Actuarial Notes

Specialized Insurance Topics

Study guide: Exam 6U

Specialized Insurance Topics, in the Exam 6U syllabus, are the parts of the U.S. market that regulation treats differently from the standard admitted, state-by-state model — excess and surplus lines, credit-based insurance scores and risk retention groups. Each illustrates a different regulatory tool: a home-state rule, a consumer-protection overlay on a rating variable, and federal preemption of multistate licensing.

\text{Who regulates?} \begin{cases} \text{E\&S placement: the insured's home state} \\ \text{RRG solvency: the chartering state only} \\ \text{Credit scores: FCRA plus each state} \end{cases}

  • Excess and surplus lines. Nonadmitted insurers write risks the admitted market will not — unusual, hazardous or very large exposures — and are free of rate and form filing, which is the point of the market. Protection is aimed at the transaction instead:
    • placement only through a licensed surplus lines broker, after a diligent search of the admitted market — unless the coverage is on a state export list or the insured is an exempt commercial purchaser;
    • eligibility standards for the insurer (capital and surplus minimums for U.S. insurers; alien insurers through the NAIC's Quarterly Listing of Alien Insurers);
    • premium tax collected through the broker, and generally no guaranty fund protection;
    • since the NRRA (2011), only the insured's home state regulates and taxes the placement (Dodd-Frank).
  • Credit-based insurance scores. Scores built from credit-report data are strongly predictive of personal auto and homeowners losses — a 2007 FTC study found them effective predictors of auto claims — but contested because they correlate with income and race and their causal link to loss is disputed. The layers:
    • the federal Fair Credit Reporting Act permits insurers to obtain reports and requires an adverse-action notice;
    • most states follow the NCOIL model act (2002, readopted 2015): credit may not be the sole basis to decline, cancel or non-renew; listed items (medical collections, inquiries the consumer did not initiate) may not count against the consumer; re-scoring on request and exceptions for extraordinary life circumstances; scoring models filed with the regulator;
    • a few states ban it in auto (California, Hawaii and Massachusetts among them).
  • Risk retention groups. Under the federal Liability Risk Retention Act (1986), an RRG — a liability insurer owned by insureds with similar or related liability exposures — is chartered and licensed in one state and may write in every other after registering. Non-chartering states keep a limited role: registration, premium tax, unfair claims and deceptive practices laws, residual-market participation, and the power to seek an examination or an injunction if the RRG is in hazardous condition. RRGs may write only commercial liability (no property, no workers compensation), and every policy must warn that state guaranty funds are not available. Many are chartered as captives, which is why the NAIC extended accreditation standards to RRG domiciles and added governance standards, including independent directors.

Three Placements, Three Regimes A broker handles three accounts: (a) a Texas-headquartered fireworks manufacturer that admitted insurers have declined; (b) a homeowner in a state following the NCOIL model whose renewal premium rose after a credit re-score during a medical emergency; (c) a group of 300 physicians in several states wanting to form their own malpractice carrier. Which regime governs each, and what protections apply?

Answer (a) Surplus lines. Texas, as home state, alone regulates and taxes the placement. The broker must be licensed there, satisfy its diligent-search rule (unless the insured is an exempt commercial purchaser) and remit the tax. The rate and form are not filed, and a claim against an insolvent surplus lines insurer generally has no guaranty fund behind it.

(b) Credit-based scoring. Under the NCOIL framework the homeowner can ask for an extraordinary life circumstances exception — serious illness is a listed example — and medical collections cannot be used against them. The insurer must also have sent an adverse-action notice under FCRA and, under the model act, explained the principal credit factors behind the increase.

(c) Risk retention group. The physicians share a related liability exposure, so they can form an RRG, charter it in one state — often a captive domicile — and register in the others. Only the chartering state regulates its solvency; the other states collect premium tax and police claims practices. Members must understand that if the RRG fails, no state guaranty fund will pay their claims.