Procedural Updates

Beginning January 1, 2013, the Texas Department of Insurance (TDI) will require agents, when reporting to the Stamping Office, to identify policies that were procured for an “Exempt Commercial Purchaser” (ECP) without conducting a diligent effort for coverage in the admitted market. This may be done in one of three ways:

1. Paper Filers – Paper filers must submit the new “Exempt Commercial Purchaser Form” (sample attached).
2. EFS Filers (programmatic method) – EFS filers submitting business through the Electronic Filing System (EFS) using the programmatic method simply set the ECP flag to “Yes”. Instructions can be found in the Technical Reference Supplement on the EFS website, as previously informed by global email on 07/28/11.
3. EFS Filers (web entry) – Those filing through web entry will only need to change “No” to “Yes” on the ECP button.

Note this requirement is for policies filed with the Stamping Office on or after January 1, 2013. Please refer all questions regarding the regulation of an exempt commercial purchaser policy to the Texas Department of Insurance.

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 ECP under the federal Nonadmitted & Reinsurance Reform Act (NRRA) and follows the “streamlined application” procedures permitted under the NRRA. Those procedures require the agent first to disclose to a purchaser who meets the NRRA definition of an ECP that 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. The NRRA defines an ECP as a buyer who meets the following requirements:

1. Employs or retains a qualified risk manager.
2. Pays aggregate nationwide commercial property and casualty insurance premium in excess of $100,000 in the immediately preceding 12 months.
3. Satisfies 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.

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.

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

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.

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.

TO: ALL INSURERS AUTHORIZED OR ELIGIBLE TO ENGAGE IN THE BUSINESS OF INSURANCE IN THE STATE OF TEXAS, ALL AGENTS, ALL THIRD-PARTY ADMINISTRATORS, ALL TRADE ASSOCIATIONS, AND THE PUBLIC GENERALLY.

RE: ENACTMENT OF HB 3221 BY THE 81ST TEXAS LEGISLATURE RELATING TO AUTOMATIC WITHDRAWAL OF FUNDS FROM A PERSON’S ACCOUNT.

The purpose of this bulletin is to notify insurers of the requirements of House Bill 3221 (HB 3221 ), amending Section 550.002 of the Insurance Code relating to the required notification before automatic premium payments may be increased. The Department has received several inquiries relating to the implementation of HB 3221. Section 550.002, as amended, applies to insurers that collect insurance premiums through the automatic withdrawal of funds from their insureds’ specified accounts. Section 550.002 requires these insurers to provide notice to their insureds of an increase in the automatic withdrawal amount and a means for objecting to the increased withdrawal prior to the funds being withdrawn. Insurers should review their business practices to ensure that they are in compliance with the laws described in this bulletin.

Provisions of Amended §550.002

Section 550.002(b) applies to an insurer receiving automatic premium payments through withdrawal of funds from a person’s account. This section requires the insurer to provide notification to a person relating to an increase in the amount of funds to be withdrawn from the person’s account to pay premiums on insurance coverage. Section 550.002(b) is amended to specify that this notification must be provided by mailing a notice through the U.S. Postal Service.

Section 550.002(b-1) specifies the required contents of the notice and identifies the means by which a policyholder may object to an increase in the automatic withdrawal amount. This section provides that the notice must include the insurer’s toll-free telephone number, mailing address, and electronic mail address, if applicable, through which the person may object to the increase. This section further provides that an objection made by the policyholder through a telephone call, mail, or electronic mail constitutes a valid objection.

Section 550.002(b-2) specifies that the insurer may increase the amount of funds to be withdrawn only if the insurer does not receive a valid objection to the automatic withdrawal increase on or before the fifth day before the date on which the increase is scheduled to take effect.

Applicability

Section 550.002 applies to a person or entity engaged in the business of insurance in the State of Texas as described by Chapter 101, including a person or entity engaged in the business of surplus lines insurance in this state.

Section 550.002(b) applies to “an insurer receiving automatic premium payments through withdrawal of funds from a person’s account.” The term “account” is defined by §550.002(a)(1) as “a person’s account in a financial institution.” “Financial institution” is defined by §550.002(a)(2) as “a state or national bank, a state or federal savings and loan association or corporation, or a state or federal credit union.” Section 550.002(b) extends the definition of “account” to include an escrow account.

Section 550.002 applies to increases in the amount of funds to be automatically withdrawn from an account by an insurer to pay premiums. The notice requirement applies without consideration of the reason for the increase in the premium payment amount.

The notice requirement applies to any increase in the automatic withdrawal amount to pay premiums that occurred on or after June 19, 2009, subject to the exemptions outlined in §§550.002(c) and (d).

Timing

Section 550.002(b) requires the notice to be mailed “not later than the 30th day before the effective date of the increase in the premium payment amount.” Section 550.002(b-2) addresses receipt of a valid objection “on or before the fifth day before the date on which the increase is scheduled to take effect.” Insurers may vary in the timing of their automatic fund withdrawals. Therefore, for some persons, the effective date of the premium increase may be the date the coverage takes effect, while for others, it may be the date the funds are withdrawn. So, for example, the notice is required to be mailed not later than the 30th day before the earlier of the extraction date or the coverage effective date, whichever is applicable.

Mailing Requirement

Section 550.002(b) requires “mailing a notice through the United States Postal Service.” Pursuant to the Texas Business and Commerce Code §322.00B(b) relating to agreements to conduct business by electronic means, if a law other than Chapter 322 of the Texas Business and Commerce Code requires a record to be sent, communicated, or transmitted by a specified method, the record must be sent, communicated, or transmitted by the method specified in the other law. Texas Business and Commerce Code §322.008(d)(2) does allow a requirement under a law other than Chapter 322 of the Texas Business and Commerce Code to send, communicate, or transmit a record by first class mail to be varied by agreement to the extent permitted by the other law. However, §550.002 does not provide for variation of the notice requirement by agreement. Therefore, the notices must be mailed through the U.S. Postal Service, despite any agreements to transact business electronically.

Exemptions

Section 550.002(c)(1) exempts insurers from the notice requirement if the insurance contract or certificate, when issued, contains a schedule of increasing premiums; expressly specifies the exact amount of each premium; and specifies the period for which each premium is payable.

Pursuant to §550.002(c)(2), an insurer is not required to notify a person of an increase in a premium payment amount if the increase is the result of a change ordered by the insured. Moreover, §550.002(d) exempts increases in a premium payment that are less than $10 or 10 percent of the previous monthly amount from the notice requirement.

Objection Protocol

The protocol an insurer must follow to respond to an insured’s objection of the automatic withdrawal prevents amount is not specifically addressed in statute. An objection under §550.002 prevents the automatic withdrawal of the additional premium from the insured’s specified account, not the actual increase in premium. Therefore, if an insured objects to the increase in automatic withdrawal amount, the insurer may not increase the automatic withdrawal amount. The insurer may use other means to collect the additional premium due.

If you have any questions regarding this bulletin, contact Leslie Hurley, Manager, Personal Lines Division, Property & Casualty Program at (512) 322-2266 or Doug Danzeiser, Deputy Commissioner, Life, Health & Licensing Program at (512) 475-1964.

Marilyn Hamilton, Associate Commissioner
Property & Casualty Program MC 104-PC

Texas Commissioner’s Bulletin No. B-0011-08 has been issued to all P&C insurers and eligible surplus lines insurers. Insurers subject to rate and form regulation must submit policy language and rates regarding terrorism coverage. For surplus lines insurers, the bulletin is primarily advisory, reminding them that domestic acts of terrorism must now be covered. Also, insurers must provide a clear disclosure to policyholders of the existence of a cap of $100 million in aggregate industry insured losses before federal reimbursement is triggered under the program. The bulletin can be accessed at this link, or below:

 

To:ALL PROPERTY AND CASUALTY INSURERS AND ELIGIBLE SURPLUS LINES INSURERS

Re:Terrorism Risk Insurance Program Reauthorization Act of 2007

Purpose

The purpose of this bulletin is to advise insurers of certain provisions of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the Reauthorization Act) that may require insurers to submit a filing in Texas of the policy language and the applicable rates as a result of the Reauthorization Act.

Background

There has been much uncertainty in the markets for commercial lines property and casualty insurance coverage in light of the substantial losses experienced by the industry on September 11, 2001. Soon after the tragic events, many reinsurers announced that they did not intend to provide coverage for acts of terrorism in future reinsurance contracts. This led to a concerted effort on behalf of all interested parties to seek a temporary federal backstop to calm market fears over future terrorist attacks and the ability of the insurance industry to allocate capital to provide coverage for these unpredictable and potentially catastrophic events. As a result, Congress enacted and the President signed into law in November 2002, the Terrorism Risk Insurance Act of 2002 (the Act). This federal law provides a federal backstop for defined acts of terrorism and imposes certain obligations on insurers. The Act was extended for a two-year period covering Program Years 2006 and 2007. The Act has now been extended for an additional seven years through December 31, 2014 with the enactment of the Reauthorization Act.

Several provisions of the initial Act have changed in the 2007 reauthorization. Those changes include:

• Revising the definition of a certified act of terrorism to eliminate the requirement that the individual(s) is acting on behalf of any foreign person or foreign interest.
• Extending the program through December 31, 2014.
• Requiring clear and conspicuous notice to policyholders of the existence of the $100 billion cap.
• Fixing the Insurer Deductible at 20% of an insurer’s direct earned premium, and the federal share of compensation at 85% of insured losses that exceed insurer deductibles.
• Fixing the program trigger at $100 million for all additional program years.
• Requiring the U.S. Treasury to promulgate regulations for determining pro-rata shares of insured losses under the program when insured losses exceed $100 billion.
• Requiring the Comptroller General to study the availability and affordability of insurance coverage for losses caused by terrorist attacks involving nuclear, biological, chemical, or radiological materials and issue a report not later than one year after the enactment of the Reauthorization Act.
• Requiring the Comptroller General to determine whether there are specific markets in the United States where there are unique capacity constraints on the amount of terrorism insurance available and issue a report not later than 180 days after the enactment of the Reauthorization Act
• Requiring the President’s Working Group on Financial Markets to continue an ongoing study of the long-term availability and affordability of terrorism risk insurance.
• Accelerating the timing of the mandatory recoupment of the federal share through policyholder surcharges.

Other terms of the Act, as amended by the Terrorism Risk Insurance Act of 2005, remain unchanged.

Definition of Act of Terrorism

One of the changes made to the Act with the enactment of the Reauthorization Act was a revision to the definition of an act of terrorism that eliminated the requirement that an individual or individuals that carry out an act of terrorism be acting on behalf of a foreign person or foreign interest. In short, this means that acts formerly referred to as “domestic” terrorism may now be certified as an act of terrorism under the Act.

Section 102(1) of the Act defines an act of terrorism for purposes of the Act. Please note that the unmodified reference to “the Secretary” refers to the Secretary of the Treasury. The revised Section 102(1)(A) states, “The term “act of terrorism” means any act that is certified by the Secretary, in concurrence with the Secretary of State, and the Attorney General of the United States-(i) to be an act of terrorism; (ii) to be a violent act or an act that is dangerous to-(I) human life: (II) property; or (III) infrastructure; (iii) to have resulted in damage within the United States, or outside the United States in the case of-(I) an air carrier or vessel described in paragraph (5)(B); or (II) the premises of a United States mission; and (iv) to have been committed by an individual or individuals, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.” Section 102(1)(B) states, “No act shall be certified by the Secretary as an act of terrorism if-(i) the act is committed as part of the course of a war declared by the Congress, except that this clause shall not apply with respect to any coverage for workers’ compensation; or (ii) property and casualty insurance losses resulting from the act, in the aggregate, do not exceed $5,000,000.” Section 102(1)(C) and (D) specify that the determinations are final and not subject to judicial review and that the Secretary of the Treasury cannot delegate the determination to anyone.

The Act, as amended, contains in Section 103(1)(B) a program trigger of $100 million in aggregate industry insured losses resulting from a certified act of terrorism before federal reimbursement is triggered.

Submission of Rates and Policy Form Language

Insurers subject to policy form and rate regulation must submit the policy language and rates that they intend to use in Texas. The policy should define acts of terrorism in ways that are consistent with the Act, as amended and state law. The definitions, terms and conditions should be complete and accurately describe the coverage that will be provided in the policy. Insurers may conclude that current filings are in compliance with the Act, as amended and state law, in which case no filing is necessary. However, if policy forms make a distinction between acts of a foreign person or foreign interest and a domestic person or domestic interest, it is likely that a filing is necessary. Proposed rate changes filed in Texas should reflect any reduction in ultimate exposure provided by the Federal program. Supporting documentation for such filings must be sufficient for the Texas Department of Insurance (the Department) to determine if the rates are excessive, inadequate or unfairly discriminatory.

The Department has approved/accepted various filings relating to certified acts of terrorism for the Insurance Services Office, Inc. (ISO) and the American Association of Insurance Services (AAIS). A list of the Advisory Organization Approved/Accepted filings can be found on the Department’s website at https://www.tdi.texas.gov/commercial/pccpadvs1.html. Please contact ISO or AAIS for details.

All filings should be made in accordance with the requirements contained in the Department’s Property & Casualty Filings Made Easy Manual. This manual can be found on the Department’s website at http://www.tdi.texas.gov/company/rspceasy.html.

Disclosures

Another change introduced in the Reauthorization Act is a new disclosure requirement for any policy issued after the enactment of the Act. Specifically, in addition to other disclosure requirements previously contained in the Act, insurers must now also provide clear and conspicuous disclosure to the policyholder of the existence of the $100 billion cap under Section 103(e)(2), at the time of offer, purchase and renewal of the policy. The disclosures should comply with the requirements of the Act, as amended, and should be consistent with the policy language and rates filed by the insurer. Insurers must continue to separately state the amount of the estimated portion of the premium being charged a policyholder for acts of terrorism, as defined in the Act. Disclosure notices are not required to be filed with the Department.

Effect on Workers’ Compensation Insurance Coverage

Even with the passage of the Reauthorization Act, workers’ compensation coverage continues to be treated slightly different than the other property and casualty insurance lines. Section102(1)(B)(i) continues to provide that the Federal program will share the risk of loss for workers’ compensation for acts of war in addition to acts of terrorism. This treatment occurs because of the statutory scheme of workers’ compensation, which does not provide an exclusion for losses resulting from an act of war or an exclusion for losses resulting from acts of terrorism. There is no provision in the Reauthorization Act that would preempt the compulsory coverage aspects of Texas workers’ compensation insurance policies. In other respects, however, workers’ compensation coverage is treated under the Reauthorization Act as any other covered line of insurance.

The notice requirements of the new Section 103(b)(3) and the mandatory availability requirements of Section 103(c) still apply to workers’ compensation policies. Workers’ compensation insurers must continue to separately state the amount of the estimated portion of the premium being charged a policyholder for acts of terrorism, as defined in the Reauthorization Act. Since the Texas workers’ compensation law does not have any exclusion for terrorism or war, neither insurers nor policyholders may create an exclusion.

All filings should be made in accordance with the requirements contained in the Department’s Property & Casualty Filings Made Easy Manual. This manual can be found on the Department’s website at https://www.tdi.texas.gov/pubs/pc/rspceasy.html .

Contact Information

Questions regarding workers’ compensation should be addressed to Nancy Moore, Deputy Commissioner, Workers’ Compensation Division, MC 105-2A, Texas Department of Insurance, P.O. Box 149104, Austin, TX 78714-9104, (512) 322-3486, Nancy.Moore@tdi.state.tx.us. Questions regarding surplus lines should be addressed to Kathy Wilcox, Registration Officer, Company Licensing and Registration Division, MC 305-2C, Texas Department of Insurance, P.O. Box 149104, Austin, TX 78714-9104, (512) 322-3535, Kathy.Wilcox@tdi.state.tx.us, and other questions regarding this bulletin should be addressed to Mark Worman, Manager, Commercial Property/Casualty Section, MC 104-PC, Texas Department of Insurance, P. O. Box 149104, Austin, TX 78714-9104, (512) 305-7544, Mark.Worman@tdi.state.tx.us.

The Department may supplement this bulletin as necessary.

Sincerely,
Mike Geeslin
Commissioner of Insurance

In December 2006 the Board of Directors of the Surplus Lines Stamping Office of Texas recommended to the Commissioner of Insurance a decrease in the stamping fee rate charged on Texas surplus lines policies. In March 2007 the Commissioner ordered that the rate be lowered from .1% (.001) to .06% (.0006), effective July 1, 2007.

The lower stamping fee rate will apply to each new or renewal surplus lines policy with an effective date on or after July 1, 2007. The new rate will apply also to policy date extensions if effective on or after this date. Policies effective on or before June 30, 2007 will run to expiration, cancellation, or next annual anniversary date (for multi-year policies) at the old rate of .1% This includes any subsequent endorsements, audits, cancellations, reinstatements, installments, and monthly or quarterly reports.