Assessment of public comments for the Twelfth Amendment to Regulation 41 (11 NYCRR 27)

The Department received comments from the following entities:

Excess Line Association of New York (ELANY).

Trade B, a statewide property/casualty insurance trade association comprised of over 70 member insurers;

Trade C, a trade association composed of more than 1,000 member property/casualty insurers;

Trade D, a property/casualty insurance trade organization representing 350 insurers; and

Law Firm A, a law firm that provides legal services to various entities.

Summaries of the comments on the proposal and the Department’s responses thereto are as follows:

 

Comments

ELANY supports the promulgation of the Twelfth Amendment to Regulation 41. ELANY submission stated as follows:

 

Comments

The Department received several comments regarding the proposal to increase the minimum surplus to policyholders by $3 million every three years. The comments were as follows:

Law Firm A commented that it is inappropriate for the Department to propose unlimited and arbitrary increases in the minimum surplus to policyholders requirement. Law Firm A alleges that continued arbitrary increases in the minimum surplus to policyholders requirement may result in reduced competition in New York’s excess line market, while not improving the financial viability of insurers participating in the market. Law Firm A asserts that the minimum surplus to policyholders requirement for insurers should be related to the size and risk profile of the insurer, concepts already included in section 27.13(b)(1) and (2) of Regulation 41. Therefore, Law Firm A asked that the Department delete proposed section 27.13(b)(3) and 27.13(c)(4).

Trade D commented that it does not understand the public policy objective of automatically increasing the minimum surplus to policyholders requirement by $3 million every three years, without review or regulatory action by the Superintendent. Trade D stated that the proposal requires a "surplus line insurer" to increase its surplus by $3 million every three years, regardless of how much minimum surplus to policyholders the insurer already has. Trade D objects to the automatic indexing of the minimum surplus to policyholders requirement.

Trade C stated that proposed section 27.13(b)(3) is too arbitrary and is potentially damaging to the excess line market, given the unknown circumstances that may accompany such change. Trade C provided suggested language revising proposed section 27.13 (b)(3).

 

Department’s Response

The Department is increasing the minimum surplus to policyholders requirement to update the safety net for New York insureds. It is necessary to increase the minimum surplus to policyholders requirement to $45 million, with automatic increases every three years, in order to recognize the effects of compound inflation and provide additional protection against insolvency. The removal of the automatic increases as suggested by the Law Firm A and Trades C and D would negate the aforementioned. However, after reviewing the comments, the Department revised the automatic $3 million increase every three years to an automatic $1 million increase every three years. This represents a conservative approach in attempting to recognize the effects of inflation over the past three decades and minimizes the impact that the three-year increase will have on excess line insurers. The Department will continue to closely monitor market conditions and amend the regulation as appropriate.

 

Comments

Law Firm A commented that new section 27.13(b)(3) requires that all eligible "surplus lines insurers" increase surplus to policyholders by at least $3 million as of January 1, 2014 and every three years thereafter. Law Firm A states that this revision, as written, applies to all eligible insurers, including insurers with surplus to policyholders well above the minimum requirement. Law Firm A stated that the Department should revise this section to clearly indicate that it applies only to insurers that don’t satisfy the new minimum amounts in the regulation. Trade D made a similar comment.

 

Department’s Response

The Department clarified the proposed rule to clearly indicate that the triennial increase does not apply to excess line insurers that already exceed the amounts in the regulation. In other words, if an insurer had $50 million on Jan. 1, 2017, it exceeds the required $48 million and thus would not need to increase its surplus.

 

Comments

The Department received two comments regarding the graduated increase to $45 million for current excess line insurers.

Trade D commented that the proposal should eliminate its distinction between existing writers and new entrants with respect to meeting minimum requirements.

Trade C acknowledged that most current eligible insurers already meet the proposed $45 million minimum surplus to policyholders standard, and urges that a more lenient graduated schedule be adopted. Trade C noted that the U.S. economy continues to slowly recover from this most recent financial crisis, which impacts the availability of and access to capital. Trade C provided suggested language revising section 27.13(b)(2)(i). Similarly, Trade C made the same recommendation for subitem (iii).

 

Department’s Response

As previously stated in the Department’s regulatory impact statement (RIS), the Department considered increasing the minimum surplus to policyholders for existing and new excess line insurers as of a certain date. However, the Department believes that it is equitable and reasonable to implement the change in stages for current excess line insurers, which have already demonstrated a degree of viability in the market. Since the January 1, 2011 proposed effective date has passed, the Department revised the rule to provide more time for all the incremental increases to $45 million.

 

Comments

The Department received comments from Trade B regarding the possibility that the proposed rule may decrease competition.

Trade B commented that New York’s excess line market, just like any other insurance market, works most efficiently and effectively when it is competitive, with as many market participants as possible offering products to New York customers. Trade B stated that the Department’s RIS for this proposed rule, in the "costs" section, notes that of the 133 eligible excess line insurers, 25 have less than $45 million in minimum surplus to policyholders. Trade B asserts that this means that almost 20% of the current marketplace participants will no longer be eligible to compete in New York’s excess line market, resulting in a decrease in competition.

Trade B further commented that the proposed rule will have a detrimental impact on the New York domestic property/casualty insurance industry. Trade B is aware of at least one New York domestic insurer with an excess line insurance company subsidiary that would not be able to meet the new minimum surplus to policyholders requirement. Trade B states that this New York domestic insurer uses its excess line subsidiary to create a full service coverage facility for its independent agents. The agents may offer coverage in the admitted market for a policyholder and coverage in the excess line market for any part of the policyholder’s risk that needs to be placed in the excess line market. (We assume that Trade B means "brokers" and not "agents" since the latter may not access the excess line market.) If the New York domestic insurer’s excess line subsidiary is not able to operate in New York due to this proposed rule, then Trade B stated that the domestic insurer will be placed at a distinct disadvantage when competing against other larger insurers for business risks.

 

Department’s Response

The great majority of current eligible excess line insurers already have $45 million in minimum surplus to policyholders. Furthermore, the proposed rule incrementally increases the minimum surplus to policyholders requirement, thereby granting current eligible insurers time to increase their minimum surplus to policyholders.

Furthermore, the Superintendent has not increased the current minimum surplus to policyholders requirement since January 1, 1994. Therefore, the requirement must be updated to recognize the effects of compound inflation and provide additional policyholder protection against insolvency. In addition, excess line insurance policies are not eligible for coverage by any New York State financial security funds. Therefore, excess line insurers must maintain an adequate minimum surplus to policyholders cushion to effectively operate in the New York marketplace, pay claims, and remain solvent, since excess line insurers tend to underwrite riskier lines of business.

In addition, as previously stated in the RIS, some of the insurers are members of larger groups of affiliated insurers, and the Department anticipates that parent companies will provide their subsidiaries with the additional required surplus to meet the new minimum requirement.

As stated above, the Department also is revising the proposed rule to provide more time for insurers to comply with the $45 million minimum surplus to policyholders requirement.

 

Comments

Trade B stated that raising the minimum surplus requirement from $25 million to $45 million will have the effect of discouraging new insurers from entering the New York excess line market. Trade B asserts that since only three other states require an excess line insurers to maintain more than $15 million in minimum surplus to policyholders, it is evident that raising the minimum to $45 million represents a significant barrier to entry into the New York excess line market. Trade B stated that decreasing competition and the number of market participants in the New York excess line market ultimately hurts businesses and individuals with unique risks, and given the continued economic slump in New York, businesses in this state need more options for their difficult risks, not fewer choices. Trade B commented that this proposed rule runs directly counter to the need for more options, exacerbating an already fragile business and economic climate in New York.

 

Department’s Response

The Department believes that every excess line insurer must maintain an adequate minimum surplus to policyholders cushion to effectively operate in the New York marketplace and remain solvent, since excess line insurance policies are not eligible for coverage by any New York State financial security funds and since excess line insurers tend to underwrite riskier lines of business.

It is possible that some new entrants may be deterred from entering the New York excess line market. Nonetheless, there currently is healthy competition and adequate capacity in the New York excess line market, and entry of those insurers that would have difficulty raising the required minimum surplus to policyholders would not be in the best interest of New York insureds, since these insurers may not have the wherewithal to pay claims.

 

Comments

Trade B stated that the proposed rule will have a negative effect on the New York excess line market, as discussed above, and that there does not appear to be a corresponding need for the rule that would outweigh the negative effects. Trade B further stated that there are no solvency issues regarding excess line insurers at the present time. In addition, there has not been a solvency issue concerning excess line insurers for the last few years. Trade B also stated that given the lack of a demonstrated problem with the current excess line minimum surplus to policyholders requirement, it seems to be unwise public policy to implement a rule that will minimize competition and potentially harm the New York domestic insurance market.

 

Department’s Response

Although the Superintendent does not directly regulate excess line insurers and excess line insurers are not subject to the minimum capital and surplus requirements applicable to authorized insurers, the Superintendent is responsible for ensuring that insurers doing business in the New York excess line market are adequately capitalized.

The Department believes that excess line insurers must maintain an adequate minimum surplus to policyholders cushion to effectively operate in the New York marketplace and remain solvent, since excess line insurance policies are not eligible for coverage by any New York State financial security funds and excess line insurers tend to underwrite riskier lines of business.

Even though there has not been a solvency issue concerning excess line insurers for the last few years, this does not mean that there will not be any insolvencies in the future. The current $15 million minimum surplus to policyholders requirement may have been adequate in the past, but with escalating jury awards, the amount is inadequate.

Moreover, and as stated previously, the Superintendent has not updated the current minimum surplus to policyholders requirement since January 1, 1994. Therefore, for the reasons previously stated, the current requirements are inadequate and must be updated. In addition, excess line insurance policies are not eligible for coverage by any New York State financial security funds, therefore excess line insurers must maintain an adequate minimum surplus to policyholders cushion to effectively operate in the New York marketplace, pay claims and remain solvent, since excess line insurers tend to underwrite riskier lines of business.

In addition, a higher minimum surplus to policyholders provides a greater cushion if it eroded due to poor management or external circumstances.

Thus, the Department determined that it is not necessary to make any changes to the proposed rule in light of these comments.

 

Comments

Regarding the increase of the minimum surplus to policyholders requirement to $45 million dollars, Trade D has previously indicated its preference for an approach that considers the risk-based capital (RBC) system to measure the financial strength of excess line insurers, and if New York were to continue with an approach based on a minimum surplus to policyholders requirement, then Trade D believes that the proposed rule should not be adopted. Trade D stated that Regulation 41’s current minimum surplus to policyholders requirement of $15 million is long standing, and that the proposed rule would impose a significant increase over a short period of time. Trade D opposes its adoption.

 

Department’s Response

With the imminent implementation of the NRRA, RBC is no longer a relevant factor in determining a company’s eligibility. The NRRA provides that "A State may not— (1) impose eligibility requirements on, or otherwise establish eligibility criteria for, nonadmitted insurers domiciled in a United States jurisdiction, except in conformance with such requirements and criteria in sections 5A(2) and 5C(2)(a) of the Non-Admitted Insurance Model Act, unless the State has adopted nationwide uniform requirements, forms, and procedures developed in accordance with section 521(b) of this subtitle that include alternative nationwide uniform eligibility requirements…." Sections 5C(2)(a) states, in relevant part, that a "surplus lines licensee" cannot place coverage with a nonadmitted insurer, unless, at the time of placement, the "surplus lines licensee" has determined that the nonadmitted insurer has capital and surplus or its equivalent under the laws of its domiciliary jurisdiction that equals the greater of (1) the minimum capital and surplus requirements under the law of the state; or (2) $15 million.

Moreover, the Superintendent has not updated the current minimum surplus to policyholders requirement since January 1, 1994. Therefore, the requirement must be updated for the reasons previously stated. In addition, excess line insurance policies are not eligible for coverage by any New York State financial security funds. Therefore excess line insurers must maintain an adequate minimum surplus to policyholders cushion to effectively operate in the New York marketplace, pay claims, and remain solvent, since excess line insurers tend to underwrite riskier lines of business.

The Department determined that no changes to the proposed rule were necessary.

 

Comments

Trade D commented that, with the enactment of the NRRA and the present implementation efforts underway at the NAIC and the National Conference of Insurance Legislators (NCOIL), this proposal should be tabled until the guidance on eligibility is finalized and publicly set forth for consideration by the states and interested parties. Trade D stated that questions continue to arise over what the NRRA contemplates, including questions regarding eligibility and what is meant by the reference in section 524 of the NRRA to section 5C(2)(a) of the Nonadmitted Insurance Model Act.

Trade D further commented that –it is unclear whether the proposed $45 million minimum surplus to policyholders requirement for foreign excess line insurers would unfairly discriminate against such insurers in light of the NRRA’s prohibition against states objecting to the eligibility of alien insurers "listed on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the NAIC."

 

Department’s Response

California has already increased its minimum surplus to policyholders requirement to $45 million and New York State’s minimum surplus to policyholder will be $45,000,000 when NRRA becomes effective.

The increase in the minimum surplus to policyholders requirement is not discriminatory. Under the NRRA, alien insurers qualify if they are on the NAIC’s International Insurers Department (IID) list, which does require a lower minimum surplus to policyholders of $15 million. However the IID requires alien companies to maintain trust funds of at least $5.4 million or 30% of estimated liabilities, whichever is greater. Moreover, the Department believes that the criteria for the IID list should be raised.

The Department determined that changes to the proposed rule in light of the foregoing comments are not necessary.