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Surplus lines tax alignment plan would aid brokers

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Competing efforts to launch clearinghouse arrangements for the payment and allocation of surplus lines premium taxes soon may be working alongside one another to make it easier for brokers and policyholders to meet their obligations.

Two widely differing arrangements being developed by industry groups have been bogged down for months while proponents of each try to convince state lawmakers, regulators and the surplus lines market of the merits of their approaches.

The Surplus Lines Insurance Multi-State Compliance Compact is the clearinghouse backed by the National Assn. of Professional Surplus Lines Offices Ltd. and the National Conference of Insurance Legislators, among others. The Nonadmitted Insurance Multi-State Agreement is supported by the National Assn. of Insurance Commissioners.

In late September, Louisiana Insurance Commissioner James J. Donelon, who chairs the NAIC's Surplus Lines Implementation Task Force, revealed that insurance regulators were considering changes to NIMA that would allow it to work in the same way as SLIMPACT with regard to collecting and allocating the taxes.

“We have been approached by the industry as to the extent we can make that happen,” Mr. Donelon said. Brokers have made known their view that having NIMA operate similarly to SLIMPACT “will greatly enhance the efficiency” of tax collections, he said.

SLIMPACT proponents have argued that their proposed collection and allocation system is far better than that originally conceived by NIMA because it is simpler and does not require the same data-collection burden called for by NIMA.

The clearinghouses are being developed in response to the Nonadmitted and Reinsurance Reform Act, which became part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and took effect July 21. The law stipulates, among other things, that only the home state of a policyholder can collect the premium taxes. It requires state legislatures to approve a method to allocate the taxes.

The NRRA does not address how states should allocate the taxes, but allows them to approve the system they feel will do it best. They can select SLIMPACT or NIMA, or devise their own allocation method.

Since the law took effect, SLIMPACT and NIMA have worked to launch their clearinghouse arrangements, each touting their method in a sometimes-contentious debate as the one that will do it best.

Neither, though, has been widely embraced by states, leaving surplus lines brokers, insurers and policyholders to comply with the NRRA as best they can without help from a formalized tax payment and allocation system.

As of late September, nine states had agreed to use the SLIMPACT approach, while a dozen had signed on to the NIMA compact. Before it can be implemented, SLIMPACT needs 10 states to sign on.

“We are studying the possibility of coordinating our system with SLIMPACT if and when it becomes operational,” Mr. Donelon said. “That would allow for similar, if not identical, allocation and collection systems.”

Brady Kelly, NAPSLO's executive director, said the organization applauds the proposal that NIMA allocate taxes in the same manner as SLIMPACT. “The news of coordination between NIMA and SLIMPACT is a welcomed first step in the direction of a more efficient surplus lines tax system,” he said in an email.

Mr. Kelly said that a “uniform system for the allocation of surplus lines tax is necessary, and having NIMA and SLIMPACT work together is consistent with the law's intent that nationwide, uniform requirements be implemented.”

NIMA would not, however, adopt the same uniformity requirements around nontax issues for surplus lines policyholders and brokers that are found in SLIMPACT.

NIMA is meant only to address tax collection and allocation, Mr. Donelon confirmed, and is structured differently than SLIMPACT, which sets up an executive committee as a governing board and establishes an operations committee.

Reactions among market sources varied as to how SLIMPACT and NIMA, perhaps along with other arrangements developed by states, might work if more than one exist.

“I really think we need one approach, not two or three,” said Dave Obenauer, president of Crump Insurance Services in Roseland, N.J. “We're a strong advocate of one approach moving forward.”

If more than one approach is used, said Mr. Obenauer, a process that already is complicated and expensive will become even more so.

Some brokers are not too worried about the clearinghouse issue.

“Whatever version we end up with, or if we end up with no version, I don't think it will be terribly material,” said Kevin Westrope, president of Kansas City, Mo.-based wholesaler Westrope. “Most of us doing multistate filings are already doing very complex transactions.”

“We're used to confusion because we're used to dealing with 50 state regulators,” said Glenn Hargrove, president of Marketscout Wholesale L.L.C., a Dallas-based broker. “Ultimately when it's settled as to how the clearinghouse works and states are in agreement, it should streamline our operations. By all accounts, it should make things simpler and easier.”

Depending on how the clearinghouses are administered, costs related to operating the arrangements could trickle down to insurance buyers, some sources suggest.

If a clearinghouse has to be run by a company or organization selected by the state, there will be additional costs to insurance buyers, said Mark R. Goodman, an attorney with Freeborn & Peters L.L.P. in Chicago.

“Somebody has got to run it, and there's going to be a cost,” Mr. Goodman said. Those costs likely will be passed on to brokers, who will then pass the cost on to insureds, he said.

“Ideally that shouldn't be required,” Letha E. Heaton, president of NAPSLO, said of an outside organization administering the clearinghouse. “I'd like to think (the states) will know how to do that without another level of bureaucracy.”