The National Association of Insurance Commissioners (NAIC) is a non-profit entity that acts as the trade association for state insurance commissioners.
Although the NAIC may play a central role in regulation of the insurance industry, it nonetheless is a private organization that has no apparent governmental or other legal immunity from suit or liability for negligent acts or omissions associated with performance of regulatory functions.
Pursuant to Section 524(2) of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA), the Congress 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 nation’s consuming public from the risk of insolvency — or outright fraud — by insurers domiciled outside the United States.
Infamous frauds not so long ago by the likes of Alan Teal and Carlos Miros, among others, as well as gross mismanagement in yet 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 policyholder 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 appears 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 regulatory imprimatur, in this case the NAIC Quarterly Listing of Alien Insurers.
But is the NAIC up to the task to protecting the consuming public from the risk of dealing with unscrupulous insurers beyond the reach of U.S. regulatory jurisdiction?
Prior to the NRRA, state regulators could take or leave the NAIC’s approval of alien insurers. Now that the NAIC is the gatekeeper, how is it going to accomplish this critical task?
For more than two decades active cooperation and market surveillance by and among state regulators, surplus lines stamping offices, and industry groups has kept the bad guys out.
Although the NRRA changed the rules for taxation and regulation of surplus lines transactions, 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.
There is no lack of financial data. The NAIC already receives ample annual and quarterly data to evaluate the financial bona fides of alien insurers. Necessary but not sufficient.
To effectively protect the public, two key pieces are missing.
The first is the seasoned 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. That is their business.
By enacting the NRRA, Congress did not intend to mothball the market surveillance resources that have been so effective in protecting the consuming public from fraudulent offshore insurance operations.
The state insurance commissioners control the NAIC. They 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.
Simple regulatory prudence should dictate that the resources and expertise represented by seasoned insurance regulatory personnel and the industry network be deployed sooner rather than later.
No one wants a replay of the era that ushered even Lloyd’s to the brink of extinction only 20 years ago.
Brown is an insurance regulatory attorney who has authored previous articles about the NRRA and its implementation, and made presentations on the topic to industry groups. He regularly represents surplus lines brokers, insurers, and industry organizations in a variety of surplus lines and other regulatory matters. Brown can be contacted at RAB@InsuRegulatory.com. Copies of his NRRA articles can be found on his website: www.InsuRegulatory.com.
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