London market surplus lines insurers are focusing on US legal issues, says Marie-Louise Rossi.
London is a significant player in the US surplus lines market. By one estimate, London companies write about 23% of US surplus lines business. Stephen Cane, chairman of the joint North America committee of the London International Insurance and Reinsurance Market Association (LIRMA) and the Institute of London Underwriters (ILU), estimates members' US surplus lines premium was more than $2 billion in 1996.
With such significant levels of trade between London and the US, regulatory and legal developments there can have an impact on the London market. The joint committee has strong positions on many current issues, and is working actively to ensure that London's position in the US surplus lines market is not threatened by legal changes.
Legislative efforts to deregulate commercial lines are gathering speed, led by the National Association of Insurance Commissioners (NAIC) which has produced a white paper on the subject. Its recommendations would, if adopted, provide state insurance commissioners with both the authority and the charge to recognise the effectiveness of market forces as a means to regulate rates and cover. Under the NAIC plan, prior model laws regarding rate and policy form approval would be replaced with a single model that would address both rate and form filing.
Meanwhile, as many as 11 states are working on commercial lines deregulation bills or regulations. Two areas of proposed change are of great interest to London surplus lines insurers active in the US:
1. The exemption of commercial lines insurers from rate and form filing and approval requirements, and
2. The elimination of the requirement for surplus lines brokers to obtain declinations from at least three admitted insurers (the diligent search for supply) before turning to the surplus lines market.
In Maryland, the first US commercial insurance deregulation proposal has passed, and at the time of writing is awaiting the governor's signature. Under the proposal, the purchase of commercial surplus lines cover by "commercial insureds" would be permitted without the diligent search now required.
In contrast, a commercial lines deregulation proposal introduced in the New York State Senate does not remove the diligent search requirement, but would exempt from rate and form filing requirements many categories of commercial insurance. In the absence of these requirements, admitted insurers would find it easier to provide a fast and tailored service to commercial insureds. However, many insureds may continue to want to select the specific security offered by various London surplus lines insurers. At present the insured's brokers must obtain three declinations before buying from an approved London insurer; removal of this requirement may increase use of non-admitted surplus lines insurers.
LIRMA/ILU maintains that re-engineering must both streamline and, where possible, remove the burdens of rate and form filing and remove the triple-declination requirement. To do otherwise will limit insurance buyers easy access to the products currently available to them.
At present about 30 London market companies are approved to underwrite US surplus lines business in one or more states. Each is required to maintain a trust fund of at least $5.4 million to protect US policyholders. However, Louisiana has introduced new trust fund requirements, effective by the end of 1998, which increase the requirement to 30% of US surplus lines liabilities, capped at $60 million. The bill also requires maintenance of minimum capital and surplus of $15 million. The increased funding requirement, which will mean that many of the companies will have to top up their trust funds, will serve to strengthen policyholder confidence in the security of non-US insurers.
The new requirements are based on recommendations made to the NAIC by LIRMA/ILU and the French insurers' Fédération Française de Sociétiés d'Assurances (FFSA). A similar set of rules is under consideration in New York, although a bill in Alaska has failed to pass. The NAIC has adopted as standard the level of 30% of gross liabilities, and has issued a model act (on which the Louisiana bill is largely based) which is likely to cause most states to adopt the new standard when they revise their existing legislation.
The international insurers department (IID), a subsidiary of the NAIC, has yet to adopt the standard, but should it elect to do so, the decision will automatically affect about half of US states, being those which base the eligibility of non-US insurers to write business in their state on the insurers' approval by the IID (that is, the insurers' inclusion in the so-called IID white list).
The joint London market committee is actively involved in several other US legal issues, including some which would affect reinsurers, and is keenly watching other developments. It has had several successes, from which all non-admitted insurers active in the US will benefit.
Marie-Louise Rossi is the chief executive of LIRMA, the London International Insurance and Reinsurance Market Association, and chief executive designate of the body which will emerge from the merger of LIRMA and the Institute of London Underwriters.