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States moving slowly on surplus lines reforms

Delays raise fears of lack of uniformity in law's adoption

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State legislatures' slowness in considering how to implement surplus lines provisions of the federal financial services regulatory reform law dim the chances that a comprehensive approach to surplus lines will be in place by the time the law takes effect, observers say.

The surplus lines provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act are slated to take effect July 21. The provisions, which initially were contained in the Nonadmitted and Reinsurance Reform Act before that measure was folded into the broader bill, make a policyholder's home state the sole regulator of any surplus lines transaction.

In addition, premium taxes will be paid only to the policyholders' home state as of July 21. The law calls on states to come up with a way to allocate premium taxes.

No state has enacted legislation to implement the provisions, said Joel Wood, senior vp of the Council of Insurance Agents & Brokers in Washington. The slow process led three groups involved in state governments to call on Congress to delay implementation of the law for a year.

In an open letter to Congress sent late last month, the National Conference of Insurance Legislators, the Council of State Governments and National Conference of State Legislatures noted that several states have starting drafting implementation legislation. But the groups—which support a comprehensive approach to surplus line reform known as the Surplus Lines Insurance Multi-State Compliance Compact, or SLIMPACT—note that some legislatures will be in session for less than two months and are consumed with other issues, such as health care reform.

Unless Congress postpones the effective date, states that haven't entered a compact could lose premium tax revenue, the groups wrote.

Further complicating the situation is that SLIMPACT is not the only proposal being offered. The current version of SLIMPACT would authorize a governing commission to establish allocation formulas to help states share premium tax dollars, uniform payment methods and reporting requirements for policyholders and surplus lines brokers, national eligibility standards, and a single policyholder notice to replace various forms used across the country.

But the National Assn. of Insurance Commissioners has devised its own proposal—the Nonadmitted Insurance Multi-State Agreement. NIMA focuses on the tax issue but does not address uniformity issues addressed by SLIMPACT.

The Risk & Insurance Management Society Inc. “is continuing to monitor results,” said John Phelps, RIMS secretary and board liaison to the external affairs committee. “Obviously, we want to see that it's done correctly and with the best interest of policyholders at heart,” said Mr. Phelps, who also is director-business risk solutions at Blue Cross and Blue Shield of Florida Inc. in Jacksonville.

RIMS and other groups sent a letter last year that criticized NIMA to the head of the NAIC task force dealing with the implementation issue (BI, Nov. 22, 2010).

“We have problems with the compact that NAIC has proposed,” said Dick Bouhan, executive director of the Kansas City, Mo.-based National Assn. of Professional Surplus Lines Offices Ltd. “It doesn't provide uniformity.”

NAPSLO recently released a set of guidelines spelling out surplus lines brokers' responsibilities under the law. Among other things, the guidelines include being licensed in the policyholder's home state, complying with that state's placement requirements and providing any disclosure or disclaimer required by the state.

“Brokers will need to comply with the tax payment and premium reporting requirements of the insured's home state, including determining if the home state has enacted a new multistate tax-sharing system,” Mr. Bouhan said.

“The clients have just as high an interest as the broker in assuring that everything is done in a kosher way,” said the CIAB's Mr. Wood. “By everything, I mean diligent search requirements, eligibility of insurers and premium tax allocation.”

Mr. Wood said SLIMPACT is the preferred approach to implementation. The “worst scenario” would be for states to agree on an interstate basis to share revenue while doing nothing to define or avoid the inherent conflicts between states over where the premium tax would go, he said.

“Our core belief is if you have one single set of rules, it's a cleaner transaction for clients, brokers, insurers and ultimately for states,” Mr. Wood said.