In July 2024, the General Assembly of the Commonwealth of Pennsylvania passed PA Act 45, amending the nearly century-old Insurance Company Law of 1921. In a significant legislative update, Act 45 addresses present-day needs and challenges in the insurance sector, particularly focusing on surplus lines. Specifically, it permits surplus lines licensees to charge service fees if they meet certain requirements.
Whether you’re a compliance officer, insurance agent, or broker, understanding these updated provisions is a must. Here’s what you need to know.
Understanding Surplus Lines Insurance
Before diving into the amendments, it's essential to understand what surplus lines insurance is. Surplus lines insurance, also known as excess lines or non-admitted insurance, is a specialty insurance product designed to cover high-risk policies that standard insurance markets often exclude. These policies are commonly related to unique or high liability risks that traditional insurers are unable or hesitant to underwrite due to the potential financial exposure. This could include specialized businesses, high-value properties, or even unusual personal coverage requirements.
Surplus lines of insurance helps bridge the gap between what regular insurance carriers offer and the unique or unconventional coverage needs of some clients. Surplus lines products offer flexible solutions that help the insurance marketplace accommodate challenging risks that would otherwise go uninsured. As a result, it is a critical component of the insurance marketplace.
Changes to Surplus Lines Fees
The recent legislative update introduces several important changes to how surplus lines insurance can be handled within Pennsylvania. These changes include:
Fee Structure for Surplus Lines Policies
One of the most notable changes is that surplus lines licensees can now charge a service fee for the placement of a surplus lines insurance policy. This service fee can be in addition to any commission received for the policy.
For personal lines insurance policies, the service fee cannot exceed $150 or 4% of the policy premium, whichever is greater. This cap could change, as the power to adjust it lies in the Pennsylvania Insurance Commissioner's hands.
For commercial policies, the services fee does not have a specific monetary cap. Instead, Act 45 requires that the fee charged be reasonable in relation to the actual costs involved in underwriting, issuing, and processing the policy.
This cap impacts pricing strategies, as agencies now need to consider these limits when determining whether to charge, and the amount of, their service fees for surplus lines policies.
Recoupment of Inspection Fees
Act 45 also authorizes licensees to recoup the actual costs of inspections for the placement of a surplus lines policy. These costs can only be recouped if an inspection is required. Furthermore, the cost of the inspection must actually be incurred by the licensee, cannot be retained by the licensee, and must be documented and verifiable.
Disclosure Requirements for Fees
While Act 45 permits licensees to charge a service fee, it also requires transparency in fee structuring. In order to charge services fees, prior to placing the policy, surplus lines licensees must disclose to the policy holder the total service fees, inspection fees, and premium taxes, and provide an itemization of any fees charged.
This specific obligation ensures that policyholders have a clear view of what they’re paying for beyond the policy premium itself. It helps foster trust and informed decision-making for clients.
Additionally, the licensee must also disclose any compensation they receive from, or ownership interest they hold in, the entity completing the inspections. This disclosure will help to create a more transparent relationship between insurers and policyholders.
Monthly Reporting
Surplus lines licensees' monthly reports to the Pennsylvania Department of Insurance have also been affected by Act 45. These reports now must include the amount of service fees charged for each surplus lines insurance policy. This requirement aims to improve oversight, giving the Department the power to monitor compliance and ensure that service fees remain within set limits.
Non-compliance or inaccurate reporting may lead to penalties, including monetary fines, licensing actions, or enhanced scrutiny and audits. Given the potential fallout associated with both, it’s important to take action and adopt robust reporting systems and workflows.
What PA Act 45 Means for Surplus Lines Brokers
The changes in PA Act 45 demand significant shifts from surplus lines brokers. While they now can charge service fees and recoup inspection costs, this amendment mandates compliance with the updated disclosure requirements. Compliance will involve a precise accounting of fees, ownership disclosure, and transparency in inspection cost breakdowns.
To reap the benefits of these service fees, surplus lines licensees must adjust internal processes to meet these regulatory standards. For inspection costs, they must track and document inspection expenses in detail to support these claims. They also must track ownership interests and compensation received from inspectors.
Maintain Compliance with Recent Act 45 PA Amendments
The 2024 amendments to PA Act 45 have brought about notable changes for surplus lines licensees. Between setting clear guidelines on service fees, establishing rigorous disclosure standards, and requiring monthly reporting, Act 45 is all about transparency and policyholder protection within a more regulated environment for high-risk policies.
Maintaining compliance with these new requirements is a must in order to charge service fees and recoup inspection costs. While the shift may demand several major modifications to operational processes, doing so helps avoid penalties associated with non-compliance.
If you’re uncertain about the compliance specifics or how they apply to your business operations, seek legal or compliance advice. At 3H Compliance Group, we offer comprehensive compliance services designed to streamline and optimize your compliance efforts. Contact us today to learn more about how we can help you.
