On July 15, 2010, the Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). Title V of the Act is captioned “Insurance” and contains a number of provisions that directly impact insurance and reinsurance companies, which we have summarized below.
State-Based Insurance Reform
The Act provides for certain state-based insurance reforms. The two areas addressed are state laws regulating nonadmitted insurance and state laws regulating credit for reinsurance.
Provisions Regarding Nonadmitted Insurance
The Act provides that no state other than the home state1 of an insured may require any premium tax payment for nonadmitted insurance. States may enter into a compact or otherwise establish procedures to allocate among the states the premium taxes paid to the home state. Congress intends that each state shall adopt uniform requirements that provide for the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance. The Act provides that the NAIC may submit a report describing any agreement reached among the states for the allocation of premium tax.
The Act further provides that nonadmitted insurance (including the licensing of insurance brokers selling the nonadmitted insurance) shall be subject to regulation solely by the insured’s home state. This provision is not to be construed to preempt any state law, rule, or regulation that restricts the placement of workers compensation insurance or excess insurance for self-funded workers compensation plans with a nonadmitted insurer.
The Act encourages states to participate in the national insurance producer database of the NAIC (or any other equivalent uniform national database) for the licensure of surplus line brokers and the renewal of such licenses. Beginning two years after the enactment of the Act, states that do not participate in such a database are prohibited from collecting any fees relating to the licensure of surplus lines brokers.
The Act prohibits states from imposing eligibility requirements on nonadmitted insurers that are domiciled in a
The Act streamlines the purchase process for large insureds by providing that a surplus lines broker seeking to procure or place nonadmitted coverage for an exempt commercial purchaser2 shall not be required to make a due diligence search to determine whether the insurance could be obtained from admitted carriers if it has: (1) disclosed that the insurance might be available from an admitted carrier that might provide more protection with greater regulatory oversight; and (2) the exempt commercial purchaser has subsequently requested in writing that the broker procure the insurance from the nonadmitted insurer.
The Act requires the GAO, in consultation with the NAIC, to prepare a report on the nonadmitted insurance market and to complete the report within 30 months after the enactment of the Act. This report must address the effect of the Act on the size and market share of the nonadmitted market for coverage typically provided by the admitted market.
Regulation of Reinsurance
The Act provides that if the state of domicile of a ceding insurer is an NAIC-accredited state or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for an insurer’s ceded risk, then no other state may deny such credit. All laws, regulations, and other actions of a state that is not the domiciliary state of the ceding insurer, except those with respect to taxes and assessments on insurance companies or insurance income, are preempted to the extent that they:
The Act provides that if a state is an NAIC accredited state, or has financial solvency requirements substantially similar to the requirements for NAIC accreditation, it has sole responsibility for regulating the financial solvency of reinsurers domiciled3 in the state. No other states may require the reinsurer to provide financial information other than the information that the reinsurer is required to file with the domiciliary state.
The Establishment of the Federal Insurance Office
The Act establishes a Federal Insurance Office within the Department of the Treasury. The Office has authority to:
The Federal Insurance Office has authority over all lines of insurance except:
Prior to collecting any information from an insurance company, the Office shall try to obtain the data from federal or state insurance regulators or from publicly available data sources and shall not seek information from insurance companies if it is timely available from these other sources.
The Act preempts state insurance regulations only if the Director determines that the state regulation: (1) results in the less favorable treatment of a non-U.S. insurer domiciled in a foreign jurisdiction that is subject to a covered agreement than a U.S. insurer domiciled, licensed, or otherwise admitted in that state; and (2) is inconsistent with the covered agreement. Any preemption shall be limited to the subject matter covered in the protected agreement and shall achieve a level of protection for insurance or reinsurance customers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation. The Director’s determination that a state regulation is preempted is subject to the Administrative Procedure Act and to judicial review. If judicial review is requested, the court shall determine the matter de novo.
Nothing in the Act will preempt:
The Act does not provide the Office with general supervisory or regulatory authority over the business of insurance.
The Office is required to make certain reports to Congress and certain congressional committees including:
The Director also is required to conduct a study within 18 months after the passage of the Act on how to modernize and improve the system of insurance regulation in the United States. The study is to explore the possibility of subjecting insurance (other than health insurance) to federal regulation and the impact that federal regulation could have on the operation of state guarantee funds, on policyholder protection, on the possible loss of life insurance special separate account status, and on the international competitiveness of insurance companies.
1. The “home state” of an insured is the state in which it has its principal place of business unless 100 percent of the insured risk is located outside of that state, in which case the home state is the state in which the greatest percentage of the insured’s taxable premium for the insurance policy is allocated. If more than one insured from an affiliated group are insureds under one policy, the home state of the member of the group that has the highest percentage of premium under the policy attributed to it is the home state for the entire policy.
2. An exempt commercial purchaser is an entity purchasing commercial insurance that: (1) employs a qualified risk manager to negotiate insurance coverage; (2) has paid aggregate national property and casualty premium in excess of $100,000 in the prior 12 months; (3) has a net worth in excess of $20 million, or has annual revenues in excess of $50 million, or employs more than 500 full-time employees, or is a member of an affiliated group employing more than 1,000 full-time employees, or is an not-for-profit organization generating annual budgeted expenditures of at least $30 million, or is a municipality with a population of at least 50,000.
4. “Covered agreements” are written bilateral or multilateral agreements that are entered into between the United States and one or more foreign governments, authorities, or regulatory agencies that relate to the recognition of prudential measures with respect to the business of insurance or reinsurance and achieve a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our insurance clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or the following individual:
Robert C. Leventhal
Los Angeles, California