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Two-pronged approach aims to streamline surplus lines regulation


Modernizing surplus lines regulation by creating a more uniform and efficient system for handling multistate risks is a top priority this year for many industry representatives, lawmakers and some regulators.

Supporters are following a two-pronged strategy by generally supporting two related, but independent, proposals, before both Congress and the National Assn. of Insurance Commissioners.

It remains to be seen, however, whether those proposals garner enough support to streamline the operation of the surplus lines industry. Those proposals include the development of the first-ever national allocation formula for surplus lines tax payments.

In Congress, similar versions of the "Nonadmitted and Reinsurance Reform Act of 2007" have been introduced on a bipartisan basis in each chamber (H.R. 1065 and S.B. 929).

The bills give an insured's home state sole authority to regulate the licensing of brokers soliciting or handling the insured's account. They also give the insured's home state authority to collect premium taxes, which are due only to the home state, although states can establish procedures to allocate those premium taxes among themselves.

proposed interstate compact

Before the NAIC, the industry presented its draft of a proposed interstate compact—The Surplus Lines Multi-State Compliance Compact—that also emphasizes the authority of the insured's home state. It also would establish: one set of compliance requirements for all multistate surplus lines risks, a clearinghouse for information and a tax allocation mechanism.

Passage of either measure "would greatly improve marketplace efficiency by making it crystal clear that only the insured's home state can regulate any single, multistate excess and surplus transaction," said Daniel F. Maher, executive director of the Manhattan-based Excess Line Assn. of New York.

"ELANY supports the concepts contained in both the compact and H.R. 1065, but believes H.R. 1065 needs to be amended in several respects to maximize the value it brings to the market and to restore eligibility standards with consumer protection in mind," ELANY's Mr. Maher said in a statement.

The House bill's uniform eligibility requirements for surplus lines insurers "would eviscerate the current financial strength requirements and thorough analysis many states require as a prerequisite for insurer eligibility," Mr. Maher said. "These provisions of H.R. 1065 will ultimately lead to greater insurer insolvencies, increased broker liability and overall damage to the reputation of the E&S marketplace."

However, the National Assn. of Professional Surplus Lines Offices Ltd. "supports the bill as written and would like to see it enacted," said Richard Bouhan, executive director of the Kansas City, Mo.-based based group representing nonadmitted insurers and wholesalers.

Mr. Bouhan said he is aware that "some states and stamping offices have expressed concerns about the establishment of uniform eligibility requirements that they see as eliminating states' flexibility and discretion in determining a surplus lines company's eligibility. I expect those concerns to be discussed in the coming debate."

In terms of eligibility, the primary requirements for a surplus lines insurer are that it have $15 million in capital and that U.S.-based companies be licensed in one state. A company not based in the United States must meet capital and other requirements that the NAIC's International Insurance Department imposes before placing the insurer on its approved list.

As of late last month, congressional committees had not scheduled meetings to discuss the respective bills, which had 48 co-sponsors in the House and one in the Senate.

The House passed last year's version of the bill unanimously, but it died without a sponsor in the Senate.

Such reform is "long overdue," said U.S. Rep. Dennis Moore, D-Kan., a cosponsor of the House bill. Currently, "disparate and sometimes directly conflicting state laws in the surplus lines market create unnecessary inefficiencies and make it difficult, if not impossible in some cases, for producers and others to comply with their legal duties," he said in a statement.

"The problem is incredibly serious," said Bill Newton, president of both NAPSLO and Los Angeles-based Lemac & Associates Inc., a division of Risk Placement Services Inc., which is a unit of Arthur J. Gallagher & Co. In the past decade, business and the economy have changed so that it is common for policyholders to have exposures in multiple states, he said.

The situation is "an administrative nightmare" in that it adds cost, time and expense to the transaction, Mr. Newton said. Also, "it is not just a broker issue," because once brokers make payments to states affected by a transaction, some states go to insurers and ask them to reconcile what the brokers did, he said.

Mark Maher, president of Manhasset, N.Y.-based NIF Group, said small brokers face a particularly bad situation, which puts them in a noncompetitive position because they don't have the capacity to break out the tax allocations for complex, multistate risks.

"The concept is good. It creates efficiencies and gives all states the proper tax allocation," said NIF's Mr. Maher, whose company is primarily a regional managing general agent and broker. Implementing a workable solution "gives the smaller brokers a level playing field," he said.

But, he said he would not support any effort to eliminate the review process that is used to determine whether an insurer's operation meets surplus lines eligibility requirements.

"Most insurers would like it if it were easier," said Patrick Sheehy, a London-based director at BMS Intermediaries Ltd.

"Simplifying and streamlining the insurance market will bring savings to consumers and companies doing business across state lines," said U.S. Rep. Ginny Brown-Waite, R-Fla., a House bill co-sponsor.

modernization and protection

The industry also supports its draft of the proposed interstate compact that it presented to the NAIC during a March meeting in New York. More than 60 industry representatives, as well as some regulators and legislators, presented its draft to the NAIC's Producer Licensing Working Group.

"We look at this as a large, collective effort to modernize surplus lines regulation without diminishing consumer protections," said ELANY's Mr. Maher, who coordinated the group.

The proposed structure is similar to a compact now used for life and disability products, although it is not intended to review proposed policy languages for approval. Each state legislature would have to vote to join the compact.

The surplus lines compact proposal would establish:

  • One set of compliance requirements for all multistate surplus lines risks by which all compacting states jointly regulate the transaction.

  • A clearinghouse through which all multistate surplus lines risks would be filed and recorded, eliminating separate filing with individual states.

  • A mechanism through which each compacting state would receive its share of taxes for the portion of the risk located in the state as determined by one set of uniform tax allocation formulas.

The NAIC's Surplus Lines Task Force will begin reviewing the proposal during an upcoming conference call, said task force chair James Donelon, the Louisiana insurance commissioner.

He said he supports the concept of reform and sees the proposed federal and state reforms as "complementary." Both the federal bills and the NAIC proposal have the common goal of making surplus lines regulation, especially tax allocation, "more uniform and efficient," Mr. Donelon said.

"Either H.R. 1065 or the compact could be enacted and operate independently of each other," although the federal bill calls for such a device as the compact to deliver its goals, ELANY's Mr. Maher said.

The inclusion of the compact concept in last year's version of the House bill "gave the idea of a compact great credibility," Mr. Bouhan said.

Having proposals pending in Congress and the NAIC is an unusual strategy, observers say.

ELANY's Mr. Maher said supporters decided to move ahead with the NAIC proposal because "there was no guarantee that the federal law will pass."

In addition, the success of the Interstate Insurance Product Regulation Commission's compact, which deals with disability and life-related coverages, has educated many regulators and state legislators about the concept.