Primer on the Non-Admitted Market

The Surplus Line Market is a Well-Regulated and Well-Functioning Market

The non-admitted market is often misunderstood. The non-admitted market (surplus line market) is not unregulated, as some believe. The non-admitted insurance carriers are regulated in their domiciliary jurisdiction and must be eligible under federal and California law before business can be placed with them (exported to them). Additionally, the surplus line broker in California is licensed and regulated directly by the California Department of Insurance. Surplus line brokers are also subject to periodic audits by the California Department of Insurance. In a summation, the nonadmitted market is a well-functioning, well-regulated market that serves as an appropriate place for consumers to obtain coverage when the admitted market is unable to meet their insurance needs.

State and Federal Regulations

There are twenty-one sections of the California Insurance Code devoted to regulating surplus lines. Sections 1760 through 1780 provide the surplus line broker licensing requirements, policy placement conditions with a non-admitted insurer, and the prerequisites of a non-admitted insurer writing business in California.

Surplus Line Broker Licensing Requirements: To transact business as a surplus line broker, a resident broker must hold a property and casualty (P&C) license, which requires passing the fire and casualty examination for broker-agents, before applying for a surplus line license. In addition to holding a P&C license in their resident state, a non-resident broker must also hold a surplus line license in their resident state before applying for a surplus line license.¹ The broker must complete an application, complete a Surplus Line and/or Special Line Certification form stating the applicant has read the sections of the California Insurance Code pertaining to surplus lines, and file a surety bond of $50,000 to the people of the State of California.

To maintain the surplus line license, the resident broker must complete a renewal application and pay a fee to renew his/her license every two years. To maintain the P&C license, the resident broker is required to complete continuing education each license term. The non-resident broker must complete the continuing education required by their resident state.

For an applicant applying for a business entity surplus line license, brokers transacting under the organizational license must be named under the license and a surety bond of $50,000 must be filed to the people of the State of California.

Conditions of Placement with a Non-Admitted Insurer: Before a risk is placed in the surplus line market, the surplus line broker must ensure that insurance is not generally available from admitted insurers qualified to write that type of insurance. Except for narrow exemptions for commercial insureds, specialty lines, and coverages listed on the "export list" maintained by the California Department of Insurance, brokers must complete an affidavit (Diligent Search Report or SL2 form) documenting the diligent search effort to place the risk in the admitted market. Insurance buyers must sign a disclosure statement (D1 form) acknowledging that the risk is being placed with a nonadmitted insurer and that guaranty fund protection is unavailable to the buyer. If the SL2 form shows that three admitted insurers that actually write the particular type of insurance decline the risk or fewer than three admitted insurers write the type of insurance, it is prima facie evidence that a diligent search was made.

The broker must not place insurance with a non-admitted insurer solely for obtaining a premium less than the lowest premium offered by an admitted carrier. A premium tax is levied on all surplus line transactions to the insured with payment remitted to the CDI by the broker. The broker must submit the policy and required documents to the stamping office for review to verify that the placement was handled correctly by the broker.

The brokers are audited by the Premium Tax Audit Bureau of the CDI to ensure compliance with tax filings.

Eligibility Requirements for a Non-Admitted Insurer: Non-admitted insurers on the LASLI (List of Approved Surplus Line Insurers) must demonstrate their financial stability, reputation and integrity; maintain a minimum of $45 million in capital and surplus at all times; have three years' seasoning (or qualify for an exception); have a valid license to transact insurance in their domicile; file financial information with the CDI; and adhere to specific capitalization, investment and solvency standards established under the California Insurance Code.

On July 21, 2011, the Non-Admitted Reform and Reinsurance Act (NRRA) went into effect, establishing federal guidelines for non-admitted insurer eligibility in all states.

The SLA worked with California regulators to adapt the federal standards to conform with existing California law, which led to the creation of AB315. AB315 established the requirements for non-admitted insurers not on the LASLI to write policies in California:

• Foreign companies must maintain a minimum capital and surplus of $45 million and be authorized to transact in their state of domicile.
• Alien companies must be included on the NAIC's Quarterly List of Alien Insurers.

About The Surplus Line Association of California: Overview

The Surplus Line Association of California (SLA) is a private, non-profit entity that serves as the statutory surplus line advisory organization to the California Department of Insurance (CDI). As the advisory organization, the SLA is assigned responsibilities by California's elected Insurance Commissioner. The Commissioner utilizes the expertise, knowledge, and statistical data of the SLA in implementing the surplus line laws and regulations of California.

The Surplus Line Association of California

The Association's membership is comprised of surplus line brokers who are licensed by the state to negotiate and place insurance coverage for California consumers with non-admitted insurers (insurers unlicensed in California). When California consumers with unique or unusual risks are denied coverage by admitted insurance companies (insurers licensed in California) they need access to insurance in the non-admitted market. The SLA currently has over 4,000 members.

The mission of the SLA: Governance

The SLA is a self-governed private organization in which the governing body, the Board of Directors, is elected by the membership annually. The Association operates under the direction of the Board of Directors and six other committees appointed by the Board of Directors. These committees include the Stamping, Information Technology, Education, Legislative, Audit, and Admitted Market Liaison.

Origins

In 1937, the state legislature of California revised surplus line law enabling the Insurance Commissioner to oversee the regulation of the surplus line industry. To assist with the oversight, surplus line brokers formed the Surplus Line Association of California to keep their members aware of regulations and guidelines relating to surplus line insurance. In 1939, the Commissioner requested the SLA expand its role of a "stamping office" to receive and examine broker filings.

In the late 1980s and early 1990s, surplus line activity increased significantly and California regulators passed additional rules and regulations to tighten controls on surplus line transactions. Regulation 2174 established stricter financial and operational standards for non-admitted insurers doing business in California.

Stamping Office and Its Duties

Historically, the stamping office performed two functions in assisting the Commissioner oversee surplus line activity: 1) ensuring broker filings were in order and compliant with existing laws and regulations, and 2) collecting and reviewing the financial information regarding the non-admitted insurers used by its members.

Today these two functions remain essential components in monitoring surplus line activity. In addition, information from the filings is entered into a database providing statistical data and reports requested by the CDI.

The data from 2008 through 2012 show that the majority of consumers purchasing insurance with non-admitted carriers were commercial entities; only 4% of all policies processed by the SLA and only 1% of premium processed by the SLA were in personal lines. In the same time period, the top five coverages based on premium processed were in commercial lines: commercial general liability, commercial difference in condition and stand-alone earthquake, commercial property all risk, errors and omissions, and special multi-peril coverage.

The Executive Director oversees the operations of the office and executes the strategic goals set forth by the Board of Directors. The Executive Director represents the Association and serves as the liaison between the membership and state and federal regulators.

Other duties performed by the Executive Director include:

• Reporting to the Commissioner any fraudulent or illegal insurance activities in the surplus line market.
• Responding to any request by the Commissioner on proposed legislation or regulation affecting the placement of insurance in accordance with surplus line law.
• Receiving, disseminating, and educating its members about surplus line laws and regulations.
• Communicating with admitted insurer organizations with respect to the proper use of the surplus line market.

The SLA is funded by a stamping fee charged for each premium-bearing document reviewed. The fee reflects all reasonable costs associated with the services provided by the SLA.

Outlook

Under the direction of the CDI, the SLA is committed to maintaining a responsive and lawful California surplus line market that protects the policyholders. The SLA continues to honor its mission statement by working with the regulators and its membership to maintain a healthy, fair and competitive surplus line marketplace in California and protect the interests of the California consumer.