South Dakota Course Update April 2017

April 7, 2017

South Dakota Life & Health and Property & Casualty courses have been updated with outline changes effective March 1, 2017. Continue reading for Life & Health and Property & Casualty Addendums.

Addendum: for use with South Dakota Life and Health online ExamFX courses and study guide version 19688en/19717en, per exam content outline updates effective March 24, 2017.

The following are content additions to supplement your existing text unless otherwise indicated:

LIFE & HEALTH

General Insurance

Insurers
Types of Insurers

Self-Insurers

Self-insuring is when a person or entity, as an alternative to the purchase of insurance from an insurance company, develops a formal program identifying, evaluating and funding its losses. It is frequently used for workers compensation where losses are fairly predictable and states have established regulations for self-insurance.

Self-insurers frequently structure their programs to only retain losses up to a certain specified limit and purchase insurance to cover loss above that level. (This is called stop-loss coverage.)

Captive Insurers

Captive insurers are organized and owned by a corporation or firm to serve the parent organization's insurance needs at lower rates than other insurers and without the uncertainties of commercial insurance.

Marketing (Distribution) Systems

With the exception of a small amount of insurance sold through the mail, insurance companies are represented by agents. Most agents are independent contractors, but they may also be employees of the general agency or insurer. The following are marketing arrangements used by insurers:

Independent Agency System/American Agency System - An independent agent represents several companies and is appointed on a non-exclusive basis. An independent agent earns commissions on personal sales and overrides of other agents, and owns the expirations of their policies allowing them to place the renewal business with any company they represent.
Exclusive Agency System/Captive Agents - The agent represents only one insurer and is appointed on an exclusive basis. The captive agent earns commissions on personal sales and overrides of other agents. Business is owned by the insurer and the insured is a customer of the insurer. Therefore, renewals are placed with the insurer only.

General Agency System - A general agent is an entrepreneur, empowered by the insurer that he or she represents on an exclusive basis to sell insurance in a specified territory and to appoint subagents. The general agent may receive compensation for office expenses, advertising and staffing, and will receive commissions on personal sales and overrides on his agents.
Managerial System - A sales force is supervised by a branch manager who, in contrast to the general agent, is a salaried employee of the insurer. The agents assigned to the branch office can be employees of the insurer or independent contractors.
Direct Response Marketing System - A company which advertises its insurance through the mail, internet, television, or through other mass marketing techniques and requires the applicant to complete the application and return it directly to the insurer by mail or online, therefore bypassing the agent, is a direct response marketing system. Telephone solicitors that use agents to complete the transaction and may pay a commission to the agents are also considered Direct Response Marketers.

Financial Solvency Status (Independent Rating Services) – addition to the existing text:

The National Association of Insurance Commissioners (NAIC) is an organization composed of insurance commissioners from all 50 states, the District of Columbia, the U.S. territories, and Puerto Rico. The NAIC resolves insurance regulatory problems. They are active in the formation and recommendation of model legislation and regulations designed to bring uniformity from state to state and simplify the marketing of insurance.

Insurance Regulation

State Regulation
Insurance Fraud Regulation

Notification of Suspected Fraud

An insurer, or any person authorized to act on its behalf, which reasonably believes that a false or fraudulent claim, statement, or representation has occurred, must notify an authorized agency and provide it with all relevant information in its possession. Upon request by an insurer to an authorized agency or by an authorized agency to an insurer, each must provide to the other, directly or through any person authorized to act on its behalf, all information relevant to any suspected false or fraudulent claim, statement, or representation, including the following information:

Insurance policy information relevant to an investigation, including any application for such a policy;
Available policy premium payment records;
History of previous claims made by an insured; and
Information relating to the investigation of any suspected insurance fraud, including statements of any person, proofs of loss and notice of loss.

An authorized agency accepting information from an insurer must provide any information in its possession or control relevant to the suspected false or fraudulent claim, statement, or representation of which the insurer notified the agency within 30 days of a written request. An authorized agency receiving information must release or provide any relevant information in its possession to any other authorized agency.

LIFE

Life Insurance Basics

Producer Responsibilities
Solicitation and Sales Presentations

Replacement – addition to the existing text:

Exemptions:

The replacement regulation does not apply to the following types of insurance:

Credit life;
Group life insurance and group annuities (not direct solicitation);
An application to the existing insurer that issued the existing policy when a contractual change or conversion privilege is being exercised, or when the existing policy is being replaced by the same insurer;
Replacement under a binding or conditional receipt issued by the same company;
Policies used to fund an employee pension or welfare benefit plans that are covered by ERISA;
New coverage provided under a life insurance policy the cost for which is borne in full by the insured's employer;
Existing nonconvertible term life insurance policy that will expire in no more than 5 years and cannot be renewed;
Immediate annuities purchased with proceeds from an existing contract; or
Structured settlements.

HEALTH

Health Insurance Basics

Limited Policies

Short-Term Medical

Short-term medical insurance plans are designed to provide temporary coverage for people in transition (those between jobs or early retirees), and are available for terms from one month up to 11 months, depending on the state. Unlike regular individual major medical plans, short-term health insurance policies are not regulated by the Affordable Care Act and their enrollment is not limited to the open enrollment period; they also do not meet the requirements of the federally mandated health insurance coverage.

Like traditional health plans, short-term plans may have medical provider networks, and impose premiums, deductibles, coinsurance and benefit maximums. They also cover physician services, surgery, outpatient and inpatient care.

Individual Underwriting by the Insurer
Underwriting Criteria – addition to the existing text:

Underwriting of group policies is unique in that when a group policy is written every eligible member of the group must be covered regardless of physical condition, age, sex or occupation. Therefore, the underwriting of group policies concentrates on the group as a whole. Cost of the policy will vary by ratio of males to females and the average age of the group. Evidence of insurability normally is not required since an annual reevaluation makes adjusting of the premium possible based upon the group claim experience. Making the premium retroactive for the year is often allowed. Any group replacement underwriting will consider loss history, group stability and composition.

The underwriting process is designed to avoid adverse selection by the following requirements:

The insurance must be incidental to the group. In other words, the group cannot have been formed for the sole purpose of purchasing insurance;
There should be a steady flow of persons through the group, with the older or unhealthy individuals being replaced by younger or healthier individuals;
The persistency of the group: insurers do not want to write risks that frequently change insurers;
A method of selecting benefits that prevents the individual selection of benefits;
How eligible participants are selected: employees are usually full-time only and meet minimum service requirements;
Whether the group is contributory or noncontributory;
The size and composition of the group, as well as the industry the group is involved in; and
The prior claims experience of the group.

Classification of Risks

Premium Rates

When developing premium rates for a qualified health plan (QHP) in the individual and small group markets, insurers may only consider the following factors:

Whether the plan or coverage covers an individual or a family;
Age (subject to restrictions);
Tobacco use (subject to restrictions); and
Rating area (by geographic boundaries: counties, three-digit zip codes, or metropolitan statistical areas).

Individual Health Insurance Policy General Provisions

Uniform Required Provisions

Refund Upon Cancellation

The cancellation by the insured provision specifies that the insured may cancel the policy at any time by written notice delivered or mailed to the insurer or the insurer's representative. Such cancellation will become effective upon receipt by the insurer or the insurer's representative, or on such later date as may be specified in the notice by the insured. If the insured cancels the policy, the insurer must promptly return any unearned portion of the premium. The earned premium must be computed on a short-rate basis. Cancellation must be without prejudice to any claim originating prior to the effective date of the cancellation.

Coordination of Benefits Provision

The purpose of the coordination of benefits (COB) provision, found only in group health plans, is to avoid duplication of benefit payments and overinsurance when an individual is covered under multiple group health insurance plans. This provision limits the total amount of claims paid from all insurers covering the patient to no more than the total allowable medical expenses.

The COB provision establishes which plan is the primary plan, or the plan that is responsible for providing the full benefit amounts as it specifies. Once the primary plan has paid its full promised benefit, the insured submits the claim to the secondary, or excess, provider for any additional benefits payable (including deductibles and coinsurance). In no case will the total amount the insured receives exceed the costs incurred or the total maximum benefits available under all plans.

Loss - Amount covered by Primary Plan = Amount covered by Secondary Plan

If all policies have a COB provision, the order of payments is determined as follows:

If a married couple both have group coverage in which they are each named as dependents on the other's policy, then the person’s own group coverage will be considered primary. The secondary coverage (the spouses' coverage) will pick up where the first policy left off.
If both parents name their children as dependents under their group policies, then the order of payment will usually be determined by the birthday rule, i.e. the coverage of the parent whose birthday is earlier in the year will be considered primary. Occasionally, the gender rule may also apply, according to which the father's coverage is considered primary.
If the parents are divorced or separated, the policy of the parent who has custody of the children will be considered primary.

Medical Plans

Cost Containment in Health Care Delivery
Cost-saving Services

Telemedicine

Telemedicine seeks to improve a patient's health by permitting two-way, real time interactive communication between the patient and the physician or practitioner at the distant site. This electronic communication means the use of interactive telecommunications equipment that includes, at a minimum, audio and video equipment to provide access to health assessment, diagnosis, intervention, consultation, supervision and information across distance.

Telemedicine includes a growing variety of applications and services using two-way video, email, smart phones, wireless tools and other forms of telecommunications technology, which are used to provide or support healthcare delivery by replicating the interaction of a traditional encounter in person between a provider and a patient. It is viewed as a cost-effective alternative to the more traditional face-to-face way of providing medical care.

Patient Protection and Affordable Care Act (PPACA) – addition to the existing text:

Benchmark Plans

A benchmark plan is the second-lowest priced silver plan available within a state health insurance exchange in a geographical region. Benchmark plans determine the specifics of the Essential Health Benefits required of every Affordable Care Act plan sold in the state. Tax credit amounts are derived on the cost of this benchmark plan and are then adjusted according to an enrollee's annual income. Consumers who are eligible for premium tax credits are not required to purchase the benchmark plan in their region and will not lose out on these credits by choosing a different plan.

Tax Penalties

The Affordable Care Act requires all U.S. citizens and legal residents to have qualifying health care coverage. This is known as the individual mandate, and is part of the Act's Shared Responsibility Provision. If the individual does not have qualifying health care, a tax penalty will be assessed, based on the individual's taxable income, number of dependents, and joint filing status. The current maximum penalty is $325 for individuals and $975 for families, or 2% of income above tax filing threshold, scheduled to be raised in 2016 to $695 per year up for individuals and $2,085 per family, or 2.5% of household income.

The shared responsibility payment for not obtaining or maintaining the minimum essential benefits coverage will be required to be paid for each month an individual went without coverage or an exemption. If coverage was active for at least one day within the taxable year, then the individual will not owe the payment for that month.

Certain groups, such as members of Indian tribes, religious objectors, persons in prison, undocumented aliens, and those with severe financial hardship or who are below the tax filing threshold (those who are not required to file income tax returns) are exempt from the penalty.

Employer Penalties: The following are penalties for employers with more than 50 full-time employees if at least one employee receives a premium tax credit for health care coverage:

Coverage	Penalty Tax
Employerdoes notoffer coverage	$2,000 per full-timeemployee (first 30 employees are excluded)
Employerofferscoverage	The lesser of $3,000 per employee who receives a premium tax credit or $2,000 per each full-time employee(first 30 employees are excluded)

Employers who have fewer than 50 full-time employees are exempt from these penalties.

Actuarial Value

Employers must provide at least a minimum value (MV) plan that covers 60% or more of the participant's expected health care costs. To determine if an employer's plan meets the requirement, an employer can use one of three methods: the MV Calculator, a Safe Harbor Checklist, or an Actuarial Certification.

The MV Calculator uses standard population data along with the employer plan cost-sharing and benefits to determine whether a plan meets the requirements.
The Safe Harbor checklist uses a standard population database along with data from a self-insured plan. If the plan's cost-sharing and benefits meet the 60% requirement or are more generous, the plan meets the MV.
With the Actuarial Certification method, employers hire an actuary who uses the plan's cost-sharing and benefit coverages along with standard population data to determine if the plans meets the MV.

Network

In contrast to traditional broad provider networks, narrow networks contain a smaller number of providers and in-network facilities, which typically results in lower premiums. The use of narrower networks usually allows insurers to gain greater leverage to negotiate lower prices with providers, especially hospitals and large medical groups.

Narrow networks can be advantageous to insurers as a risk-selection mechanism because poor risks are likely to be more attracted to broad network plans. Many of the health plans initially sold on the state exchanges offered limited networks of hospital and medical providers. The ACA has since been addressing these limitations by establishing the federal standard for network adequacy in the commercial insurance market, applicable nationwide to plans available through the insurance marketplaces. To encourage insurer participation in the marketplaces and to allow consumers access to a broader choice of plans, insurers now have more flexibility to satisfy network standards.

Requirements for Termination and Rescission

A Health Insurance Exchange may cancel an enrollee’s coverage in the event of any of the following:

The enrollee is no longer eligible for coverage;
Premiums are no longer being paid and grace periods have been exhausted;
The enrollee’s coverage has been rescinded;
The health plan terminates or is decertified; or
The enrollee changes from one plan to another.

A rescission is the discontinuance or cancellation of coverage on a retroactive basis. Unless there is an intentional material misrepresentation of fact or fraud, plans and issuers may not rescind coverage. This prohibition even extends to situations where coverage was granted to ineligible participants.

Summary of Benefits and Coverage

Any group health plan or a health insurance issuer offering group or individual health insurance coverage is required to provide a written summary of benefits and coverage (SBC) for each benefit package without charge to insureds and policyowners as follows:

Upon application: provide the SBC to a group health plan sponsor upon application, as soon as practicable following receipt of the application, but in no event later than 7 business days following receipt of the application;
By first day of coverage: whenever there is any change in the information required to be in the SBC, the issue must update and provide a current SBC to the plan sponsor no later than the first day of coverage;
Upon renewal: provide SBC either on the date of renewal application or no later than 30 days prior to the first day of the new plan or policy year;
Upon request: as soon as practicable, but no later than 7 business days after the receipt of request.

Navigators

Trained and certified professionals who help on exchanges are called navigators. Navigators help educate consumers seeking coverage under the Affordable Care Act. Their duties include

Conducting public awareness campaigns regarding the availability of qualified health plans;
Distributing impartial information about the enrollment process and the availability of tax credits;
Helping consumers enroll in qualified health plans;
Referring consumers who have questions, grievances or complaints to the proper agencies; and
Providing information in a manner appropriate to the consumer.

While navigators assist consumers in the enrollment process, they do NOT enroll consumers in a qualified health plan, nor do they select a plan for the consumer. They are also not responsible for determining a consumer’s eligibility.

Before aiding consumers, navigators complete comprehensive federal training and undergo criminal background checks, and state training and registration (when applicable).

Dental Insurance

Prepaid Plan Characteristics – new section on the outline

Characteristics

Prepaid dental plans typically provide their subscribers routine preventive care at no charge (other than the premium) after a small copayment for the office visit. Other dental procedures are provided at a discounted rate of 25% to 50%. Most plans' benefits are not subject to waiting periods, pre-existing conditions exclusions or deductibles. Members are allowed to choose their own dentist from a list of participating general dentists. Some plans include benefit payments for procedures such as cosmetic dentistry, out of area emergency benefits and adult and child orthodontia.

Basic Services

A prepaid dental plan must provide the basic dental services listed below:

Emergency dental services on a 24-hour-per-day basis;
Diagnostic services;
Preventive services; and
Restorative services.

A schedule of benefits that includes the dental plan's basic dental services, any other services, and any associated copays must be made available by each organization offering prepaid dental services.

Exclusions

A membership coverage and advertising and sales material cannot contain provisions or statements that are unjust, unfair, inequitable, misleading, deceptive, or untrue, or that encourage misrepresentation. No membership coverage or amendment, advertising matter or sales material must be issued or delivered to any person in this state until a copy of the form of the membership coverage or amendment has been filed with and approved by the Director.

Limitations

Any limitations of prepaid dental services, kind of services or benefits to be provided, including any deductible or co-payment feature must be included in membership coverage contract.

Federal Tax Considerations for Health Insurance

Personally-owned Health Insurance

Health Savings Accounts (HSAs)

Definition

Health savings accounts (HSAs) are designed to help individuals save for qualified health expenses that they, their spouse, or their dependents incur. An individual who is covered by a high deductible health plan can make a tax-deductible contribution to an HSA, and use it to pay for out-of-pocket medical expenses. Contributions by an employer are not included in the individual's taxable income.

Eligibility

To be eligible for a Health Savings Account, an individual must be covered by a high deductible health plan (HDHP), must not be covered by other health insurance (does not apply to specific injury insurance and accident, disability, dental care, vision care, long-term care), must not be eligible for Medicare, and can't be claimed as a dependent on someone else's tax return.

Contribution Limits

HSAs are linked to high deductible insurance. A person may obtain coverage under a qualified health insurance plan with established minimum deductibles ($1,300 for singles and $2,600 for families in 2017).

Each year eligible individuals (or their employers) are allowed to save up to certain limits, regardless of their plan's deductible (current contribution limits are $3,400 for singles and $6,750 for families). When opening an account, an individual must be under the age of Medicare eligibility. For taxpayers aged 55 and older, an additional contribution amount is allowed (up to $1,000).

An HSA holder who uses the money for a nonhealth expenditure pays tax on it, plus a 20% penalty. After age 65, a withdrawal used for a nonhealth purpose will be taxed, but not penalized.

Taxation

Health Savings Accounts (HSAs) feature tax-deferred growth, and enable the insured to pay for medical expenses with pre-tax income. Excess funds can be carried over to the next year. Regardless of how income is earned, any money deposited into an HSA is considered an "above-the-line" deduction, giving a 100% write-off against adjusted gross income.

Health Savings Accounts provide a broad range of tax-free withdrawals including

Doctors, dentists and hospitals;
Artificial limbs;
Drugs;
Eyeglasses and contacts;
Chiropractic;
Laboratory expenses;
Nursing home costs;
Physical therapy;
Psychoanalysis;
X-rays; and
Nursing home insurance premiums.

Flexible Spending Accounts (FSAs)

Definition and Overview

A Flexible Spending Account (FSA) is a form of cafeteria plan benefit funded by salary reduction and employer contributions. The employees are allowed to deposit a certain amount of their paycheck into an account before paying income taxes. Then, during the year, the employee can be directly reimbursed from this account for eligible health care and dependent care expenses. FSA benefits are subject to annual maximum and "use-or-lose" rule. This plan does not provide a cumulative benefit beyond the plan year.

There are 2 types of Flexible Spending Accounts: a Health Care Account for out-of-pocket health care expenses, and a Dependent Care Account (subject to annual contribution limits) to help pay for dependent's care expenses which makes it possible for an employee and his or her spouse to continue to work.

An FSA is exempt from federal income taxes, Social Security (FICA) taxes and, in most cases, state income taxes, saving 1/3 or more in taxes. If the plan favors highly compensated employees, the benefits for the highly compensated employees are not exempt from federal income taxes.

Cafeteria Employee Benefit Plans that meet the design conditions outlined in Section 125 of the Internal Revenue Code (IRC) give an employee a right to choose from at least one taxable benefit and one qualified benefit. It provides participants an opportunity to receive certain benefits on a pretax basis.

The plan may offer benefits to employees, their spouses and dependents. It may also include coverage of former employees, but cannot exist primarily for them.

The normal approach to a cafeteria plan is a program which grants employees credits that may be used to "buy" benefits. Credits can be based on salary, years of service, or a combination of factors, but cannot discriminate in favor of key employees. The employee then selects benefits most appropriate for his or her need from the range of choices offered, which can include any nontaxable benefits, such as group term life insurance, health insurance, dependent care, or participation in a group legal service plan. The employer may also permit the employee to take some or all of the credit in the form of cash or deferred profit-sharing or stock bonus plans, but not in the form of taxable income.

Contribution Limits

The IRS limits the annual contribution for Dependent Care Accounts to a specified amount that gets adjusted annually for cost of living. This is a family limit, meaning that even if both parents have access to flexible care accounts, their combined contributions cannot exceed the amount.

Taxation

Flexible Spending Accounts (FSAs) allow consumers to take pre-tax dollars from their paycheck and deposit them in an FSA with their employer. Consumers then submit receipts for healthcare-related expenses for reimbursement, up to a specific amount set by the employer under IRS regulations. FSAs are financially advantageous for consumers because pre-tax dollars are used to pay for healthcare-related expenses.

Small Business Health Options Program (SHOP)

By 2014, each state was required to set up Affordable Insurance Exchanges, referred to as Marketplaces. These exchanges will either serve individuals and small businesses separately, or have a combined exchange to serve both individual and small business clients under one organization. In states that have chosen not to build their own Marketplace, a Federally-Facilitated Marketplace (healthcare.gov) is available that helps with eligibility and enrollment, plan management, and consumer support.

Under the proposed regulations, states that choose to set up an Exchange for Small Business Health Options Program (SHOP) must adopt the federal standards for the program or have a state law or regulation that implements the federal standards. Each state will establish insurance options for small employer participation. A SHOP is intended to give small employers the same purchasing power that large employers have, the opportunity to make a single monthly payment, and the ability to offer a choice of plans.

PPACA defines small employers as those with at least one but not more than 100 employees. Individual states can restrict participation in the Small Business Health Options Program Exchange to those employers with fewer than 50 employees until January 1, 2016. In 2017, states may allow large employers to purchase coverage through SHOP exchanges.

Insurance exchanges may or may not have open enrollment periods for small employers, but must admit small employers whenever they apply for coverage.

Enrollment in the Health Insurance Market place began in October 2013, and tax credits for those who qualify became available in 2014.

After submitting an application for health insurance for a qualified health plan, individuals will be able to take an advance tax credit to reduce the cost of their health care coverage if purchased through an exchange. For the purposes of the premium tax credit, household income is defined as the Modified Adjusted Gross Income (MAGI) of the taxpayer, spouse, and dependents. The MAGI calculation includes income sources such as wages, salary, foreign income, interest, dividends, and Social Security.

Legal residents and citizens who have incomes between 100% and 400% of the Federal Poverty Level (FPL) are eligible for the tax credits. States have the option of extending Medicaid coverage to people under 138% of the FPL. Persons who receive public coverage like Medicare or Medicaid are not eligible for the tax credits.

Persons who are eligible for a premium tax credit and have household incomes between 100% and 250% of FPLare eligible for cost-sharing subsidies (reductions). Eligible individuals will be required to purchase a silver level plan in order to receive the cost-sharing subsidy.

The tax credit is sent directly to the insurance company, and reduces the insured's monthly health care premiums. Tax credits are based upon the individual's or family's expected annual income.

Small employers that offer health plans may be eligible for federal tax credits, depending on the average wages and size of the employer. These tax credits, available to low-wage employers (under $50,000 average per employee) with 25 or fewer workers, may cover up to 50% of premiums paid for small business employers and 35% of premiums paid for small tax-exempt employers.

To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP).

The credit is available to eligible employers for 2 consecutive taxable years.

Addendum: for use with South Dakota Property and Casualty online ExamFX courses and study guide version 19720en/19756en, per exam content outline updates effective March 24, 2017.

The following are content additions to supplement your existing text unless otherwise indicated:

General Insurance

Insurers
Types of Insurers

Self-Insurers

Self-insurers frequently structure their programs to only retain losses up to a certain specified limit and purchase insurance to cover loss above that level. (This is called stop-loss coverage.)

Captive Insurers

Marketing (Distribution) Systems

Independent Agency System/American Agency System - An independent agent represents several companies and is appointed on a non-exclusive basis. An independent agent earns commissions on personal sales and overrides of other agents, and owns the expirations of their policies allowing them to place the renewal business with any company they represent.
Exclusive Agency System/Captive Agents - The agent represents only one insurer and is appointed on an exclusive basis. The captive agent earns commissions on personal sales and overrides of other agents. Business is owned by the insurer and the insured is a customer of the insurer. Therefore, renewals are placed with the insurer only.

General Agency System - A general agent is an entrepreneur, empowered by the insurer that he or she represents on an exclusive basis to sell insurance in a specified territory and to appoint subagents. The general agent may receive compensation for office expenses, advertising and staffing, and will receive commissions on personal sales and overrides on his agents.
Managerial System - A sales force is supervised by a branch manager who, in contrast to the general agent, is a salaried employee of the insurer. The agents assigned to the branch office can be employees of the insurer or independent contractors.
Direct Response Marketing System - A company which advertises its insurance through the mail, internet, television, or through other mass marketing techniques and requires the applicant to complete the application and return it directly to the insurer by mail or online, therefore bypassing the agent, is a direct response marketing system. Telephone solicitors that use agents to complete the transaction and may pay a commission to the agents are also considered Direct Response Marketers.

Financial Solvency Status (Independent Rating Services) – addition to the existing text:

Other Coverages and Options

Surplus Lines – new section on the outline

Broker Licensing Requirements

All states require an insurer to obtain a license or certificate of authority to transact the business of insurance in the state. These insurers are called admitted or authorized insurers. The term nonadmitted insurance means any property and casualty insurance permitted to be placed directly or through a surplus lines broker with a nonadmitted insurer eligible to accept such insurance. Each state makes certain exceptions to allow nonauthorized or nonadmitted insurers to transact business within the state. The permitted types of transactions are usually limited to insurance that is difficult to place, or insurance that is not readily available through an authorized insurer in the state. These unauthorized insurers are called excess or surplus lines insurers. Although the insurance company is unregulated, the insurance may be sold only through licensed excess and surplus lines brokers.

Each state defines those circumstances in which excess and surplus lines insurance may be written. The following are some of the general requirements:

After diligent effort, the insurance cannot be written through an authorized carrier;
The purpose of writing the insurance through an excess or surplus lines insurer must not be to obtain a better price or better terms;
The coverage must be written through a state-licensed excess or surplus lines broker.

Although these insurers are considered unauthorized, most states compose an approved listing of excess and surplus lines insurers. The NAIC also publishes a listing of excess and surplus lines insurers that it deems acceptable, and many states have adopted this listing.

Eligibility

Any individual who is licensed in this state as an insurance producer and who is determined by the Director to be competent and trustworthy with respect to the handling of surplus lines may be licensed as a surplus line broker. No individual is required to be licensed as a surplus lines broker if the selling, soliciting, or negotiating of surplus lines insurance takes place in an insured's home state, and the home state of the insured is a state other than South Dakota.

A licensed surplus line broker may accept and place surplus line business for any insurance producer licensed in this state for the type of insurance involved, and may compensate the insurance producer for it.

Premium Tax Obligations

Before the first day of April of each year, each surplus lines broker must remit to the state treasurer, through the Director, a tax on the premiums, exclusive of sums collected to cover federal and state taxes and examination fees, on surplus lines insurance transacted by him/her at the rate and in the manner provided by statute. If in any prior calendar year a broker collects and remits in excess of $5,000 of surplus lines premium tax, in the following year, the broker must remit the tax on a quarterly basis. Such tax will be in lieu of all other taxes upon such insurers with respect to the business so reported.

A tax of 2 1/2% of the gross premium charged for insurance may be imposed upon the insured in independently procured coverages. This amount should be paid within 30 days after insurance is procured, continued or renewed.

NRRA (Nonadmitted and Reinsurance Reform Act)

The Nonadmitted and Reinsurance Reform Act (NRRA) became effective on July 21, 2011. The aim was to address a number of underlying issues for surplus lines brokers. Conflicting tax provisions made it unclear how much tax was due to each state in reference to the portion of where the risk exposure resided. The NRRA solved this dispute between the states by authorizing only the home state of the insured to tax a surplus lines transaction.

The NRRA does not expand the scope of the types of insurance that an insurer may write in the nonadmitted insurance market, so each state continues to determine that.

Insurance Regulation

State Regulation
Insurance Fraud Regulation

Notification of Suspected Fraud

Insurance policy information relevant to an investigation, including any application for such a policy;
Available policy premium payment records;
History of previous claims made by an insured; and
Information relating to the investigation of any suspected insurance fraud, including statements of any person, proofs of loss and notice of loss.

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