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A relatively new law aimed at streamlining excess and surplus lines insurance practices for multistate companies has translated into inflated increases in premiums in the surplus lines markets for states that are home to large corporate hubs.
Experts say the latest batch of filings and premium data released by the U.S. Surplus Lines Stamping Office shows a slightly hardening market and an industry adjusting to the new regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
That act, signed into law in 2010, addresses excess and surplus lines insurance under the Nonadmitted and Reinsurance Reform Act. Among other provisions, the new insurance law requires that companies with multistate offices pay premium taxes in the states where they are headquartered.
“We're all watching for changes regarding the new NRRA regulations,” said Phil Ballinger, executive director of the Austin, Texas-based Surplus Lines Stamping Office of Texas, which compiles data from all 14 U.S. stamping offices.
Stamping offices examine surplus lines filings to ensure compliance with state laws and regulations. They also ensure that surplus lines taxes and stamping fees are properly calculated and collected.
The latest round of data reveals a slightly hardening market, Mr. Ballinger said.
Overall, premiums processed by the 14 U.S. stamping offices through June 2012 totaled $9.4 billion, a drop of 8.3% compared with the first half of 2011. The number of filings decreased 1.9% to approximately 1.5 million.
Mr. Ballinger, however, warned that the aggregate data is skewed by a large volume of late-filed return premiums from prior years in New York, which showed a 67.3% decrease in premiums. Removing data for New York results in an 11% increase in premiums for the remaining 13 offices — to $8.6 billion from $7.7 billion, Mr. Ballinger said.
“That seems to be in line with what we are hearing and seeing in the trades and when you speak with individual underwriters,” he said. “They are seeing an increase in some amounts, (and) that's all indicative of hardening to some degree, but not the increase in filings we would see in a true hard market.”
“In softer markets, standard (insurers) become very aggressive in underwriting; they lower rates and chase business,” he said. “We're not seeing that here; we are seeing the increase in premium, but the filings decreased.”
Overall, the 2012 data shows a 1.9% decrease in filings for 14 states, counting New York's figures and a major change for the Illinois surplus market that negatively affected the number of filings overall.
In New York last year, late filings out of that state accounted for skewed results in the 2010-2011 U.S. Stamping Office figures. Meanwhile, New York's 2012 numbers are “distorted” by one particular filer, said Dan Mahar, executive director of the New York-based Excess Line Association of New York.
Mr. Mahar said the issue — the result of late filings and multiyear filings — will “fix itself” in the future.
And one change in Illinois affected the numbers for the entire country as well as the state. Specifically, it saw an 11.7% increase in premium — to $550 million from $492.4 million — but a massive 34.8% decrease in filings, from 85,108 down to 55,515.
David Ocasek, executive director for the Chicago-based Surplus Line Association of Illinois, said the drop in filings was caused by the loss of a small Lloyd's of London program in Florida.
“It was ancillary auto coverage out of Florida that would ride on top of a (traditional) auto policy. It covered petty theft and other minor coverage with small premiums (that) never generated any money,” he said. “It was, however, a lot of documents.”
In turn, the 11.7% increase in premiums in Illinois was likely the result of new laws, he said, adding that many other states are zeroing in on the NRRA regulations and how that could shift premium upward in the future for individual stamping offices.
California, Illinois, Nevada, Pennsylvania, Texas and Washington all saw major increases in premium — between 10.2% and 36.2%. “Some of the increases you are seeing in the big states are the result of the NRRA changes,” said Mr. Ballinger. “All the big states are watching out for this.”
Tracking Texas alone, Mr. Ballinger said 40% of the premium filed in his home state through August 2012 accounted for the changes in the way premium tax is collected under the new law. In the new data, Texas saw a 23.2% increase in premium from the first half of 2012 compared with that of 2011, yet a 2% drop in filings. “We know that we are keeping a lot of non-Texas premium and writing it and taxing it as though it were all in Texas.”
Meanwhile, experts say the new regulations are making it tough to know which markets are seeing prices harden.
“We definitely see an increase in the property area,” said Mr. Ocasek, of Illinois. “It's hard for us to tell how much is due to the new NRRA environment. Illinois is a larger state and is likely to have a lot of multistate business. We are hearing anecdotally that they are getting better prices, (but) I suspect it's a little bit of both. As a corporate hub-type state, there are a lot of businesses based here. We are more likely, under the NRRA, keeping taxes that we were previously allocating to other states.”
In New York, another large state with headquartered multistate operations, Mr. Mahar said all eyes are on the NRRA changes. “The dust is still settling on the impact (because) you have 50 states trying to react to it,” he said.