Surplus Lines Fundamentals: The Surplus Lines Distribution System

Surplus Lines Fundamentals: The Surplus Lines Distribution System

Overview

  • Course: SPEC 210 - Surplus Lines Fundamentals
  • Institution: FAULKNER THE STUMBAUGH SCHOOL OF RISK MANAGEMENT & INSURANCE
  • Assignment Focus: The Surplus Lines Distribution System
  • Organization: WSIA (Wholesale & Specialty Insurance Association), The Institutes Knowledge Group™

Regulation of Surplus Lines Transactions

  • State Regulation
    • Insurers:
    • Not Licensed: Insurers that do not have a license are not regulated by the states.
    • Intermediaries: These professionals are monitored and controlled on a state-by-state basis. Specific duties include:
      • Verification of diligent search for coverage.
      • Filing affidavits/documentation.
      • Confirmation of surplus lines insurer eligibility.
      • Maintenance of policy files.
      • Collection and remittance of taxes.
      • Provision of necessary disclosures.

Licensing Requirements for Intermediaries

  • An intermediary must hold a licensed status in InsurED's home state.
  • Must possess either a Resident P&C (Property & Casualty) Admitted License or a Nonresident license.
  • Licensing requirements, along with continuing education mandates, are contingent upon state regulations.

Diligent Search and Affidavit Filing

  • Diligent Search: A good faith effort usually requires obtaining a minimum of three declinations from licensed admitted insurers.
  • Documentation: This search is documented through affidavits sent to regulators.
  • Export List: This is a list excusing the diligent search, unique to each state and continuously updated.

Determining Insurer Eligibility

  • Approaches for determining insurer eligibility include:
    • White List: A list of eligible insurers; the most widely accepted and used method.
    • Broker Responsibility: The responsibility of the broker in ensuring compliance with state-set standards.
    • Black List: A list identifying ineligible insurers. Broker responsibility may be supplemented with the black list.

Recordkeeping Regulations

  • Each transaction must be documented and reported to a regulator or stamping office.
  • Essential Record-Keeping: Detailed tracking of all transactions is mandatory.
  • These records are subject to audit by state authorities.

Collecting Premium Tax

  • Admitted Insurers: These entities are required to pay taxes to individual states.
  • Nonadmitted Insurers: These are not under state regulation but intermediaries are required to remit taxes to states.
    • Nonadmitted and Reinsurance Reform Act (NRRA): This act mandates payment of taxes to InsurED's home state.
    • Definitions:
    • Home State: For business, this refers to the headquarters or the principal place of business of the intermediary. For individuals, it is defined as their principal residence.

Optional State Tax Sharing

  • State Tax Sharing Initiatives:
    • NAIC’s Nonadmitted Insurance Multistate Agreement (NIMA)
    • SLIMPACT: Surplus Lines Insurance Multistate Tax Compact initiated by the National Council of Insurance Legislators.
    • NAPSLO: The National Association of Professional Surplus Lines Offices is involved in forming a consensus on tax sharing.

Disclosure to Policyholders

  • The primary purpose of disclosures is to inform InsurED of the lack of state oversight for surplus lines.
  • Typical Disclosure Statements:
    • "Not Licensed by State".
    • "Not subject to the same scrutiny as admitted insurers".
    • "No state guaranty insolvency protection".
  • Operationalization of disclosures varies by state (stamped, attached documents of varying location and size).

Surplus Lines Stamping Offices

  • Also known as Surplus Lines Association or Surplus Lines Service Office.
  • Goals:
    • Help intermediaries maintain compliance with regulations.
    • Protect the surplus lines market from potential malpractices.
    • Monitor industry players for regulatory compliance.
    • Safeguard tax revenue while ensuring consumer access to surplus lines coverage.
    • Provide the necessary disclosures to consumers to maintain transparency.

Activities of Surplus Lines Stamping Offices

  • These offices are crucial sources of information and training for industry professionals.
  • Responsibilities include:
    • Evaluating the financial stability of insurers.
    • Providing lists of eligible surplus lines insurers.
    • Lobbying on behalf of the surplus lines industry.
    • Recording premiums and tax liabilities incurred by intermediaries.
    • Filing necessary reports with regulatory bodies.
    • Assisting in the accurate and timely remittance of tax revenues to states.

Florida Surplus Lines Service Office (FSLSO)

  • Website: www.fslso.com
  • Established in 1998, FSLSO provides numerous resources for surplus lines the following areas:
    • Market Data Reports
    • Tax Estimator
    • Licensing and registration information
    • Compliance and filing requirements
    • Educational and internship opportunities
  • All relevant documents such as: agent procedures manuals, insurer procedures manuals, and compliance review programs are available through FSLSO.
  • The site also features a diligent effort disclosure matrix, detailing policy requirements based on exported coverage.