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Reinsurance reform act seeing mixed results

Home-state regulation nearly 100% achieved, but questions about rules for captives remain

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The Nonadmitted and Reinsurance Reform Act has achieved most but not all of its objectives.

The provision, which is part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, set clear goals.

One was to clarify that the only rules governing the placement of a surplus lines policy, including collecting premium taxes, are those of the home state of the insured.

NRRA also aims to make it easier for risk managers to tap the surplus lines market by eliminating requirements that they first approach the admitted market.

Yet challenges remain in implementing NRRA, not the least of which is how the law applies to captive insurers.

“So far, everything we hearing from our membership and the wholesale insurance community is very positive,” said Bernd G. Heinze, King of Prussia, Pennsylvania-based executive director of the American Association of Managing General Agents. “The purpose of the NRRA was to ensure uniformity and consistency with multistate risk and the payment of taxes on those risks. Now, with most of the states having gone to 100% home-state tax assessment and collection, we're seeing the uniformity and consistency really taking hold.”

“We're very happy with what has happened,” said Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices Ltd. in Kansas City, Missouri. “The primary purpose of that legislation was to define the home state of the insured as the sole regulator and taxer of a surplus lines transaction. That reform alone has reaped tremendous benefit for the surplus line industry and the NAPSLO membership.”

“The absolute No. 1 element of NRRA was the provision that one state — that being the home state of the insured — is the sole regulator,” said Hank Haldeman, president of NAPSLO and executive vice president of The Sullivan Group in Los Angeles.

“That was the watershed aspect of NRRA, and that is essentially fully implemented. That's an unfettered success. It's had a huge impact on the operation of our business ... as that of many members of NAPSLO,” Mr. Haldeman said.

“We think that the NRRA has fulfilled 85% to 90% of its promise,” said Joel Wood, senior vice president at the Council of Insurance Agents & Brokers in Washington.

“With respect to premium tax allocation and diligence search requirements, it's essentially one standard,” he said. He said the historical problem with surplus lines regulation, which he said was an “ever-frustrating anxiety for brokers and clients,” was that various state laws contradicted each other.

But there have been some catches, he said.

The council wanted one standard to apply. Had states entered into an interstate compact, “that would have been fine, but all of the states had to join. But it was evident that big states were not interested in joining a compact.”

Instead, two interstate compacts arose — the Non-Admitted Insurance Multi-State Association Inc. and the Surplus Lines Insurance Multi-State Compliance Compact. SLIMPACT could be activated only if 10 states entered the agreement, but only nine did and three later withdrew. NIMA did not require a minimum number of states to join, and four states plus Puerto Rico are currently full members of the Tallahassee, Florida-based organization.

But, Mr. Wood said, “as far as we're concerned, both SLIMPACT and NIMA have fizzled.”

“A fragmented multistate but no national compact is not generating revenue for the participating states and is a significant bureaucratic hassle for everyone inside the transaction,” Mr. Wood said. “It's more of an irritation than anything.”

SLIMPACT and NIMA “muddied the waters, and some states continue to have taxation regimes that we find inconsistent with the intent of NRRA,” Mr. Wood said.

“It's highly unlikely that any additional states would enact SLIMPACT,” said NAPSLO's Mr. Kelley. “Therefore, NAPSLO would not advocate that it ever become operational.

“We have strongly advocated for the home-state tax approach to be implemented nationwide,” said Mr. Kelley. He said NAPSLO is disappointed that some states still participate in NIMA.

Mr. Haldeman said the vast majority of states practice single-state taxation, where 100% of the premium tax is allocated to the home state of the insured.

“The fact that they're still trying to share the taxes means they're trying to make brokers follow special rules to file and pay taxes through NIMA,” Mr. Kelley said. “It's not as simple as filing with one state — the home state of the insured — which we would love to see happen with every state across the country.”

The New York-based Risk & Insurance Management Society Inc. supported NRRA but would like one provision clarified, said Julie Pemberton, RIMS vice president and board liaison to the external affairs committee, and director of enterprise risk and insurance management for Bellevue, Washington-based Outerwall Inc., which owns movie and video game rental kiosk operation Redbox.

“RIMS believes that all of the states have enacted the elements of the NRRA that we were concerned with,” Ms. Pemberton said. “However, the act requires clarification in respect to how it applies to captives. Currently, there's concern for duplicative taxing. For the insured, it would apply to their home state and then also apply in the captive domicile state.”

She said RIMS supports the Captive Insurers Clarification Act, S. 1561, which was introduced in the Senate in June and would exclude captives from NRRA.

Mr. Haldeman said uniformity in other aspects, such as tax reporting dates and disclosure dates, is a “longer-term goal toward which we're making some progress.”

The AAMGA's Mr. Heinze said more work needs to be done to implement an NRRA provision that calls for establishing uniform eligibility standards for surplus lines insurers among all of the states, “and we're not there yet. We're continuing to work with the National Association of Insurance Commissioners and commissioners on a state-by-state basis in order to achieve those uniform eligibility standards.”

“Currently there are 51 different standards, and there really only needs to be one,” he said.

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