Nevada Rate Standards and Surplus-Lines Placement: Fair Prices, and Coverage from Insurers Outside Nevada's Authorized Market

Introduction

This lesson answers two practical questions.

Is this insurance price allowed? Nevada law tests insurance prices against three standards. A price must not be too high for the risk, too low to pay the claims it promises, or different from a similar customer's price without a cost-based reason.

When can coverage go to an insurer that lacks Nevada authority? Sometimes no insurer authorized in Nevada will write the coverage a customer needs. Nevada then allows the coverage to be placed with an insurer outside that authorized group, but only under conditions. The placement also brings reports, fees and tax filings.

What you will be able to do

• Tell an excessive, an inadequate and an unfairly discriminatory rate apart, and explain the fact that identifies each one.
• Recognize which insurance the rate standards cover, and describe the two filing paths: a regular filing, and a faster path for small property rate increases.
• Decide whether a coverage can be placed with an insurer that has no Nevada authority, including the exception for exempt commercial purchasers.
• Apply the stated reporting, inspection-fee, review-fee and tax-filing requirements, including the fee arithmetic.

Before you start

This lesson builds on two earlier lessons. Insurers: identity, domicile, authority and transactions covers what it means for an insurer to be authorized in Nevada. From application to renewal: a producer's licensing lifecycle covers how a producer gets and keeps a license. Both ideas come up again here.

The Commissioner of Insurance (Nevada's insurance regulator) appears throughout. The Commissioner's general powers are covered in Nevada's Commissioner: authority, examinations and hearings.

Part 1: What a rate is, and which rates Nevada's standards cover

A rate is the price an insurer charges per unit of risk it covers. A premium is the total amount a particular policyholder pays. Two people can be charged the same rate and still pay different premiums, for example because one insures a larger home. The standards in this lesson judge rates.

Insurers set rates for a class of business: a group of similar risks priced together, such as homeowners policies on similar houses. Several of the standards compare a rate with the costs of its class.

The rules are in Chapter 686B of the Nevada Revised Statutes (NRS). These rules apply to direct insurance written on Nevada risks by authorized insurers, meaning insurers that hold a Nevada certificate of authority to do insurance business here.

The law lists exceptions. One matters for a property license: property insurance for business and commercial risks is excluded. The exclusion has a limit, though. It covers only questions about determining or approving premium rates. Commercial property is not exempt from the chapter's other provisions.

Example. An authorized insurer sells homeowners policies in Nevada. Those rates fall under the standards below. The same insurer also insures warehouses. The rate-setting and rate-approval questions for that warehouse coverage fall under the commercial-property exclusion. Questions that are not about determining or approving rates do not.

Check. An authorized insurer prices a renters policy for a Las Vegas apartment and a property policy for a restaurant building. For which one do the chapter's rate-approval provisions apply?

The three rate standards: too high, too low, or unfairly different

Nevada law says rates must not be excessive, inadequate or unfairly discriminatory. A separate rule says an insurer may not charge a rate that, if continued, would tend to destroy competition or create a monopoly (a market controlled by one seller).

Each standard asks a different question, so take them one at a time.

Excessive: a rate too high for the risk when competition isn't holding prices down

"Excessive" does not simply mean expensive. Nevada ties this standard to competition.

The Commissioner may disapprove rates when there is not a reasonable degree of price competition at the consumer level for that class of business. Price competition means insurers competing on price for customers. To decide whether it exists, the Commissioner considers all relevant tests, including:

• how many insurers actively sell that class, and their market shares
• whether rates differ among insurers in the class
• whether insurers' long-run profits in the class are unreasonably high compared with how risky the class is
• how much consumers know about the market
• whether the competition is real or artificial

When competition does not exist, a rate is excessive if either of these is true:

• it is likely to produce a long-run profit that is unreasonably high for the riskiness of the class, or
• the expenses built into it are unreasonably high for the services provided.

Example. A homeowners rate for houses near wildfire-prone brush is much higher than the rate for city houses. That alone does not make it excessive, because the brush-area houses carry more risk.

Now change the facts. Suppose one insurer is the only real seller for a class, and its rate keeps producing profits far above what the class's riskiness justifies. That is the pattern the excessive standard targets.

Tempting mistake: "The customer found a cheaper quote, so this rate is excessive." Nevada's test looks at competition, long-run profit compared with risk, and expenses compared with services. A higher quote by itself shows none of these.

Inadequate: a rate too low to pay the expected claims and costs

A rate is inadequate if it is clearly insufficient to pay the projected losses and expenses of its class. Projected losses are expected claim payments. Expenses are the insurer's costs of running the business.

The rate is not judged alone. The test counts the rate together with the investment income attributable to it, meaning money the insurer earns by investing premiums before it pays claims.

An inadequate rate is a problem even though customers might like it. A price too low to pay the claims it promises can leave those claims unpaid.

Worked example (fictional figures for practice, not a regulatory finding). For one class of business next year, an insurer projects:

• Income from the rate: $1,200,000
• Investment income attributable to those premiums: $80,000
• Projected losses and expenses: $1,500,000

Step 1: Add the two income sources: $1,200,000 + $80,000 = $1,280,000.

Step 2: Compare that total with the projected losses and expenses: $1,280,000 − $1,500,000 = −$220,000.

The rate falls $220,000 short even after counting investment income. That shortfall points toward an inadequate rate. Whether a rate is clearly insufficient is a judgment the regulator makes, not something the arithmetic settles alone.

Change one fact. Keep the same income, but lower the projected losses and expenses to $1,250,000. Now the comparison is $1,280,000 − $1,250,000 = +$30,000, so the rate covers its projected costs.

Here is the tempting mistake. If you leave out investment income, $1,200,000 against $1,250,000 looks $50,000 short. The law counts the investment income, and with it the rate is not short.

Unfairly discriminatory: a price difference that expected costs don't explain

Insurers may charge different rates to different customers. A difference becomes unfairly discriminatory when one rate, compared with another in the same class, clearly fails to fairly reflect the differences in expected losses and expenses. In other words, the price gap is not explained by the cost gap.

Example. Two houses are in the same class. One sits much closer to a fire hydrant and station, so the insurer expects fewer and smaller fire losses there and charges less. The difference follows expected losses, and the law accepts such differences when they are reasonably accurate.

Change one fact. Now the two houses have the same expected losses and the same expenses, yet one owner is charged 20% more for no cost-based reason. The price gap no longer reflects any cost difference, which is the pattern this standard targets.

The law spells out what is not unfair:

• Different premiums for policyholders with similar exposure to loss but different expense factors.
• Different premiums for policyholders with similar expense factors but different exposure to loss.

Both are acceptable as long as the rates reflect the differences with reasonable accuracy. Rates also are not unfairly discriminatory just because they are averaged broadly across the people insured under a group, franchise or blanket policy, which is a single arrangement covering many people.

Some classifications are banned outright. Insurers may group risks in any reasonable way to set rates, but not by race, color, creed, national origin, sexual orientation, or gender identity or expression.

Compare the three side by side

Each standard asks a different question:

• Excessive asks: Where competition isn't working, is the rate producing unreasonably high long-run profit for the risk, or carrying unreasonably high expenses for the services?
• Inadequate asks: Is the rate, plus its investment income, clearly too low to pay projected losses and expenses?
• Unfairly discriminatory asks: Compared with another rate in the same class, does the price difference fail to reflect expected loss and expense differences?

A rate can be high without being excessive, low without being inadequate, and different from another rate without being unfairly discriminatory.

Check. Name the standard each situation raises, or say that none is raised.

1. Two condo owners in the same class have the same expected losses and expenses. One is charged more because of their national origin.
2. Projected losses and expenses for a class are $700,000. The rate brings in $640,000, and attributable investment income is $40,000.
3. A customer complains that their homeowners quote is the highest of five competing insurers' quotes.

What the Commissioner considers when testing a rate

When checking a rate against the three standards, the Commissioner considers several things:

• Experience: past and expected losses and expenses, from Nevada and elsewhere.
• Risks and trends: catastrophe hazards (events like major fires or earthquakes that cause many losses at once), contingencies, and trends.
• Other factors: loadings for leveling premiums over time or for policyholder dividends or savings, plus other relevant factors, including the judgment of technical staff.
• Individual adjustments: rates may be adjusted for individual risks using rating plans that measure likely differences in hazards, expenses, or both.
• Expense provisions: these may reflect the insurer's own way of operating and its own expense experience, to the extent that experience is credible.
• Profit: rates may include a profit that is not unreasonable for the riskiness of the class.

Notice that profit is allowed. The standards don't forbid profit; they forbid unreasonable profit relative to risk when competition isn't working.

How rates reach the Commissioner: two filing paths

A rate filing is the formal submission of rates to the Commissioner. Authorized insurers must file the following, plus any changes or amendments to them:

• their rates and proposed rate increases
• the policy forms the rates apply to
• supplementary rate information, the supporting rules and materials used to apply the rates

The same duty applies to licensed rate service organizations that an insurer has designated to file its rates.

Filings go through either the regular section of the law or, where it applies, the flex-rated filing program.

Flex-rated filing: a faster review path for small property rate increases

The flex-rated program is for an insurer with a line of property insurance that covers real property, meaning land and buildings. It allows a proposed rate increase to be filed under the program instead of the regular path, if every condition is met:

• The filing contains only a rate increase, with no changes to supplementary rate information.
• The increase does not exceed either of the two flex-rated filing thresholds in effect when the filing is made.
• Existing policyholders don't feel the increase until their policy renews.
• The first existing policyholder affected is at least 45 days after the filing date.

The two thresholds measure different things:

• Overall rate impact is the total premium increase for all affected policyholders, divided by those policyholders' total premiums on the day before the increase would take effect. It asks how big the increase is across the whole group.
• Individual rate disruption is the largest percentage increase any single affected policyholder would see. It asks who is hit hardest.

The Commissioner sets these thresholds after public input and a hearing, and may adjust them each year by June 1. Always use the thresholds in effect on the filing date. This lesson does not supply the current figures.

The program is also unavailable when both of the following are true:

• the insurer's filings on that line within the prior 12 months, added together, exceed a threshold, and
• an affected policyholder already had a flex-rated increase within that 12-month period.

Review. The Commissioner reviews each flex-rated filing. If the Commissioner finds within 15 days that it fails the program's conditions or the rate standards, the insurer is notified and the filing is treated as a regular filing. If no notice arrives within 15 days, the filing is deemed approved.

The Commissioner checks the filing against the rate standards from earlier in this lesson. A fast path is not a way around them.

Worked example (invented thresholds, for practice only). Assume the thresholds in effect are 5% overall rate impact and 10% individual rate disruption. An insurer files a homeowners rate increase that changes nothing else. Existing customers see it at renewal, starting 60 days after filing.

• The affected policyholders' premiums total $2,000,000, and the increase adds $70,000. The overall rate impact is $70,000 ÷ $2,000,000 = 3.5%, which is under 5%.
• The largest increase for any one policyholder is 14%, which is over 10%.

Because the filing exceeds one of the two thresholds, it does not qualify for the flex-rated program. The tempting mistake is to check only the overall figure. A small average can hide a large increase for one customer, which is why the second threshold exists.

Check. An insurer files a 2% homeowners rate increase that also revises its rating rules, which are supplementary rate information. Assume the amount is within every threshold. Does it qualify for the flex-rated program?

Part 2: Surplus lines — placing Nevada coverage outside the authorized market

The terms you need

An admitted insurer (also called an authorized insurer) holds a Nevada certificate of authority to do insurance business here. A nonadmitted insurer (also called an unauthorized insurer) does not.

Among nonadmitted insurers, an eligible insurer has no certificate of authority but has qualified under Chapter 685A to write nonadmitted insurance in Nevada.

Export means placing a Nevada risk with a nonadmitted insurer. The coverage placed this way is nonadmitted insurance, also called surplus lines insurance. "Surplus" describes coverage the admitted market won't fully provide.

A surplus lines broker is a broker licensed as such under Chapter 685A. Which license someone needs is covered in Who needs which Nevada insurance license?

The rules below apply when Nevada is the insured's home state. In every scenario in this lesson, Nevada is the home state.

The basic rule: try the authorized market first

When Nevada is the home state and certain coverage cannot be obtained from authorized insurers, it may be placed with nonadmitted insurers. All of these conditions apply:

1. The right person places it. It must go through a broker licensed as a surplus lines broker under Chapter 685A, or be obtained by the insured directly from a nonadmitted insurer as the law permits. This provision is not permission for anyone else to place it.
2. The admitted market can't supply the full amount. After a diligent effort (a genuine search of authorized insurers), the full amount of insurance needed must not be available from them. The one exception is covered below.
3. Price alone isn't a reason. Coverage may not be exported to get a lower premium than an authorized insurer would accept. If any authorized insurer is able and willing to carry the risk, a difference in rates does not support export.
4. Cost-related wording differences aren't a reason either. If the policies otherwise provide substantially the same coverage, differences in their terms that directly affect cost do not support export.

Worked example (fictional). Copper Ridge Bottling, a Nevada business, needs $8,000,000 of property coverage on its plant. Its broker searches the authorized market. The best any authorized insurer will write is $5,000,000.

Is the full amount available from authorized insurers after a diligent effort? No, so the condition is met. A licensed surplus lines broker may place the coverage with a nonadmitted insurer, subject to the other conditions.

Change one fact. Now an authorized insurer will write the full $8,000,000, but at a higher premium than a nonadmitted insurer quotes. Export is not supported. The coverage is available from an able and willing authorized insurer, and a lower price alone doesn't justify going outside the authorized market.

Change a different fact. The authorized insurer offers substantially the same coverage, but its terms cost more, for example a lower deductible option priced higher. Differences like that, tied directly to cost, don't support export either.

The tempting mistake in both changed cases is to treat "cheaper elsewhere" as "not available here." The test is availability of the coverage, not the price.

The exempt commercial purchaser exception: skipping the search, with disclosure and a written request

An exempt commercial purchaser is a business buyer that meets a specific legal definition. This lesson does not teach that definition. Being a business is not enough, and every scenario below states whether the buyer qualifies.

For a buyer that does qualify, the broker does not have to make the diligent-effort search, but only if both of these happen:

• (a) Disclosure. The broker tells the buyer that the coverage may or may not be available from the admitted market, and that the admitted market may give greater protection with more regulatory oversight.
• (b) Written request. The buyer then asks the broker, in writing, to place the coverage with a nonadmitted insurer.

The law describes the written request as coming after the disclosure.

Worked example (fictional). Assume Basin Logistics meets the exempt commercial purchaser definition. Its broker gives the disclosure above. Afterward, Basin's risk manager emails the broker asking for placement with a nonadmitted insurer. Both steps are complete, so the broker need not search the admitted market first.

Change one fact. The risk manager agrees by phone, and nothing is put in writing. Step (b) is missing, so the exception does not apply yet. The diligent-effort requirement still stands.

Change another fact. The buyer is a small business that does not meet the definition. Disclosure and a written request don't help, because the exception covers only exempt commercial purchasers.

This exception relieves the diligent-effort search. It does not change who may place the coverage: that still must be a licensed surplus lines broker, or the insured directly as the law permits.

Check. A broker gives a qualifying exempt commercial purchaser the required disclosure. The buyer's owner replies, "Sure, go ahead," during a meeting. Can the broker skip the search of authorized insurers now?

After placement: reports, fees and tax filing

The broker's report: showing the export was allowed

NRS 685A.050 requires a broker's report giving facts that show whether the insurance was eligible for export. The regulations (Nevada Administrative Code, or NAC, Chapter 685A) add the following:

• Statement of compliance. The report counts as the broker's statement that the placement complies with the export conditions and related sections.
• Renewals. Each renewal or extension of coverage needs its own separate report, filed with the broker's organization. The organization is the nonprofit organization of surplus lines brokers formed under Nevada law.
• Amended reports. An amended report goes to the organization for each cancellation. It is also required for each endorsement (a change to the policy) that changes any of the following:
• the named insured (the person or business the policy names)
• the description or location of what is insured
• the coverage, conditions or terms
• the premium
• the participating insurers
• Electronic filing. A report filed electronically must carry the broker's electronic signature under Nevada's electronic-transactions law.

Example. A surplus lines policy is endorsed to move coverage from one warehouse address to another. That changes the location of what is insured, so an amended report is due. Without any endorsement, the policy then renews. The renewal needs its own separate report.

Inspection fees: when the broker may pass them on

A broker may pass an inspection fee to the insured and collect it as part of the premium. The fee must be directly related to an independent inspection the insurer requires. When this happens:

• The broker keeps a copy of each inspection report and each related invoice or statement.
• The fee must appear as a separate item on the broker's certificate, the cover note, or both. Both documents are papers the broker issues showing the coverage.

Change one fact. The inspection is one the broker arranged on their own, and no insurer required it. This rule does not authorize passing that fee on, because the condition is an inspection required by insurers.

Building the premium-tax base

The premium tax is the state tax on surplus lines premiums. The regulations require the broker to account for the premium carefully, including any inspection fee charged as part of it, and to compute the tax on this base:

total premium (or deposit premium) + the broker's fee allowed by NRS 685A.155 − any return premium

The premium must include policy fees, membership fees and other fees or assessments the insurer charges as payment for the insurance. NRS 685A.155 is the section that addresses the broker's fee for procuring surplus lines coverage. This lesson doesn't teach the fee's limits, so the fee amounts below are simply given as allowed.

Worked example (fictional amounts). The insurer's premium is $23,750, and it also charges a $250 policy fee. The broker's procurement fee, assumed allowed under NRS 685A.155, is $900. There is no return premium.

Step 1: Premium for tax purposes. The insurer's policy fee counts, so $23,750 + $250 = $24,000.

Step 2: Add the broker's allowed fee: $24,000 + $900 = $24,900.

Step 3: Subtract any return premium: $24,900 − $0 = $24,900.

Change one fact. An endorsement lowers coverage and creates a $1,400 return premium. The base becomes $24,900 − $1,400 = $23,500.

The tempting mistake is to leave out the insurer's $250 policy fee because it isn't labeled "premium." The regulation says fees charged by the insurer as payment for the insurance are part of the premium. Dropping it gives $24,650, which is $250 too low.

This lesson does not teach the tax rate itself, so it does not compute the tax.

The coverage-review fee: 0.4%, paid to the organization

Each broker who is a member of the organization pays it a fee for reviewing surplus lines coverage:

• Amount: 0.4 percent of the amount subject to tax for each policy.
• Timing: due within 30 days after the broker receives the organization's invoice.

Worked example (stipulated amount). Assume the amount subject to tax on a policy is $24,900.

0.4% written as a decimal is 0.004, so $24,900 × 0.004 = $99.60.

Magnitude check: 1% of $24,900 is $249. Since 0.4% is a bit less than half of 1%, the answer should be a bit under $124.50, and $99.60 fits. The tempting mistake is to use 4% (0.04), which gives $996, ten times too much.

Timing example. The organization's invoice is dated March 1, but the broker receives it March 3. The 30 days count from March 3, the receipt date, not the invoice date.

Filing the premium tax

To determine the tax owed to the Commissioner, the broker files premium taxes through the organization's Surplus Lines Information Portal, or any successor system that replaces it.

Where the other surplus-lines duties are found

You only need to recognize these sections, not the details of their operation:

• NRS 685A.155 addresses the broker's fee for procuring surplus lines coverage.
• NRS 685A.160 requires the broker to keep a record of each surplus lines coverage procured. This is a surplus-lines record requirement, separate from general producer recordkeeping.
• NRS 685A.175 and 685A.180 address the broker's quarterly report and the tax itself. This lesson doesn't teach the current tax rate, deadlines or procedures.

Check. A broker collects a $300 fee for an independent inspection the insurer required, as part of the premium. What two things must the broker do about that fee under the inspection rule?

Practice on your own

Try each case before opening the answer.

1. Two homeowners in the same class have the same expected losses. The insurer's records show that servicing one owner's policy type costs noticeably more, and the rate difference matches that cost with reasonable accuracy. Is the difference unfairly discriminatory?

2. For one class, a rate brings in $900,000, attributable investment income is $120,000, and projected losses and expenses are $980,000. Does the arithmetic point toward an inadequate rate?

3. Assume flex-rated thresholds of 5% overall and 10% individual, which are invented for practice. A proposed real-property rate increase changes nothing but the rate. It produces a 4% overall rate impact and a largest single-policyholder increase of 8%. Existing policyholders see it at renewal, and the first one is affected 30 days after filing. Does it qualify?

4. A Nevada shop owner tells their broker, "An authorized insurer will write my full building coverage, but a nonadmitted insurer is $1,500 cheaper. Place it there." Assume the shop is not an exempt commercial purchaser. May the broker export the coverage?

5. Assume Pinyon Mining meets the exempt commercial purchaser definition. Its broker gives the required disclosure, and Pinyon's CFO then emails a request to place the coverage with a nonadmitted insurer. A colleague says the broker must still search authorized insurers first. Who is right, and why?

6. For a surplus lines policy, the insurer's premium is $15,600, which already includes a $275 insurer-required inspection fee collected as part of the premium. The insurer also charges a $100 membership fee. The broker's allowed procurement fee is $500, and a later endorsement creates a $700 return premium. Answer three questions:

• (a) What is the premium-tax base?
• (b) If the amount subject to tax is stipulated as that same figure, what is the coverage-review fee?
• (c) The endorsement changed the premium. What report does that trigger?

What to remember

• Rate standards. Rates must not be excessive, inadequate or unfairly discriminatory, and must not tend to destroy competition or create a monopoly.
• Excessive is tested through competition. Where competition doesn't exist, the question is unreasonable long-run profit for the risk, or unreasonable expenses for the services. A high price alone doesn't show it.
• Inadequate means clearly too low, counting attributable investment income, to pay projected losses and expenses.
• Unfairly discriminatory means a same-class price difference that doesn't fairly reflect expected loss and expense differences. Prohibited classifications are banned outright, and broad averaging under group, franchise or blanket policies is not unfair by itself.
• Commercial property. The exclusion removes only rate determination and approval questions.
• Filing paths. Insurers file rates, forms, supplementary rate information and changes. The flex-rated program is for real-property rate increases only. Every condition must be met, including both thresholds in effect on the filing date, and the Commissioner has 15 days to object.
• Surplus lines placement. Nevada coverage may be exported only through a licensed surplus lines broker or the insured directly as the law permits. The full amount must be unavailable from authorized insurers after a diligent effort. Lower price and cost-related term differences don't count.
• Exempt commercial purchaser exception. The search can be skipped only for a buyer that actually qualifies, after the disclosure and a later written request.
• Reports. Renewals and extensions need a separate report. Cancellations and the listed endorsement changes need an amended report. Electronic reports need an electronic signature.
• Inspection fees. They may be passed on only for insurer-required independent inspections, shown separately, with the report and invoice kept.
• Tax base and fees. The tax base is premium (including insurer-charged fees) plus the broker's allowed fee minus return premium. The review fee is 0.4% of the taxable amount, due within 30 days after the invoice is received. Premium taxes are filed through the Surplus Lines Information Portal or its successor.

Mixed practice with these rules continues in Solve mixed cases and repair your weak spots.