Orville D. Jones explains how the surplus lines market views proposed deregulation of commercial lines insurance in the United States.
Possibly the most significant issue facing the insurance industry in the United States today is the potential deregulation of commercial lines. A number of states have or are considering laws which would deregulate certain insurance transactions. Congress is also considering the matter through H.R. 10, which would revamp the laws concerning financial services.
Regardless of one's view of the benefits of commercial lines deregulation, it appears that it is an idea whose time has come. The surge in commercial lines deregulation legislation in the various states this year is just the beginning of a crumbling of various state regulatory laws, particularly rate and form review and approval, for commercial lines transactions.
Commercial lines deregulation, for the most part, is premised upon the concept that large commercial insurance buyers possess the knowledge, assets and expertise to deal effectively in the commercial marketplace without needing to receive the benefits of current regulatory protections or having to bear the cost and burdens of doing so. The elimination or circumvention of these existing safeguards would reduce the cost of the insurance transaction and enable these “sophisticated” buyers to secure their insurance coverage at a cheaper price.
Under the deregulation proposals, admitted companies would not be subject to rate and form filing and approval requirements in providing coverage to deregulated buyers. The National Association of Professional Surplus Lines Offices (NAPSLO) has proposed that the surplus lines segment of the industry should also be deregulated by eliminating the diligent search requirement for surplus lines, by which the broker has to show that a serious effort has been made to place a risk with admitted carriers before it can be written in the surplus lines market.
While NAPSLO has concerns about certain elements of deregulation, we believe that if there is any deregulation of the commercial lines market, it should apply to both the admitted and non-admitted markets in order to allow the consumer the broadest possible choice of markets and products.
As a result, we advocate the implementation or enactment of “automatic export” provisions for deregulated classes of business. This concept contemplates that any coverages for deregulated buyers, or classes, should be exportable by surplus lines brokers to eligible surplus lines markets without the broker being required to obtain declinations or fulfil a diligent search requirement.
Last year, the NAPSLO board of directors adopted a resolution which advocates the enactment of state legislation to authorise the waiver of the diligent search requirement for surplus lines placement in circumstances where a buyer or risk is deregulated from rate, form or rule requirements. The board took this action in the belief that the commercial lines consumer is best served, through deregulation, by having all deregulated markets, admitted and surplus lines, available when securing insurance.
Even though the board recognised the significant benefits that the automatic export provision provides consumers, the resolution reflects NAPSLO's concerns regarding certain elements of commercial lines deregulation, which includes the proper annual aggregate premium threshold level used to define a deregulated commercial buyer as well as establishing sufficient capitalisation requirements for licensed companies that transact deregulated business and the status of guaranty fund protection for policies that are written by admitted carriers on a deregulated basis.
Since the beginning of the legislative season, we have been engaged in an effort to have the automatic export concept included in commercial lines deregulation proposals introduced in the various state legislatures.
Overall, legislatures in Arkansas, Colorado, Indiana, Kansas, Louisiana, Maine, Missouri, Oklahoma and Rhode Island approved general commercial deregulation laws, while Virginia dealt with workers' compensation programmes for large risks. New Hampshire and Pennsylvania enacted deregulation laws in 1998, and a number of states are expected to revisit the issue in 2000. Three states included a version of the automatic export provision. In addition, Congress is currently considering H.R. 10, which would revamp financial services and break down the longstanding barriers between insurance, banking and securities.The adoption of the automatic export provision offers a positive approach to deregulation for the surplus lines market. If implemented, it would allow surplus lines brokers and wholesale surplus lines companies to continue to offer their products in an expanded deregulated marketplace, and would advance an objective of deregulation effort by providing consumers with more choices and a broader array of options.
Who is a sophisticated buyer?
In addition to promoting the automatic export provision in the legislative proposals, NAPSLO has also stated its concern about the methods established for determining a deregulated or sophisticated buyer. Under a number of proposals, admitted companies could quote and accept risks for sophisticated buyers, also known as exempt commercial policyholders (ECP), without regulatory oversight and approval of rate and form.
These so called sophisticated buyers, or ECPs, have been defined as insurance buyers whose annual insurance premiums are greater than a threshold established by the state, which can range from $10,000 to $500,000. We believe that these financial criteria do not provide an objective measure and are not a true test of a buyer's sophistication or reflective of the buyer's ability to deal effectively with the marketplace without regulatory protection.
Buyers with annual premiums of $10,000 to $25,000 could include many small businesses whose sophistication in dealing with changes in policy language and coverage provisions is very limited. Not only would these low thresholds create danger for some small commercial buyers, but it could also provide difficulties for insurance producers. They might find that clients did not fully understand the changes in coverages and policy language that resulted in the negotiation of an acceptable premium, and were later surprised to find some claims unpaid for lack of coverage, leaving the producer vulnerable to errors and omissions problems.While this issue and many other questions regarding commercial lines deregulation are potential areas for legislative debate, NAPSLO has taken the position that to the extent that admitted market risks are deregulated, surplus lines should be given parity with such deregulation by eliminating the diligent search for a surplus lines placement for those deregulated risks. The automatic export provision provides consumers with an opportunity to have the broadest array of markets available, while providing surplus lines market parity with deregulated markets.
There is no question consumers benefit, both in terms of price and quality, when the number of options available to them is increased, and the automatic export provision, would enhance the array of choices to the deregulated buyer. In addition, the automatic export concept, which eliminates the diligent search requirement, is consistent with the overall objective of commercial lines deregulation which is to establish a more efficient commercial insurance market.NAPSLO contacted a number of trade groups, including the American Insurance Association (AIA) and the National Association of Independent Insurers (NAII), that are in the forefront in proposing deregulation legislation, with regard to including the automatic export provision in their deregulation legislative proposals and they indicated their support.
In addition, NAPSLO has been working with the ad hoc industry coalition on deregulation of commercial lines. Last year this coalition adopted a model deregulation law, which was submitted to the National Conference of Insurance Legislators (NCOIL), earlier this year. We supported the NCOIL deregulation proposal since it included the automatic export provision and it was adopted as the NCOIL model commercial lines deregulation bill. The language of the NCOIL model bill that implements the automatic export provision can be added to any commercial lines deregulation proposal.
NAPSLO intends to work with deregulation supporters and with allies in every other state in which deregulation legislation is proposed in order to advance and enhance the automatic export concept. Of course, the success of this effort will depend, to a great extent, upon the effectiveness of the combined efforts of NAPSLO, state surplus lines associations and individual firms, as well as the organisations promoting commercial lines deregulation proposals in the states. The enactment of the automatic export concept is important to the wholesale industry and the insurance consumer, and we will continue to work to advance the concept in state legislatures.
Orville D. Jones is president, National Association of Professional Surplus Lines Offices (NAPSLO). Web site: www.napslo.org