The National Association of Insurance Commissioners (NAIC) acts as the trade association for state insurance commissioners. The Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) delegated to the NAIC responsibility for determining whether an alien insurer (i.e., an insurer domiciled outside the United States) qualifies to accept risks from a licensed surplus lines broker.
A state may not prohibit a surplus lines broker from placing nonadmitted insurance with, or procuring nonadmitted insurance from, a nonadmitted insurer domiciled outside the United States that is listed on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the NAIC.
As a matter of federal law, the NAIC therefore is vested with the role of gatekeeper to protect the public from the risk of insolvency – or outright fraud – by insurers domiciled outside the United States.
Infamous frauds not so long ago by Alan Teal and Carlos Miros, among others, as well as gross mismanagement in other cases, led to multiple insurer insolvencies of nonadmitted insurers during the 1970s and 1980s. Transit, Mission, and Mutual Fire are a few that come to mind. Without guaranty association coverage, untold millions of dollars of claims went unpaid.
What happens if the NAIC fails to detect obvious patterns of failures to pay claims, disregards red flags signaling material financial deterioration, or overlooks outright fraud? Is the NAIC effectively a financial guarantor for having vetted alien insurers?
Surplus lines brokers ultimately are responsible for the security of alien insurers with whom they place business. Nothing in the NRRA provides any immunity for failure to discharge that obligation simply because an alien insurer is on the NAIC’s approved list.
Nonetheless, in assessing the quality of security, surplus lines brokers, risk managers, and the public rely heavily on any approval that carries indicia of the NAIC Quarterly Listing of Alien Insurers.
But is the NAIC up to the task to protecting the public from unscrupulous insurers beyond the reach of U.S. regulatory jurisdiction?
Congress never contemplated that fraudsters posing as insurers domiciled on some atoll in the middle of the Pacific would be quick to exploit NRRA transitional cracks. Under the NRRA, the NAIC is charged with making sure that does not happen.
To effectively protect the public, two key pieces are missing.
The first is the expertise of senior insurance regulatory personnel who have dealt with problems involving nonadmitted insurers on a day-to-day basis.
Over the years, regulatory staff at the larger insurance departments developed their own informal network for information exchange whenever apparent bad actors came to their attention. They did not simply await quarterly or annual financial reports.
Equally if not more important is the second missing piece. Surplus lines stamping offices, industry trade organizations such as the National Association of Professional Surplus Lines Offices (NAPSLO) and the American Association of Managing General Agencies (AAMGA), and well-regarded industry leaders have served as an informal market surveillance network to regulators for decades. The latter in particular know the alien insurer players throughout the world and are well-informed about what is happening in the market on a real-time basis.
By enacting the NRRA, Congress did not intend to mothball the market surveillance resources that have been so effective in protecting the public from fraudulent offshore operations.
The state insurance commissioners have a duty to ensure that their trade organization draws fully on the resources and expertise of state insurance departments, stamping offices, and industry. Congress took it as a given that they would.