Stone in his dissenting opinion, felt that the South-Eastern decision largely pre-empted the state insurance regulatory system in favor of federal law.[1]

The United State Congress, however, responded almost immediately: in 1945, Congress passed the McCarran-Ferguson Act.[2] The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest. Further, the Act states that no federal law should be construed to invalidate, impair or supersede any law enacted by any state government for the purpose of regulating the business of insurance, unless the federal law specifically relates to the business of insurance.[3]

The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest.

Despite this declaration of the right of the state governments to regulate the insurance industry, the McCarran-Ferguson Act nevertheless provides that three (3) federal laws are specifically applicable to the business of insurance: the Sherman Act, the Clayton Act and the Federal Trade Commission Act. These federal laws are intended to prevent and restrict anticompetitive practices and unfair competition such as cartels and monopolies, and otherwise regulate trade and promote consumer protection.[4]

Even with the seemingly firm declaration of Congress’ intent that the states regulate insurance in the McCarran-Ferguson Act, federal regulation nevertheless continues to encroach upon the state regulatory system.

In the mid 1970s, for example, the concept of an optional federal charter for insurance companies was raised in Congress. With a wave of solvency and capacity issues facing property and casualty insurers, the proposal was to establish an elective federal regulatory scheme that insurers could opt into from the traditional state system, somewhat analogous to the dual-charter regulation of banks. Although the optional federal chartering proposal was defeated in the 1970s, it became the precursor for a modern debate over optional federal chartering in the last decade.[5]

A wave of insurance company insolvencies in the 1980s sparked a renewed interest in federal insurance regulation, including new legislation for a dual state and federal system of insurance solvency regulation.

Even with the McCarran-Ferguson Act's firm statement that the states should regulate the business of insurance, federal regulation nevertheless continues to encroach upon the state regulatory system.

In response, the National Association of Insurance Commissioners (“NAIC”) adopted several model reforms for state insurance regulation, including risk-based capital requirements, financial regulation accreditation standards and an initiative to codify accounting principles. As more and more states enacted versions of these model reforms into law, the pressure for federal reform of insurance regulation waned.[6]

In 1999, Congress passed the Gramm-Leach-Bliley Financial Modernization Act, which laid out a comprehensive framework for holding company systems and affiliations involving banks, securities firms and insurance companies, breaking down many of the prior restrictions against such affiliations. Although Gramm-Leach-Bliley acknowledged that states should regulate the insurance industry, it nevertheless set out certain minimum standards that state insurance laws and regulations were required to meet or else face preemption by federal law.[7]

Over the past decade, renewed calls for optional federal regulation of insurance companies have sounded, including the proposed National Insurance Act of 2006. [8]

The most recent challenges to the state insurance regulatory system are arguably the most significant, as well, showing further erosion of state primacy. Both the Patient Protection and Affordable Care Act (“PPACA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) are material forays of federal law into the insurance industry. [9]

Significantly, PPACA is a comprehensive reform of the health insurance market that creates specific requirements for health benefit plans to be marketed through federally-mandated state-created insurance exchanges. Among myriad other requirements, PPACA mandates certain insurance coverage requirements, such as prohibiting pre-existing condition exclusions in certain instances and restricting limits on the dollar value of health benefit plans, and it requires that health insurers maintain specific medical-loss ratios as set by federal law.

Dodd-Frank has significant implications for the insurance industry.

Dodd-Frank is touted by some as the most sweeping financial regulation overhaul since the Great Depression and criticized as clumsy and incomplete by others.

Nevertheless, Dodd-Frank has significant implications for the insurance industry including, among others, the following:

• Establishes the Federal Insurance Office (“FIO”) under the U.S. Department of Treasury, charged with studying and collecting information on the insurance industry and the state insurance regulatory system, and drafting a proposed federal insurance regulatory framework;
• Establishes the Financial Stability Oversight Council (“FSOC”), which is charged with monitoring the financial services markets, including the insurance industry, to identify potential risks to the financial stability of the United States;
• The FSOC is authorized to require a state insurance regulator to either apply new or heightened financial standards on insurance companies, or explain to the FSOC in writing why the regulator chose not to apply such standards;
• The FSOC may declare that a “nonbank financial company” – including an insurance company under certain circumstances – poses a systematic risk such that it is subject to supervision by the United States Federal Reserve System;
• Requires single-state regulation of surplus lines insurance placements and requires all states to apply uniform eligibility criteria for surplus lines insurers; and
• Mandates certain requirements for reinsurance credits and generally preempts non-domiciliary state laws to insurers with respect to certain reinsurance issues.[10]

1. United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
2. The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015.
3. The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1012; State Insurance Regulation: History, Purpose and Structure; NAIC; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
4. The McCarran–Ferguson Act, 15 U.S.C. §§ 1012(b); the Sherman Act, 15 U.S.C. §§ 1-7; the Clayton Act, 15 U.S.C. §§ 12-27, 15 U.S.C. §§52-53; the Federal Trade Commission Act, 15 U.S.C. §§ 41-58).
5. Federal Insurance Regulation Optional Federal Chartering Bills Come to the Big Top: The Substance and Politics of Act II; Craig Berrington; September 2007; http://www.wileyrein.com/publications.cfm?sp=articles&id=4496.
6. The Fatal Flaw of Proposals to Federalize Insurance Regulation; Elizabeth F. Brown; Research Symposium on Insurance Markets and Regulation: Optional Federal Chartering; 2008.
7. State Insurance Regulation: History, Purpose and Structure; NAIC; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
8. Uniformity and Efficiency in Insurance Regulation: Consolidation and Outsourcing of Regulatory Activities at the State Level; W. Jean Kwon; Networks Financial Institute; Indiana State University; 2007.
9. The Patient Protection and Affordable Care Act, Pub.L 11-148, 124 Stat. 119; the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L 111-203, H.R. 4173.
10. The Dodd-Frank Act, Pub.L 111-203, H.R. 4173; Insurance Industry Implications of the Dodd-Frank Act, Willkie, Farr & Gallagher, LLP; A Decent Start, Financial Reform in America, The Economist, July 2010.

Improved Workplace Awareness Helps Traffic Fatalities Trend Downward

Employers and employees need to address the issues associated with automobile accidents as part of their daily management routine. A heightened awareness of automobile safety in the workplace has resulted in greatly improved fatality results. In 2010, 32,788 people lost their lives in vehicle accidents - down nearly 10,000 in the last decade. Fourteen percent of workplace fatalities result from automobile accidents. That is also down from 22 percent just 10 years ago. While this trend is moving in the right direction, the automobile exposure to a business offers one of the most serious liability exposures that can be faced.


Performance Management consultants recommend compliance with the 4-A’s of driving:

Anticipate what could possibly go wrong and focus on driving to avoid mishaps
Adjust to changing circumstances such as traffic congestion or changing weather
Assume nothing - don’t automatically assume that traffic will stay moving or a car won’t change lanes into your path
Allow no distractions - drivers must avoid anything that takes their focus off of driving

Not only can the strict adherence to an automobile safety program help relieve a business from a serious claim, maintaining drivers with good records reflect positively on the business’ auto insurance premiums.

Performance Management predicts that if employers would institute just two actions, implement standards of practice for driving and educate employees about good driving principles and management’s expectations, accidents would be reduced by more than 50 percent.

Credit Default Swaps: Securities, Insurance or Just Gambling?

Tom Armistead argues that credit default swaps are insurance transactions that should be regulated as such; some suggest that "deregulation" of credit default swaps was a major cause of the financial crisis of the late 2000s.

In a recent article, Tom Armistead suggests that credit default swaps are actually insurance transactions that should be regulated according to insurance regulatory principles.

Credit default swaps are insurance, and should be regulated as such, with a requirement of insurable interest for the buyer and adequate capital for the seller.[1]

In his analysis, Armistead defines insurance as "the transfer of risk for a consideration" and explains that purchasers of insurance are generally required to have an insurable interest in the subject of the insurance because: "otherwise, the transaction would create a moral hazard."[2]

Lack of an insurable interest in fire insurance would lead to arson for profit. Similarly, lack of an insurable interest in life insurance would lead to murder for profit. Moral hazard is created when the buyer of insurance is motivated to desire a loss.[3]

With respect to credit default swaps, however, savvy speculators and clever hedge funds have no true interests in the credit default swaps but can create profit by actively driving losses with respect to the swaps, according to Armistead.[4]

Armistead also equates credit default swaps with gambling, especially when there is no insurance interest involved.[5]

In simpler times our forbears noted that gambling in the financial markets creates economic turmoil, recessions and depressions, and outlawed it. Our elected servants in Congress have more and better wisdom, it seems, and have placed gambling in financial markets beyond the reach of the law.[6]

Credit default swaps were exempted from regulation as insurance (or gambling) under the Commodity Futures Modernization Act of 2000 (CFM Act). Credit default swaps are generally regulated by the United States Securities Exchange Committee, although some argument exists that regulation of credit default swaps was reduced by financial deregulation efforts linked to the Gramm-Leach-Bliley Act and the CFM Act.[7]

Eric Dinallo, the former New York Superintendent of Insurance, discussed how credit default swaps stepped outside of the realm of insurance regulation in an article from 2009:

Credit default swaps started out as essentially an insurance policy. If you owned a bond in a company and were concerned it might default, you bought the swap to protect yourself. Literally, the buyer swaps the risk of default with someone else. Banks bought them to reduce the amount of capital they were required to hold against investments – in other words, to avoid regulation. Because they owned the swap, banks claimed they no longer had the risk of a default of the bond. Others bought swaps without owning the bond to place a bet on a company’s future.

But there was serious concern that swaps violated the old bucket shop laws. Thus, the Commodity Futures Modernization Act of 2000 exempted credit default swaps from these laws. The act also exempted them from regulation by the Commodities and Futures Trading Commission and the Securities and Exchange Commission. Unregulated, the market grew enormously.[8]

"...one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate."

Dinallo's article, written during the height of the Great Recession, concluded that "we modernized ourselves into this ice age." The "old fashioned" rules and regulations that the CFM Act sought to modernize were actually effective prohibitions against activities that had been illegal for almost a century for good reason. This "modernization" was a major cause of the financial crisis, according to Dinallo. "Thus, one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate."[9]

Armistead defines credit default as "cash settled upon the occurrence of an event of default" and "the obligations are supported by the exchange of collateral as the values involved fluctuate prior to loss." Thus, Armistead characterizes credit default swaps, as currently written, as insuring market values "which do not correspond with actual economic loss."[10]

Insurance contracts, in contrast, are generally designed to make the insured whole, but not necessarily place him or her in a better position that he or she would have been had no loss occurred, according to Armistead.[11]

Armistead's simple solution: credit default swaps should be regulated as insurance, including the requirement that the seller have adequate capital and that the buyer have an insurance interest.[12]

The insurance business has been in existence for centuries, and its underlying principles are clearly understood. It is a business affected with the public interest, and effective methods of regulation have been developed and are in place globally, with certain exceptions.[13]

Thus, Armistead urges the repeal of the CFM Act's regulatory exception for credit default swaps, and concludes that such transactions should be "explicitly defined as insurance when backed by an insurable interest, and as gambling when naked."[14]

Read the full article:

JPMorgan: Another Reason CDS Should Be Regulated As Insurance
Tom Armistead | Financial Times May 21, 2012

1. JPMorgan: Another Reason CDS Should Be Regulated As Insurance, Tom Armistead, Seeking Alpha, May 21, 2012
2.  JPMorgan: Another Reason..., id.
3.  JPMorgan: Another Reason..., id.
4.  JPMorgan: Another Reason..., id.
5.  JPMorgan: Another Reason..., id.
6.  JPMorgan: Another Reason..., id.
7. See, for example: Deregulation and the Financial Panic, Phil Gramm, Wall Street Journal, Opinion, February 20, 2009; 8. We Modernised Ourselves into this Ice Age, Eric Dinallo, Financial Times, March 30, 2009.
8. We Modernised Ourselves into this Ice Age, Eric Dinallo, Financial Times, March 30, 2009.
9.  We Modernised..., id.
10.  JPMorgan: Another Reason..., id.
11.  JPMorgan: Another Reason..., id.
12.  JPMorgan: Another Reason..., id.
13.  JPMorgan: Another Reason..., id.
14.  JPMorgan: Another Reason..., id.

NAPSLO Applauds Introduction of Surplus Lines Bill in House

NAPSLO applauded the introduction of the Non-Admitted and Reinsurance Reform Act of 2009 in the U.S. House of Representatives by Reps. Dennis Moore (D-Kan.) and Scott Garrett (R-NJ), and indicated they hoped the bill would be introduced soon in the Senate.

“NAPSLO is pleased to see Rep. Moore and Garrett introduce the bill in the House and we look forward to working with them to get the bill passed,” said NAPSLO President John Wood. “We are also encouraged regarding prospects for the bill being introduced in the Senate shortly. Passage of this bill would help streamline and reduce barriers in state regulation of surplus lines insurance”

The NRRA is, in part, aimed at making access to the surplus lines market more efficient for consumers and the brokers and agents who assist them. In addition the bill could help standardize state regulations facing the industry.

Reps. Moore and Garrett, members of the House Committee on Financial Services, submitted the bill on Thursday. Senators Evan Bayh (D-IN) and Mel Martinez (R-FL), members of the Senate Committee on Banking, Housing and Urban Affairs, have also announced that they plan on introducing a version of the bill in the Senate.

“We believe that this legislation will bring efficiency and reduce the cost of regulatory compliance in surplus lines placements with multi-state exposures,” said NAPSLO Executive Director Richard Bouhan. “Consumers will benefit because the costs related to the inefficiencies and redundancies, which they bear, will be eliminated.”

The bill would establish national standards for how states regulate the surplus lines market and reinsurance and would create a uniform system of surplus lines premium tax allocation and remittance, one-state compliance on multi-state surplus lines risks, and direct access to the surplus lines market for sophisticated commercial purchasers. These are concepts long endorsed by NAPSLO and promoted with members of Congress during meetings over the past few years.

The House passed similar versions of the bill in the last two sessions of Congress and the Senate took up a similar bill in 2007 but no action was taken in the Senate prior to the end of the 110th Congress, requiring that the bill be reintroduced in the 111th Congress in order to be considered.

“Rep. Moore’s leadership has been important in getting the bill approved in the past two sessions and with the addition of Rep. Garrett as the lead Republican sponsor, we believe the prospects for passage are excellent,” said NAPSLO’s Washington D.C. representative, Maria Berthoud of B&D Consulting. “We are also encouraged by the interest in the bill by the Senate and are hopeful it will be passed in that chamber this year.”

In Memory of Eugene J. Eisenmann, NAPSLO Past President

Over the past weekend the NAPSLO family lost one of its past presidents, Eugene J. Eisenmann. Gene served as NAPSLO President from 1994 to 1995 and was on the NAPSLO Board from 1990 to 1996.

After serving in the industry for many years Gene had recently served as a consultant and Vice Chairman at tKg and advisor to AmWINS as well as other wholesalers.

 Previously he served as Chairman Emeritus of Colemont Insurance Brokers prior to its sale to AmWINS. In his early days in the industry he worked for Stewart Smith Southwest, Inc. before founding HEATH Insurance Brokers, Inc. where he served as President and later Chairman following the renaming of the firm to Colemont in 2004.

In addition to serving on the NAPSLO Board, Gene served as President of the Texas Surplus Lines Association and had been a Director and Chairman of the Surplus Lines Stamping Office of Texas.

 He is survived by his wife Denise, three sons, a daughter and many grandchildren. At Gene’s request, services will be limited to family. At the family’s request, donations in Gene’s name can be made to the Prostate Cancer Foundation at: www.pcf.org.

 Gene was a wonderful human being. To know Gene was to love him. A first class businessman who rose from a humble background to the pinnacle of our industry, he never forgot where he came from. Gene was that rare individual who could get results while never losing sight of the human side of our business.

NAPSLO Marketplace Survey Deadline Friday

NAPSLO is currently conducting a survey amongst its members on current market conditions and the deadline to complete the survey is Friday, May 22.

The survey, conducted by the NAPSLO Communications & Technology Committee, gauges current conditions in the marketplace. The survey conclusions will be published on the NAPSLO website, distributed to the insurance trade press, and discussed at an A.M. Best/NAPSLO webinar tentatively scheduled for June 11.

NAPSLO members who have not completed the survey can click on the link below to access the survey.

Surplus Lines Marketplace Survey

NAPSLO Applauds Senate's Approval of Surplus Lines Reform Language

NAPSLO representatives said they are pleased to see that language from the NonAdmitted and Reinsurance Reform Act was included in the financial reform legislation passed by the Senate on Thursday night.

"Senate approval of the language is a giant step toward achieving needed reforms of surplus lines regulation," said NAPSLO Executive Director Richard Bouhan. "This is an issue NAPSLO, and the industry, has worked on for many years and we are glad to see the language included in the bill."

With the financial services reform legislation approved, the Senate will now work with the House of Representatives, which approved a financial services reform bill last December, to reconcile the differences in each body's bill. The NRRA language was included in both the House and Senate bills and is expected to be in the final bill.

"We will be working with leaders from both Chambers of Congress to monitor negotiations and to ensure that the surplus lines reform language remains in the bill," said Maria Berthoud of B&D Consulting, NAPSLO's Washington representative.

House - Senate negotiations are expected to take place over the next month or so and a compromise bill could be approved in July and sent to the President for his approval.

When enacted, the surplus lines modernization provisions will make access for insurance consumers to the surplus lines market quicker and more efficient and the payment of surplus lines taxes, particularly on multi-state risks, easier and less burdensome for the surplus lines broker.

In addition, multiple, duplicative and overlapping compliance requirements will be eliminated on surplus lines policies that insure risks across state lines. The bill reduces surplus line broker costs by clarifying that only one state, the home state of the insured, regulates a multistate surplus line transaction. Currently multiple states regulate the placement of surplus lines multi-state risks. This will also benefit the insurance consumer who ultimately pays the price of the current dysfunctional and overlapping regulatory system for surplus lines insurance.