WASHINGTON—With last week's passage of sweeping financial services reform legislation, the task of streamlining the surplus lines insurance market is now up to the states.

The change, long sought by risk managers, will give insurance buyers more power and more choices, say supporters of the effort.

The reforms, which relate to risk managers' access to the nonadmitted market and to the collection and allocation of surplus lines premium taxes, are contained in a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which won Senate approval last week. The House of Representatives previously approved the measure, which President Obama is expected to sign this week.

The bill's chief sponsors are Senate Banking, Housing and Urban Affairs Committee Chairman Christopher Dodd, D-Conn. and House Financial Services Committee Chairman Barney Frank, D-Mass.

The provision prohibits any state other than the home state of a policyholder from requiring a premium tax payment for nonadmitted insurance. It also authorizes states to establish procedures to allocate among themselves the premium taxes paid to a policyholder's home state.

The provision also spells out conditions under which brokers representing exempt commercial insurance buyers can approach the surplus lines market directly without first being declined in the admitted market. Among other things, an exempt commercial insurance purchaser must employ or retain a “qualified risk manager.” The measure lists educational and experience criteria that define a qualified risk manager.

States have one year from the measure becoming law to implement the provision.

The New York-based Risk & Insurance Management Society Inc. believes the measure will provide risk managers with “more control and greater flexibility to work through the appointed broker in the placement of surplus lines coverage, understanding the nuances of such coverages as a qualified risk manager as defined in the bill with language provided by RIMS,” said Scott Clark, RIMS director-external affairs and risk and benefits officer for the Miami-Dade County Public Schools in Miami.

Joel Wood, a senior vp with the Council of Insurance Agents & Brokers in Washington, said the law should make placing multistate surplus lines business much easier, which is why the CIAB pushed so hard for enactment.

“For our member firms, the maddening duplication and occasional conflicts in compliance for multistate placements of surplus lines motivated our initiation of this legislation,” Mr. Wood said, noting that different states approached the surplus lines market in different ways. He said in regard to premium tax collection, “states are all over the map.”

The legislation should “dramatically simplify” the work of brokers and reduce their costs, said Scott Sinder, CIAB general counsel and chair of Steptoe & Johnson L.L.P.'s government affairs and public policy practice in Washington. Under current rules, “if you have a nationwide coverage program that's placed in the surplus lines market, the broker has to comply with as many as 55 sets of regulations,” he said. “They are by and large the same—it's just that some of the details vary.”

Under the new law, brokers will only have to comply with one set of regulations, Mr. Sinder said.

The new law should result in savings for policyholders, said Richard Bouhan, executive director of the Kansas City, Mo.-based National Assn. of Professional Surplus Lines Offices Ltd.

“The frictional costs ultimately come back to the consumer when you have multiple compliance situations and where the brokers have to allocate the premium for tax purposes in which the rules are unclear and often contradictory,” he said.

Mr. Wood said implementing the changes rests with the states, which will have to change their laws to comply. “I think that is going to light a fire under the (National Assn. of Insurance Commissioners) leadership on their efforts to establish an interstate compact to govern,” he said.

“The states have a year to start putting laws into effect that are consistent,” said Mr. Bouhan. “Hopefully the states will implement this in the way Congress intended.”

RIMS' Mr. Clark said that the year states have to comply with the law will give RIMS an opportunity to show how importantly risk managers view having the ability to control surplus lines placement.

The Troy, N.Y.-based National Conference of Insurance Legislators supports an interstate compact approach to compliance.

“We've supported SLIMPACT, a proposed interstate compact that would serve the purpose as designated in the bill regarding collection and allocation of premium tax on multistate risks,” said Susan Nolan, executive director on NCOIL, based in Troy, N.Y.

SLIMPACT stands for Surplus Lines Insurance Multistate Comprehensive Compact. NAPSLO supports the SLIMPACT effort.

In addition to easing regulatory burdens for brokers and risk managers, Mr. Sinder said the change should increase the amount of business placed in the nonadmitted market.

Mr. Sinder noted that one of the goals of supporters of an optional federal charter for insurers is deregulated rates and forms.

“The surplus lines market is deregulated rates and forms. Right now, about 25% of all commercial coverage is placed through the surplus lines market. I expect that to go up.”

“If you're a commercial insurer and come up with a new product, why would you ever put that through the admitted market now?” he asked.

But Mr. Bouhan said a market boost was not the law's intent.

“This was not intended to be a shot in the arm for the marketplace in the sense that it would immediately be a game changer, but it was done to make the marketplace more efficient, easier to use and thus, over the long term, it will benefit the marketplace and benefit those that have needed the marketplace.”