N.Y. Surplus Lines Industry in Uphill Battle over Premium Financing

New York’s surplus lines industry is trying to convince the Pataki administration to allow a change in the premium financing of surplus lines accounts, a change that lawmakers have approved overwhelmingly, but the industry is having a tough time.

A bill (S.B. 6474) to the industry’s liking was passed unanimously by lawmakers in both chambers but is being held from Gov. George Pataki for his signature by officials in the New York State Insurance Department (NYSID) who are worried about the bill, according to the industry.

According to the Excess Line Association of New York (ELANY) officials, the NYSID counsel upset prevailing practice in July 2003 with an opinion in a case involving minimum earned premium on a surplus lines account with a premium finance agreement. Industry officials say the NYSID is balking at the bill because it would overturn that opinion.

NYSID spokesman Eric Mangan would only say that the department is advising the governor on the bill.

New York has a law establishing that the most an insurer can claim as earned premium on a premium-financed policy cancelled early is the greater of 10 percent, or $60. While this rule has been followed in standard markets for years, it’s not been the norm in surplus lines.

The usual practice in the surplus lines industry has been for an insurer to ask for a minimum earned premium of 25 percent, not 10 percent, with the premium finance company agreeing to finance the remaining 75 percent of the premium. Carriers believe the 25 percent covers acquisition costs for an account and protects them against a loss should the insured cancel within 90 days.

The NYSID’s ruling last year marked the first time the state said the 10 percent limit also applies to surplus lines transactions in which premiums were financed, according to ELANY’s Dan Maher, president.

Maher notes that the spat has some history in pre-Sept. 11 market for terror insurance, when a handful of insurers then writing the coverage required that 100 percent of premiums on terror coverage policies be fully earned. After Sept. 11, and passage of the federal Terrorism Risk Insurance Act (TRIA), when insurers were required to make terror policies widely available, NYSID officials cracked down on fully earned premium agreements. As a result, the industry and NYSID compromised, with NYSID agreeing that 25 percent earned premium on terror insurance policies would be acceptable.

But now the NYSID is apparently worried that if surplus lines insurers are not held to the 10 percent cap on the books for premium-financed policies the way standard carriers are, some surplus insurers may slide back into requiring fully earned premium contracts.

Surplus lines officials, however, maintain the restriction was never meant to apply to surplus lines, which are generally free from rate and form regulation, and warn that applying the restriction to their business could curtail coverage availability and premium financing options for insureds.

Maher notes that the practice of concern to NYSID officials – the fully earned premium – is really no longer an issue in the marketplace for terror insurance. Even when it was, he added, it was a matter of concern to very large real estate owners who rarely had to finance their premiums, not to small and medium accounts which more often are the ones that turn to premium financing.

“I can’t say they (fully earned premium contracts) won’t return but I hope not,” Maher said, noting this would be a signal there had been another terror event or another significant change in the market.

Imposing the 10 percent requirement now on surplus lines will hurt small and medium accounts, not the large accounts which were NYSID’s previous concern, he says.

The Property Casualty Insurers Association of America (PCI) agrees with ELANY and has sent a letter to Pataki urging him to sign the bill.

After meetings with Superintendent of Insurance Greg Serio and the governor’s counsel, Maher said the industry failed to convince Serio to support the bill but feeling that the governor’s counsel gave ELANY representatives a “good audience.”

“I can’t say I’m optimistic,” Maher said of the chances of Pataki signing the bill.

Topics Carriers New York Legislation Excess Surplus