Procedural Updates

Lone Star Lines
Volume 18, January – March & Special Report

Even though Texas has not joined an agreement or compact with other states to allocate premium taxes on multi-state policies, the Texas Comptroller of Public Accounts and the Texas Department of Insurance are requiring you to report allocation of premium for each state covered under the policy, by individual state name, when Texas is the home state on a multi-state policy. This is effective with policies reported to the Stamping Office 01/01/12 and after.

For EFS users filing programmatically, this change is available in version 2.1, as you have been previously notified as referenced in the Programmers Technical Reference Supplement Guide. The change will occur automatically for those EFS users filing by web entry. The Breakdown of States Summary / Other States / Exempt Premium form has been modified to allow entry of individual states and their associated premium for those of you still filing by paper. Please remember that the premium for each individual state must total to the premium entered for the Breakdown of States Summary. Refer to the bulletins below for detailed information previously provided regarding the reporting of the breakdown of states premium.

Guidelines for Texas Surplus Lines Agents – Compliance with the NRRA

New Filing Form: “Breakdown of States Summary/Other States/Exempt Premium” with Examples

Fees, Safe-Harbor Provision, and Enforcement Matters
Concerning Late-Filed Surplus Lines Policies

The Texas Department of Insurance (TDI) issued the attached bulletin to inform surplus lines agents about new requirements under Section 981.105 of the Texas Insurance Code. The requirements, which became effective May 28, 2011, include late-filing fees, a safe harbor provision, and possible enforcement actions. TDI is offering a December 2011 settlement program for resolving pending disciplinary matters regarding late-filed surplus lines policies.

TO: ALL SURPLUS LINES INSURANCE AGENTS LICENSED IN TEXAS

RE: Fees, safe-harbor provision, and enforcement matters concerning late-filed surplus lines policies

The Texas Department of Insurance (TDI) issues this bulletin to inform surplus lines (SL) agents about new requirements under Texas Insurance Code Section 981.105. The requirements, which became effective May 28, 2011, include late-filing fees, a safe harbor provision, and possible enforcement actions. TDI is offering a December 2011 settlement program for resolving pending disciplinary matters regarding late-filed SL policies.

Late-Filing Fees

Texas Insurance Code Section 981.105(a) requires an SL agent to file a new or renewal SL policy with the Surplus Lines Stamping Office of Texas (SLSOT) within 60 days of the date a policy is issued or becomes effective. The new law provides two regulatory options for SL agents who have filed policies late: fees and penalties. The chart below shows the fee amounts.

If you must pay a fee, TDI will send you notice of the late filings and corresponding fees. TDl’s Enforcement Section will not initiate formal disciplinary action for those late-filed policies if the fees are paid timely. For more information about the calculation or remittance of fees, please contact Kathy Wilcox at 512-322-3535 or Kathy.Wilcox@tdi.state.tx.us.

Safe-Harbor Provision

Until January 1, 2012, agents may self-report late-filed policies with effective or issue dates before January 1, 2010, and pay a $50 fee per policy. This provision does not apply to policies that have already been listed on an SLSOT late-filers report.

Penalty Provisions

The new law provides for disciplinary action and penalties if:

• the late-filed policy fee is not paid within 30 days;
• a policy is filed on or after the 365th day; or
• a policy is filed 181 to 364 days after the policy issue or effective date and more than 2 percent of SL policy filings were late in the prior year.

TDI December 2011 Settlement Program

To help resolve pending SL late-filed policies disciplinary matters, TDl’s Enforcement Section will offer special incentives for settlement during December 2011. Pending disciplinary matters include actions about:

• late-filed policies with issue or effective dates before January 1, 201 O, that appeared on the SLSOT late filed reports and
• late-filed policies with issue or effective dates after January 1, 2010, that are subject to the noted penalty provisions.

Staff will contact agents with pending disciplinary matters to offer resolution through Consent Orders. The fines will be $50 per late filed policy. The fines may be adjusted as mitigating circumstances warrant. Acceptance of these special settlement offers is optional. For questions about the settlement program, please contact Stephen Chen at 512-322-3428 or Stephen.Chen@tdi.state.tx.us. After the December 2011 Settlement Program, penalties for late filers will be assessed based on the guidelines in Texas Insurance Code Section 84.022.

Eleanor Kitzman
Commissioner of Insurance

The Texas Comptroller has published guidelines for paying Texas taxes under the Nonadmitted and Reinsurance Reform Act (NRRA). You can access the document below.

Guidelines for Premium Tax Compliance with the Nonadmitted and Reinsurance Reform Act
Comptroller Brochure

Lone Star Lines
Volume 17, October – December

Many of you have asked for confirmation that your request for correction or adjustment to transactions listed on a monthly late filing report has or has not been accepted. We now have a form available on the SLSOT website for you to fill out and submit – by e-mail – along with the appropriate, supporting documentation. Instructions are on the form. You must follow them completely for the confirmation to be returned to you. Please remember these adjustments are only for the monthly late filers reports. The form and supporting documentation must be e-mailed to SLTX.

Lone Star Lines
Volume 17, July – September

When reporting multi-state and/or exempt premium policies and filing by paper, you must complete this new form which replaces the previous OTHER STATES/EXEMPT PREMIUM form. Instructions are included on the examples for policies effective both on and after 07/21/11 as well as prior to 07/21/11. Refer to the “Guidelines for Texas Surplus Lines Agents – Compliance with the NRRA” bulletin for further information pertaining to the Nonadmitted & Reinsurance Reform Act (NRRA).

This information is provided by the Surplus Lines Stamping Office of Texas to provide general guidance on the changes resulting from the Nonadmitted and Reinsurance Reform Act (“NRRA”). It is not being provided on behalf of the Texas Department of Insurance (“TDI”) or the Texas Comptroller’s Office and should not be considered legal or tax advice. For further guidance on issues arising from the NRRA, surplus lines licensees should contact the appropriate state agencies directly and/or seek professional legal and tax advice.

The provisions of the federal Nonadmitted and Reinsurance Reform Act become effective July 21, 2011. This bulletin provides you with information necessary to bind business and report policies. Future bulletins from Texas insurance regulators and tax officials will provide a broader summary of all aspects of the NRRA.

SLSOT has delayed issuing this bulletin, pending the passage of legislation affecting NRRA implementation in Texas. A bill (SB 1) amending premium tax laws is currently pending in the 82nd Legislature’s special session. After July 21, any sections of the Texas surplus lines laws that conflict with the NRRA are preempted.

The following apply to a policy with an effective date on or after July 21, 2011.

The importance of “home state of the insured.”

Under the NRRA, the insured’s home state assumes sole authority for the regulation of surplus lines transactions. This becomes critical in a placement insuring risks located in multiple states.

1) A surplus lines placement is subject solely to the statutory and regulatory requirements of the insured’s home state. The NRRA specifically preempts any state that is not the home state from attempting to apply its laws or regulations.

2) No state other than the insured’s home state may require a surplus lines agent to be licensed in order to sell, solicit, or negotiate surplus lines coverage. You must be licensed in each home state in which you write a policy.

3) Only the home state can require a premium tax payment.

“Home state” is defined as:

1) For a business, the state in which the insured maintains its principal place of business is the home state.

2) For an individual, the state in which the insured maintains its principal residence is the home state.

3) If 100% of the insured risk is located outside of the state identified in numbers (1) or (2) above, the state to which the greatest percentage of the insured’s taxable premium is allocated becomes the home state for that policy. However, if a tiny portion of the insured risk is located in the state identified in numbers (1) or (2) above, that state is the home state – even if another state has the vast majority of the risk insured.

4) If more than one insured from an affiliated group are named insureds on a single policy, the home state of the member of the group that has the largest percentage of premium attributed to it is the home state for that policy.

Some other important definitions found in the NRRA helpful in determining the home state are:

“Affiliate” means, with respect to an insured, an entity that controls, is controlled by, or is under common control with the insured.

“Affiliated group” means any group of entities that are all affiliated.

“Control” – an entity has “control” over another entity if:

1) the entity directly or indirectly or acting through one or more other persons owns, controls, or has the power to vote 25% or more of any class of voting securities of the other entity, or

2) the entity controls in any manner the election of a majority of the directors or trustees of the other entity.

Is Texas the “home state?”

Because of the NRRA provisions, it is imperative that a surplus lines agent determine the “home state” for each placement. A policy should only be reported to the Stamping Office and tax paid to Texas when Texas is the home state of the insured. On a multi-state procurement, even if 90% of the premium on the policy is allocable to risks located in Texas, but another state with insured risks is the home state, you should not report that policy to the Stamping Office.

The NRRA provides that the states may enter into an interstate premium tax-sharing agreement/compact to distribute the taxes paid to the home state on a multi-state placement. Texas has not elected to participate in such an agreement at this time. Therefore, when Texas is the home state, 100% of the taxable premium under the policy, regardless of location of the risk, should be charged the Texas tax rate of 4.85%. The entirety of that premium would be reported to the Stamping Office and all of the tax paid to Texas. Also, the stamping fee would be applicable on 100% of the taxable premium.

Is the buyer an “exempt commercial purchaser?”

A surplus lines agent is not required to meet the Texas diligent effort law if the buyer qualifies as an exempt commercial purchaser under the NRRA. To be eligible for this exemption, the agent must first disclose to the purchaser that the coverage may or may not be available from the admitted market that may provide greater protection with more regulatory oversight. After receiving this disclosure, the exempt commercial purchaser must request in writing that the agent procure the coverage in the surplus lines market. Under the NRRA, a buyer must also meet the following requirements to qualify as an exempt commercial purchaser:

1) Employ or retain a qualified risk manager. (The NRRA requirements for a qualified risk manager are listed at the end of this bulletin.)

2) Pay aggregate nationwide commercial property and casualty insurance premium in excess of $100,000 in the immediately preceding 12 months.

3) Satisfy at least one of the following:

a. Possess a net worth in excess of $20 million;

b. Generate annual revenues in excess of $50 million;

c. Employ more than 500 full-time employees per individual insured or be a member of an affiliated group employing more than 1,000 employees in the aggregate;

d. Be a not-for-profit organization or public entity generating annual expenses of at least $30 million; or

e. Be a municipality with a population in excess of 50,000 persons.

TDI may adopt regulations to impose reporting and record-keeping requirements on an agent for exempt commercial purchaser procurements. SLSOT will notify you of any necessary procedures resulting from the future adoption of new TDI regulations relating to exempt commercial purchasers.

Does the NRRA affect surplus lines insurer eligibility?

You should still refer to TDI’s Surplus Lines Insurers List to determine if a nonadmitted insurer is eligible in Texas. However, the NRRA restricts the ability of any state to apply its own insurer eligibility standards. For US insurers, a state may only (1) confirm that the insurer is licensed in its state of domicile to write the same kinds of insurance it intends to write in the surplus lines state, and (2) impose a minimum capital and surplus standard (in Texas, $15 million). Also, a state may not prevent an agent from using a non-US (alien) insurer appearing on the NAIC’s International Insurers Department Quarterly Listing of Alien Insurers. Accordingly, virtually all alien insurer eligibility in Texas will be based on that NAIC list.

No other eligibility standards are permissible, unless the states adopt nationwide uniform requirements, forms, and procedures as envisioned by the NRRA. Despite these limitations on TDI’s ability to determine insurer eligibility, for the benefit of agents, the Stamping Office plans to continue publishing on its website a 5-year Financial Summary for each eligible insurer.

To help you understand the changes brought about by the NRRA when filing with the Stamping Office, here is an example of a policy with multi-state exposure.

Policy effective 07/22/10 – 07/22/11 (prior to NRRA)

Premium breakdown
Texas – $10,000.00
Louisiana – $2,500.00
Oklahoma – $1,000.00

Report to SLSOT
TX premium – $10,000.00
Tax (4.85%) – $485.00
S Fee (.06%) – $6.00
Total – $10,491.00

Other States  – $3,500.00

 

Policy effective 07/22/11 – 07/22/12 (after NRRA)
Texas is the Home State

Premium breakdown
Texas – $10,000.00
Louisiana – $2,500.00
Oklahoma – $1,000.00

Report to SLSOT
TX premium – $13,500.00
Tax (4.85%) – $654.75
S Fee (.06%) – $8.10
Total – $14,162.85

Breakdown of States Summary – $3,500.00 (new category)

For multi-state policies for which Texas is the home state and which have an effective date on or after 07/21/11, you should report the total policy premium as Texas premium, but also continue to show the amount of the policy premium that is applied to risks located outside Texas, by using the new category “Breakdown of States Summary.” This will ensure the Texas tax is charged on 100% of the policy premium, but also still allow state officials to monitor the amount of non-Texas premium written on policies when Texas is the home state. For policies effective prior to July 21, continue to report under the “Texas” category only Texas premium and report the premium allocable outside Texas under the “Other States” category. If you are among the dwindling number of agents continuing to file paper copies of policies, a revised form for reporting the allocation of premium on a multi-state policy to the Stamping Office will soon be available on SLSOT’s website, along with instructions.

For a multi-year or continuous-until-cancelled policy, these rules/requirements should be applied on the policy’s first anniversary date effective on or after July 21, 2011.

Premium that is covered by a statutory tax exemption or federal preemption should still be reported using the “Exempt” category. This applies to all policies, regardless of effective date.

In the event that Texas joins an agreement or compact with other states to allocate premium taxes on multi-state policies, agents will be required to report the allocation of premium for each state covered under the policy, by individual state name, when Texas is the home state on a multi-state policy. This change may have very little lead time for implementation. We are in the process of updating our systems to capture this data. Agents should also begin to make plans for programming changes if filing programmatically using our Electronic Filing System (EFS). Filing procedures, data rules, and file formats will be available on the EFS website shortly.

Please refer questions regarding these important market changes to SLSOT, at (512) 531-1880.

NRRA Qualified Risk Manager Requirements

Under the NRRA, a qualified risk manager with respect to a policyholder of commercial insurance means a person who meets all of the following requirements:

A. The person is an employee of, or third-party consultant retained by, the commercial policyholder.

B. The person provides skilled services in loss prevention, loss reduction, or risk and insurance coverage analysis, and purchase of insurance.

C. The person –

(i)(I) has a bachelor’s degree or higher from an accredited college or university in risk management, business administration, finance, economics, or any other field determined by a State insurance commissioner or other State regulatory official or entity to demonstrate minimum competence in risk management; and

(II)(aa) has 3 years of experience in risk financing, claims administration, loss prevention, risk and insurance analysis, or purchasing commercial lines of insurance; or

(bb) has –

(AA) a designation as a Chartered Property and Casualty Underwriter (CPCU) issued by the American Institute for CPCU / Insurance Institute of America (now known as The Institutes);

(BB) a designation as an Associate in Risk Management (ARM) issued by The Institutes;

(CC) a designation as Certified Risk Manager (CRM) issued by the National Alliance for Insurance Education & Research;

(DD) a designation as a RIMS Fellow (RF) issued by the Global Risk Management Institute; or

(EE) any other designation, certification, or license determined by a State insurance commissioner or other State insurance regulatory official or entity to demonstrate minimum competency in risk management;

(ii)(I) has at least 7 years of experience in risk financing, claims administration, loss prevention, risk and insurance coverage analysis, or purchasing commercial lines of insurance; and

(II) has any 1 of the designations specified in subitems (AA) through (EE) of clause (i)(II)(bb);

(iii) has at least 10 years of experience in risk financing, claims administration, loss prevention, risk and insurance coverage analysis, or purchasing commercial lines of insurance; or

(iv) has a graduate degree from an accredited college or university in risk management, business administration, finance, economics, or any other field determined by a State insurance commissioner or other State regulatory official or entity to demonstrate minimum competence in risk management.

With the passage of SB 1806, TDI will assess new fees against surplus lines agents on certain late filed transactions. At the end of each year, the Stamping Office will provide TDI with a report summarizing all the late filed policies and the total percentage of late filed policies for each agent for the year.

If you discover transactions listed on the monthly late filing report that you believe appear in error, please contact us at once. You will need to provide us with appropriate documentation to confirm the item in question is not late so it can be adjusted before the end of the year. If you delay too long before notifying us of “false-positive” transactions, it will be too late to have them resolved. Please contact SLTX with questions regarding these reports.

To view SB 1806, click here.