Nonadmitted Insurance and Reinsurance

Non-admitted, or “surplus lines,” insurance is coverage provided by a company not licensed by the state it is providing the coverage in. Typically, surplus lines insurance is used to cover unique risks not covered by the “admitted” or state licensed market. Reinsurance is insurance that insurers buy to better spread the risks they assume. As both of these areas of insurance tend to be largely business-to-business transactions, they are subject to less regulation, including rate regulation. In June 2007, the House of Representatives passed HR 1065, the Nonadmitted and Reinsurance Reform Act addressing these areas of insurance oversight. A companion bill, S. 929, based on a 2006 version of the legislation, awaits consideration in the Senate. The legislation grants sole regulatory authority for multi-state surplus lines transactions to the insured’s home state so that each transaction is only subject to one set of rules, oversight, and taxation. It also calls on states to create a mechanism for sharing the premiums taxes associated with those multi-state policies. Similarly, the legislation also establishes a single-state authority over credit for reinsurance and reinsurer solvency assessment. The credit for reinsurance determination is made solely by the ceding insurer’s domiciliary state while solvency assessment is overseen solely by the reinsurer’s domiciliary state.

The NAIC has previously testified before Congress that federal legislation or an interstate compact approach may be appropriate to resolve conflicting rules regarding multi-state tax treatment. The NAIC has not taken a position on the current legislation, but has offered technical guidance on ways to improve the bill.