The Excess Line Association of New York (ELANY) plays a vital role for New York’s surplus-lines industry. The group, a non-profit advisory association created by the New York statute in 1988, is charged with the duty to facilitate and encourage compliance with the excess line law.
The ELANY’s many responsibilities include serving as a facilitator between brokers and regulators, and conducting financial review and oversight of non-admitted markets.
Andrew G. Simpson, vice president of content for Wells Media Group Inc., recently sat down with the ELANY’s Executive Director Daniel Maher to discuss the state of the surplus-lines industry.
They talked about a wide range of topics, including: the secret of the surplus-lines industry’s resiliency; what’s happening in terms of the volume of premiums in New York; and the consolidation of financial and regulatory offices in New York. The following are their questions and answers:
Insurance Journal: The surplus-lines industry is resilient. It seems to come through soft markets, catastrophes, bad economies, and manages to profit. What’s the secret, do you think? Obviously, there’s pricing freedom and form freedom. Is that all there is, or is there something else going on?Daniel Maher: I think it goes beyond that. Certainly, freedom of form and freedom of rate are the hallmarks of our industry, and your ability to put exclusions, sub-limits, get out of a book of business more quickly than if you are writing it on an admitted basis, all of those things are positives that help the E&S industry.
But the E&S industry has, on a national average, outperformed, from a combined-ratio standpoint, the admitted market by an average of five or six points consistently for the last decade and a half.
And I think one of the reasons that helps, besides freedom of rate and form, is the fact that there is not as much competition. There’s certainly competition in the E&S market, but the admitted market has largely passed on the book of business that the E&S carriers are seeing.
So, about two-thirds of New York’s surplus-lines business is placed through wholesalers. That generally means that there’s a retailer out there who can’t find one of his standard markets to write the risk. So certainly, the fact that there’s a little less competition helps you get a better rate, even if there is some competition in the E&S market.
Also, there’s certain expenses that the admitted market is required to pay, whether it’s residual market charges, taxes, that don’t necessarily apply in most or all states, such as guarantee funds, except for New Jersey. That applied to the admitted market, but don’t apply to the E&S market. So, there’s a little benefit there, too.
Do you think it’s also that there’s a specialized knowledge — that they really know these risks that they are getting on?
I think that’s absolutely the case. And the standard market, sometimes shows a broader appetite in the softest of markets and they get into risks that, perhaps, aren’t their standard type risk. And a lot of times, you’ll see three or four years later, both because it’s something they’re not used to underwriting, they haven’t been as sharp about it as the E&S writers might be and they didn’t get the rate they wanted, or they got the rate they wanted but it wasn’t adequate.
And that’s when that business starts to flow back to the non-admitted side, to the E&S side.
How important is the broker in that whole transaction, do you think, getting the risk where it should be at the right price?
I think that the brokers — particularly the wholesale brokers — view that retail broker as their client. The retail broker is probably placing 80 percent of their business in some type of standard market, whether they’re more of a personal lines producer, or again, small commercial lines.
They might be used to a typical workers’ comp policy, a BOP policy, auto, whether it’s private, passenger, or commercial. But when you start getting into some of the professional lines, the Arizona missions, the directors’ and officers’ liability, large property risks where that broker’s getting a little bit out of his expertise, that’s what the wholesaler brings to the table.
They have an expertise in specialized coverages, and it’s good for the insurance companies because as carriers you want somebody who can present that risk in the format in which you want it so you can really evaluate it. And it’s easier for the companies to deal with one expert wholesaler than it is to deal with maybe 100 retailers who are not as familiar with the particular class of business.
If you look at least nationally at premium growth or lack thereof over the past few years, it does look like premiums are rebounding for the surplus-lines industry. I’m wondering if you’re finding that in New York. What was 2011 like, and what have you seen this year?
I’m going to give you an interesting answer here. Our statistics, purely looking at our annual stats, you would say business is down by premium by over $600 million at nine months year-over-year. So, that seems like business is off, but there are certain things in our book of business or what I would consider the E&S book of business in New York that have distorted those numbers.
We had a very large amount of return premium transactions this year on a very large book of business. That drives down our numbers. In New York, when you file a transaction, you have to file it for the written premium if it’s a multi-year transaction.
Well, ELANY has seen a lot of those transactions in past years involving the Freedom Tower, the proposed tunnel that was going to be built from New Jersey to New York. So, we would see spikes, if you will, in those years that those transactions were reported. This year, we didn’t have those kind of transactions.
So, if you take out those distortions, I would say we are probably up a little bit. Certainly on a transaction count, we’re up five to six percent at nine months this year from year over year. So, I think the business is coming back because the economy is coming back a bit, and there are certain lines of business that drive that in New York, too.
Is there anything on the account side that surprises you about what’s being retained in the stated markets, or moving?
No, we see a lot of capacity risks in New York. I’d say that’s perhaps more obvious because having Manhattan and skyscrapers and the need for megalimits, you see a lot of that business in New York that you might not see in some of the more rural states or suburban states.
And what we’re seeing more than anything else, market drivers in New York include construction, a very difficult class of business in New York, because New York has some unique laws that take what is a tough class of business to begin with and make it even tougher. And you also see coastal property, and again, the skyscraper properties in Manhattan that are drivers of our market.
The non-admitted and reinsurance reform act that was part of Dodd-Frank passed in, I think, 2010. It went into effect about a year ago. How do you see that being implemented across the country, but particularly in New York? Does New York have the compliance legislation in place, and what’s happening?
Yes, we worked hard on getting conforming legislation so that New York’s law reflected the changes that were required by particularly the Non-admitted and Reinsurance Reform Act of Dodd-Frank. And we have the number one rule which is that only the home state of the insured can regulate and tax a risk.
We’ve obviously implemented that. Exempt commercial purchaser, that’s another spoke in that bill. The question of tax allocation was a big one. Perhaps it took on a greater aspect of implementation than some of these other provisions. At a point, the New York Insurance Department at the time — now the Department of Financial Services — had sought to adopt the NEMA proposal, and the industry really objected to that, and we were successful in convincing the legislature that that was not the way to go.
And New York, if you said, what are the majority of states doing right now, the overwhelming majority of states are taxing 100 percent of the risk when they are the home state of the insured. And New York, because it pulled the NEMA provisions out of the budget bill, which the Department had proposed that that become New York law, once they were pulled out, we went to 100 percent taxation, but unfortunately, with one little twist.
The carriers and the brokers did not want to pay tax on the portion of the risk that insures exposures outside of the United States because they felt that that was never done in the past. So, we actually do have allocation, but it’s only allocating to not pay premiums related to international exposures.
Apparently, there are a handful of states that still have some concern or desire to do some sharing of the taxes. Do you see that changing? Do you think New York will be changing its situation now, or pressure from other states will end up creating some kind of agreements for sharing?
I think that tax sharing will probably die. I don’t know how quickly. We were supporters of SLIMPACT (Surplus Lines Insurance Multi-State Compliance Compact), we thought that was the right way to go. It was an interstate compact, and nine states passed it. We needed 10 to get it off the ground. The NAIC really wanted to go in a different direction, and they helped foster the NEMA proposal.
Well, where that left the industry was, instead of getting uniformity which is what everybody was seeking, it would’ve created three different approaches. So, right now the shortest distance between two points is getting the rest of the states to say, we’ll tax 100 percent when we’re the home state. We’re closest to that, so that would seem to be the best way and the shortest distance to get uniformity. So, I think that’s where the industry’s going.
Some people have suggested the money involved isn’t enough to justify some elaborate scheme or arrangement. Would you agree with that?
I think that in the end, if you took New York as an example, New York has been averaging about a $3-3.5 billion a year marketplace for excess and surplus lines. So, if New York said, well, a billion dollars which is about what New York didn’t tax prior to the NRRA (Non-admitted and Reinsurance Reform Act of 2010) going into effect, that’s a billion dollars a year that New York wasn’t taxing, on the assumption that some of the states might be taxing that billion because there were risk exposures in those other states.
However, New York would be entitled to tax the portion of risks that were in New York when they were filed in some other state, too. So when you net that down, a billion dollars is a lot, but how much would New York be getting back? And New York being one of the four largest states, 10 percent of the market, in most states the number’s going to get much, much smaller.
So I think that there is a good argument to say that it would have been a big exchange and a lot of work to maybe not net much more than you’d net just taxing 100 percent as the home state. And that’s particularly true if you’re not taxing international exposures, because how much of that one billion dollars in New York related to international premium? If half of it related to international, you’re talking an even smaller number.
Let’s stay on the NRRA for a minute. A part of the Dodd-Frank Act. There has been some talk of Dodd-Frank being repealed or at least changed in some ways. Are you concerned about the NRRA portion going away, and if so, what would that mean? What would happen?
Well, the NRRA was one of the few parts of Dodd-Frank where you had the industry supporting its passage, and NAPSLO (The National Association of Professional Surplus Lines Offices) has talked to the legislators in Congress about, if Dodd-Frank was to be repealed, to not repeal the Non-admitted Reinsurance Reform Act portion of Dodd-Frank.
Isn’t there a risk there, though, if there’s just general talk about repealing? Sometimes Congress doesn’t get down to those details of remembering which industry was supporting which piece, right?
You know, there’s always that risk, which is why I think NAPSLO’s done a good job of trying to communicate the message in Washington. But even having said that, so many states now have actually amended their own laws to conform to the NRRA that should the NRAA be repealed, that doesn’t repeal the changes made to state law. So we may be far along, we may be way down that road because of the state changes.
Let’s go back to New York, if you will. What are some of the issues you’ll be watching for your members — in the state legislature and within the insurance department you see coming up that are of concern for them?
We have a couple of high priorities right now. One is we’re trying to amend Regulation 41, working with the Department of Financial Services to implement the eligibility provisions of the NRRA, and that’s in a regulation in New York. So we’ve made an attempt to rewrite that reg, and we’re trying to work with the Department of Financial Services.
The object to the exercise is to give the carriers what they’re entitled to in terms of the preemptive effect of not having specialized eligibility provisions state by state, but they’ll also protect the brokers, because the brokers have a non-delegable duty of due care in the selection of a financially viable E&S insurers.
So we want to make sure that we’re still protecting the flank of the brokers with respect to the carriers so there still needs to be a financial evaluation of the carriers. We’re trying to do that and also give the department what we think they need, which is a level of oversight to make sure that New York citizens are protected, because that’s what they view as their important job.
Does that take legislation to make those changes that you want?
Most of those changes we believe we can make in the regulatory setting. So that’s a high priority. We’re working hard on that. And another thing we’ve being doing more on the legislative side, six states have created what’s known as Domestic Surplus Line Insurance Company law. Essentially you incorporate in a given state.
Historically you become licensed in that state. So if you want to write surplus lines you can’t write it in the state in which you’re domiciled. So you can become eligible in 49 other states, but traditionally the big carrier groups needed two surplus lines carriers simply to cover the state that the one company was licensed in. So these statues are allowing a carrier to be surplus lines in all 50 states.
We see a lot of benefits to the carriers. One surplus line’s carrier, if they wish all 50 states, never getting into a situation where they wrote a risk as surplus lines in one state, but the state maybe there’s a claim in the state where they’re licensed, and the courts say, “Well, you’re licensed here. Here are the rules. Your policy doesn’t conform to the rules in the state where you’re licensed.”
We can eliminate some of those ambiguities and create some efficiencies. So we promoted that legislation in New York. I’m hoping that New York will be the seventh state to pass such a law.
Do you know the other states? I mean, are we talking about the largest states here?
The first state to do it in the late ’90s was Illinois. They were the frontrunner. And many of the changes occurred in the last year or two, but the other states are New Hampshire, New Jersey, Delaware, Arkansas, and Oklahoma, I believe.
You work at the intersection, if you will, where the consumer and the broker and the carrier and the people and the regulator all come together, so you get a feel for everything’s that going on. What are some of the issues that come up there, whether they be administrative or people doing things wrong in some way, or some liability issues, concerns, that you hear?
Well, I would say, first and foremost, we try and be a help desk with the brokers. I think the regulators always assume, well here’s a 100 pages of legislation and law, and that that’s the driving force of a broker’s business. Well, making a living is the driving force. Placing risk is a driving force of a broker’s business, and most of the broker’s aren’t big enough to have full-time attorney working for them.
So there’s a lot of questions, and when you take that 100 pages of regulation and statute, and you say, “What if I’m licensed in 15 states?” That’s 1500 pages, right? And there are differences state by state so we try to be a help desk. We try to make sure whether it’s the carriers calling, because sometimes the carriers ask us for some help. Even the local law firms ask us a lot about, well, what’s the difference on the E&S side?
So we try to put ourselves out there to let people know that we exist to help the brokers do things the right way so they don’t get themselves caught in like an infraction type situation where they could potentially be fined, because those things have a potential of snowballing for a broker.
They get fined in one state. They fail to report it to their next state in time. That state fines them. All of a sudden you look like a bad guy because you filed your taxes late. So we try to make sure that we get that information out to the market place. And we take a lot of phone calls from the carrier side, even sometimes the insureds.
And we also provide a lot of information to the insurance department so that they have a good window into what’s going on in a market, gives them a better chance to be a bit laissez-faire in terms of enforcement, because historically nobody would ever say the New York Insurance Department was laissez-faire. But because of what we are able to provide them, they are much more particular in terms of what they get involved in on our side of the business, and I think that’s helpful.
Have you noticed any change in your access to the insurance regulators since the consolidation of offices of Financial Services in New York?
No. I think that they brought back Rob Easton, who’s really running that division, the insurance division, if you will, of the Department of Financial Services. Rob was general counsel. He had some good experience there. He’s a forward thinker, and he’s accessible.
But I do see the department going into transition. They have a lot of people that have come up on retirement age. So what you and I would say in our business model: we’ve lost a lot of that institutional knowledge and that middle management. So I think that that’s something they have to do now is to try to fill the ranks and find out how are you going to put people in every position, with the X’s and O’s.
What do you think the mood was at the 2012 NAPSLO Annual Convention among the brokers, in particular?
I think it’s upbeat. I think we have a lot of capacity in the marketplace, but I also think that the underwriters have gotten more and more selective in terms of what risks they want and how they’re going to underwrite given books of business. So, you have to be on your game. I think everybody in our industry, I see more and more learning. It’s more and more numbers-driven. You have to understand what impacts and what the pricing models do.
When you have a facility, when you’re binding business, it seems that if you want to get a carrier involved in a new book of business, you’re going to have to have an actuarial report that says, “Here’s what the plan looks like.” And that really wasn’t the game 20 years ago. So it gets more sophisticated is what I would say.
Do you think people are getting more specialized?
I think so. And the medium to larger wholesalers, I find it’s more divisional. You don’t have a broker who necessarily says, “Well, today I’m placing a construction risk, and tomorrow I’m doing a vacant property.” I think that it’s gotten more specialized.