What do unauthorized insurers typically do to entice consumers to purchase insurance?

The Office of General Counsel issued the following informal opinion on November 8, 2001, representing the position of the New York State Insurance Department.

Re: Legal Inquiry about Unauthorized Insurers.

Questions:

1.Are there financial and other requirements for an alien insurer, which is not authorized in New York but is licensed in its domicile, to be permitted to provide insurance in New York, for property/casualty or other insurance, other than life or health?

2. If the unauthorized insurer secures reinsurance with Lloyds of London or another large insurance company, are the financial requirements or other requirements eased?

3. If a business with its primary office in New York wants to establish an insurance program for its own risk of loss only, using a captive insurance company which is located in another country, are there any financial or regulatory requirements such as N.Y. Ins. Law Art. 70 (McKinney 2000) that either the captive insurer or the insured business must adhere to?

4. If, the captive insurance company is "renting" itself to the insured for the insurance program only, must the "rented" captive insurer meet any regulatory requirements of the Insurance Department?

Conclusions:

1.Yes. There are numerous requirements that an unauthorized insurer must adhere to in order to transact insurance business through the excess line market in New York.

2. No. The financial and other requirements are not changed if the unauthorized insurer reinsures a portion of the risk with a large insurance company such as Lloyds of London.

3. No, there are no different rules that apply. N.Y. Ins. Law Art. 70 (McKinney 2000), regarding captive insurers does not apply to captive insurance companies licensed outside New York State. Both the insurer and the insured business would be subject to the same requirements that would apply were the insurer not a captive.

4. No. The fact that the captive insurer is a "rented" captive insurer does not change the answer in number 3 above.

Facts:

A business located in New York that is comprised of a warehouse worth approximately one million dollars would like to place its property/casualty risk with a captive insurance company formed and licensed in either Bermuda or the Cayman Islands.

In the alternative, the property/casualty risk would be placed with an insurer licensed in either Bermuda or the Cayman Islands whereby the warehouse would invest approximately $100,000.00 in a segregated account in the insurer which would in turn insure the warehouse for $150,000.00 (thus the warehouse business would in effect be "renting" the insurance company and the insurance company would become a "rented captive insurer"). Thereafter, the rented captive insurer would reinsure the balance of the risk, $850,000.00, with a reinsurance company. The amount of insurance premiums paid by the warehouse would have a direct correlation with the amount of equity invested in the rented captive insurer. As the warehouse’s equity grows in the rented captive insurer and no major losses are incurred, the premium payments would decline.

Analysis:

1. The New York Insurance Law generally prohibits the placement of insurance in New York by unauthorized insurers unless the placement is made through the excess line market. N. Y. Ins. Law § 1102(a) (McKinney 2000) states in relevant part:

(a) No person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter, or exempted by the provisions of this chapter from such requirement....

N.Y. Ins. Law § 1101(b)(2)(F) (McKinney 2000) provides an exception for insurance coverage placed through the excess line market and concomitantly, N.Y. Ins. Law § 2105(a) (McKinney 2000) authorizes excess line brokers to procure insurance coverage from unauthorized insurers.

In order to place insurance coverage through the excess line market, an excess line broker must adhere to and comply with the requirements found in N.Y. COMP. CODES, R. & REGS., tit.11, § 27 (1999) (Regulation 41) and in N. Y. Ins. Law §§ 2105, 2118 & 2130 (McKinney 2000). The onus is on the excess line broker who must ensure that the unauthorized insurer satisfies the financial and other requirements contained in N.Y. COMP. CODES, R. & REGS., tit.11, § 27 (1999) (Regulation 41).

2. An unauthorized insurer who transacts insurance business through the excess line market must adhere to the above mentioned requirements. The financial and other requirements including the prohibited activities do not change by virtue of the fact that a portion of the risk is subsequently reinsured with a large insurance company such as Lloyds of London.

3. N.Y. Ins. Law Art. 70 (McKinney 2000) does not apply to captive insurance companies licensed outside New York State. N.Y. Ins. Law § 7001(a) (McKinney 2000) states specifically that, "[t]he purpose of this article is to facilitate the formation and operation of captive insurance companies within the state of New York." Thus, an unauthorized captive insurer is not subject to the requirements of Article 70.

Please note that the New York Insurance Law does not distinguish between an unauthorized insurer and a captive unauthorized insurer. A captive insurer that is licensed outside New York State is treated and subject to the same laws and regulations that any other unauthorized insurer is subject to.

The point of distinction would be whether the insurance transaction occurs outside New York or within New York. In your situation, if the insured and the captive unauthorized insurer were to transact insurance business in New York they would be abrogating N.Y. Ins. Law § 1102 (McKinney 2000) which prohibits the doing of an insurance business in New York by an unauthorized insurer.

Thus, the insured warehouse business in addition to forming a captive insurer outside New York must also ensure that the insurance transaction takes place outside New York. N.Y. Ins. Law § 1101(b)(2) and (b)(2)(E) (McKinney 2000) provides an exception to the prohibition contained in N.Y. Ins. Law § 1102 (McKinney 2000), where the insurance coverage is principally negotiated, issued and delivered outside New York State. Once the initial transaction occurs outside New York, subsequent transactions between the insured and the insurer with respect to the policy may take place by mail pursuant to N.Y. Ins. Law § 1101(b)(2) (McKinney 2000).

4. The analysis in number 3 above is also applicable to a "rented" unauthorized captive insurer.

Please be advised that, in addition to the insurance laws, there are other New York State Laws that may affect whether an insured may satisfy the financial responsibility or other requirements with insurance from an unauthorized insurer. For example, an insured who directly procures insurance coverage from an unauthorized insurer without the use of an excess line broker may be subject to a placement tax under the tax laws. In addition, the insured’s ability to procure insurance coverage from an unauthorized insurer may be limited by other New York State laws such as the Vehicle and Traffic Laws and the Workers Compensation Laws that require placement of certain types of insurance liability coverage with an authorized insurer.

Since this opinion is limited to the Insurance Laws and Department Regulations you may wish to discuss with other state agencies the impact of their laws on your situation.

For further information you may contact Senior Attorney Adiza Mohammed at the New York City Office.