Surplus lines insurers must sell their insurance through a broker. They are responsible for (1)  selecting an eligible surplus lines insurer, (2) reporting the surplus lines  transaction to insurance regulators, (3) remitting the premium tax due on  the transaction to state tax authorities, and (4) assuring compliance with  all the requirements of the surplus lines state regulations. Surplus Lines Insurers’ Premiums Written Increased Modestly and Companies Have Generally Remained Profitable

From 2008 to 2012 premiums written by surplus lines insurers grew by  1.6 percent (from $24.8 billion to $25.2 billion) and remained around 5  percent of the property casualty market as a whole. Over this time, even  though insurers’ claims and underwriting expenses generally exceeded  premiums, their net investment income allowed them to remain profitable. As a result, surplus lines insurers also saw growth in capital holdings. NRRA Implementation Has Begun in Most States and Appears to Have Had Little Effect on the Pricing and Availability of Coverage

Almost all states have begun to implement NRRA, which our review of the  legislative history shows that Congress passed in 2010 to make it easier  for surplus lines insurers and brokers conducting business across states. According to surplus lines insurers, brokers, and representatives of  industry associations, the act has simplified the collection of premium  taxes for multistate risks. We found that the states had largely adopted a  definition of the home state that closely matched the term as defined in  NRRA—that is, the state in which the insured maintains its principal place  of business or residence or, if all the risk resides outside that state, the  state to which the greatest percentage of taxable premium is allocated for  that insurance contract. Rather, these states tax  and retain 100 percent of premium when they are the home state of the  insured, as discussed above. To Assess Eligibility, Some States Are Making Additional Requests of Nonadmitted Insurers

Section 524 of NRRA establishes nationwide criteria for determining  whether insurers are eligible to sell in states where they are not  domiciled. NRRA Appears to Have Had Little, If Any, Effect on Prices and Availability of Coverage

According to surplus lines insurers and brokers and representatives of the  industry associations that we contacted, NRRA has had little, if any, effect  on the price and availability of coverage in the admitted and surplus lines  markets. According to market participants, any changes in coverage would be due  to the insurance cycle rather than NRRA and there has been little  noticeable shifting in coverage between the admitted and surplus lines  markets as a result of NRRA. NAIC  provided technical comments, which we incorporated, as appropriate. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) describe the size and condition of  the surplus lines insurance market and (2) examine actions states have  taken to implement the Nonadmitted and Reinsurance Reform Act’s  (NRRA) provisions and the effects of the act, if any, on the price and  availability of surplus lines coverage. Appendix II: National Association of Insurance Commissioner’s Alien Insurers

Section 524 of the Nonadmitted and Reinsurance Reform Act of 2010  (NRRA), as part of the Dodd-Frank Wall Street Reform and Consumer  Protection Act (the Dodd-Frank Act), says that states may not prohibit a  surplus lines broker from placing nonadmitted insurance with, or  procuring nonadmitted insurance from, a nonadmitted insurer domiciled  outside the United States (also called an alien insurer) that is listed in  National Association of Insurance Commissioner’s (NAIC) International  Insurers Department (IID) Quarterly Listing of Alien Insurers.
Why GAO Did This Study

Surplus lines insurers are critical to ensuring that businesses and individuals with difficult-to-insure risks can manage those risks. These insurers provide coverage for risks that the traditional, or admitted, insurance market is unwilling or unable to cover. Historically, insurance brokers who sell such coverage have found it to be time consuming and often difficult to allocate state taxes brokers collect and remit on insurance premiums on behalf of policyholders when the risks covered reside in multiple states. To help address this issue, Congress passed NRRA as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The act mandates GAO study changes in the surplus lines insurance market. This report (1) describes the size and condition of the surplus lines insurance market and (2) examines actions states have taken to implement NRRA's provisions and the effects of the act, if any, on the price and availability of coverage. To address these questions, GAO analyzed end-of-year financial data for 2008 through 2012 for insurers who sold surplus lines insurance in 2012 and interviewed insurance regulators from states with a large number of surplus lines insurers, industry associations representing interests in the surplus lines market, and large insurers and brokers. GAO also reviewed related studies and analyses.
In commenting on a draft of the report, the National Association of Insurance Commissioners provided technical comments, which GAO incorporated as appropriate.

What GAO Found

Surplus lines insurers' premiums written have increased modestly and the companies have generally remained profitable. From 2008 through 2012 premiums written by surplus lines insurers, who sell property/casualty insurance through brokers in states where they are not licensed, grew slightly from $24.8 billion to $25.2 billion and remained stable at around 5 percent of the property casualty market as a whole. Over this time, surplus lines insurers' premiums generally exceeded their claims and underwriting expenses and they remained profitable. Surplus lines insurers also saw capital gains over this period.
Almost all states have modified their laws to implement at least portions of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA). In 2010, Congress passed the act, which supporters argued would make it easier for surplus lines insurers and brokers conducting business across states. Under NRRA, only the "home state" of the insured--the state where the insured maintains its principal business or residence or, if the risk is 100 percent outside that state, the state to which the greatest percentage of the insured's taxable premium is allocated--may tax or regulate surplus lines insurance transactions. According to market participants GAO interviewed, the changes in states' laws have simplified compliance for multistate risks. While most home states are collecting and retaining 100 percent of premium taxes, a few states are participating in a tax-sharing agreement, as permitted under NRRA. According to industry associations, including those whom GAO interviewed, some states are making additional requests of surplus lines insurers beyond the requirements specified in NRRA. The National Association of Insurance Commissioners formed a subgroup to address this issue and in August 2013 issued options for improving compliance. Market participants said that NRRA has had little, if any, effect on the prices or availability of coverage, as this was not an intent of the act. The participants said that the insurance business cycles are primarily responsible for any changes in prices and availability. According to surplus lines insurers that GAO contacted, NRRA has caused little noticeable shifting in coverage between the admitted and surplus lines markets.