Commercial lines filing exemptions and large-account deregulation

Why states deregulate large commercial accounts

The argument for lighter regulation of large commercial insurance is that the buyers can protect themselves. The NAIC's model rate and policy form law guideline lists the factors a commissioner should weigh when defining which policyholders qualify, including whether insureds are likely to:

• study and understand their business risks, coverages and exclusions;
• compare prices among competing insurers and understand the details of the proposals they receive;
• need individually written policies rather than forms used for many insureds; and
• get lower premiums from negotiation than from filed rates and rating plans.

Large accounts often need manuscript wording, layered programs and pricing that depends on underwriting judgment, all of which fit poorly with forms and rates filed in advance. The NAIC's work on what it called regulatory re-engineering of commercial lines insurance produced model language for exempting these buyers, and its speed-to-market agenda continues to encourage states to rely more on competition for commercial lines.

The forms relief takes

Exempt commercial policyholders

The most direct mechanism defines a class of large commercial insureds, often called exempt commercial policyholders (ECPs), and exempts policies issued to them. Under the NAIC model regulation guideline, an insurer covering an ECP is exempt, for those policies only, from the state's rate standards, rate filing requirements, policy form standards, form filing requirements and statutorily mandated policy language, except mandated language for workers' compensation and auto.

Line and risk exemptions

The NAIC's condensed commercial rate and form model law, Model #777, shows other common relief:

• Exempt lines. Its filing section does not apply to financial guaranty, employment practices liability, commercial inland marine not written according to manual rates or rating plans, directors and officers liability, boiler and machinery, nuclear insurance products or commercial credit insurance products.
• Individually rated risks. A rate for an individual or special risk whose size, exposure, loss experience or other factors call for underwriting judgment may be used and is exempt from filing, but the commissioner may examine the insurer's records for a pattern of using this to avoid filing requirements.
• Unique forms. Forms designed for and used with a particular risk are exempt from filing, subject to restrictions the commissioner sets by regulation or order.
• Suspended filing. The commissioner may suspend or modify filing requirements for kinds of insurance or classes of risks that cannot practicably be filed before use.

Multistate commercial risks

Both NAIC models also limit a state's form requirements to commercial risks primarily located in that state, generally judged by where the insured's headquarters and senior management are. Mandatory workers' compensation provisions, and in the model's bracketed option mandatory auto provisions, still apply.

Who qualifies

The NAIC model regulation guideline defines an ECP as an entity with enough insurance-buying expertise to negotiate with insurers that meets any two of seven criteria:

The guideline's drafting note warns that states did not adopt these figures uniformly. Some used similar or identical criteria, others enacted much lower thresholds, and in some states the exemption covers only filing requirements, not rate and form standards.

South Dakota is an example of a lower, different test. Its definition in § 58-24-68 applies to buyers of any kind of property and casualty insurance except title and workers' compensation who use a risk manager and meet at least two of seven qualifications, among them premiums of at least $50,000 in the last completed calendar year, net worth of at least $10 million, annual net revenues or sales of at least $10 million, or at least 100 full-time employees. Section 58-24-70 then exempts policies issued to those buyers from the state's rate filing requirements and its form filing requirement.

What is still required

An exemption from filing is not an exemption from regulation. What typically remains:

• Disclosure. South Dakota requires the producer, or the insurer on a direct sale, to tell the policyholder and its risk manager in writing that a rate may be quoted or a form used that is not subject to the state's filing requirements.
• Records. South Dakota's § 58-24-74 requires insurers to keep, for five years, the data, rates, rating plans and underwriting rules used, annual experience data on each risk, and complaint information, and to make them available for examination. The NAIC guideline calls for records showing the policyholder met the ECP criteria, kept for at least three years after the policy expires.
• Proof of eligibility. The insurer must be able to document that each policyholder met the criteria. The NAIC guideline lets the commissioner examine whether insurers are claiming the exemption for policyholders who don't qualify.
• Mandated language. The NAIC guideline keeps statutorily mandated policy language for workers' compensation and auto in force even for ECP policies.
• Examination. Disclosures and records for exempt business are open to the department; South Dakota's statute makes both subject to examination.
• The rest of the code. Exemptions are usually drafted to lift named filing requirements, and sometimes named standards, not the insurance code as a whole.

Exemptions also don't move the business out of the admitted market. The insurer still writes the policy as an admitted insurer under its license for the line.

Excess and surplus lines as the other route

Large or unusual commercial risks are often placed with non-admitted insurers in the surplus lines market, where rate and form filing does not apply. Admitted and non-admitted insurers explains that market.

Federal law has its own large-buyer category for surplus lines. Under the Nonadmitted and Reinsurance Reform Act, a surplus lines broker placing coverage for an exempt commercial purchaser does not have to satisfy a state's due diligence search requirement, provided the broker tells the purchaser that the coverage may or may not be available from admitted insurers, which may offer greater protection with more regulatory oversight, and the purchaser then asks in writing for the placement with a non-admitted insurer. The federal definition requires a qualified risk manager, more than $100,000 in aggregate nationwide commercial property and casualty premiums in the prior 12 months, and at least one size test, such as net worth over $20 million or annual revenues over $50 million, with dollar amounts adjusted for inflation every five years.

The admitted-market ECP and the federal exempt commercial purchaser are separate tests with different thresholds and effects. A buyer can meet one and not the other.

How to confirm whether an exemption applies

1. Find the state's provision. Look in the rating and form filing chapters of the insurance code and the implementing regulations. Exemptions may sit in a separate article or be granted by commissioner order or bulletin.
2. Check what it exempts. Determine whether it lifts rate filing, form filing, rate and form standards, or some combination, and whether any informational filing is still required.
3. Check the lines. Note which lines are excluded, commonly workers' compensation and sometimes auto or title, and whether the provision applies by line or by policyholder.
4. Test the policyholder at binding. Document each criterion the insured meets, with the financial statements, employee counts or premium records the state requires.
5. Set up the disclosure and records. Use the state's required disclosure, keep signed copies, and retain the records for the state's retention period.
6. Recheck at renewal. Thresholds are measured at a point in time, and an insured can fall out of eligibility.

When the answer is unclear, ask the department before relying on the exemption. Misapplying it means a rate or form was used without the filing the law required.