NAPSLO objects to data calls on surplus lines insurers

June 12, 2006 - NAPSLO has notified the Delaware Insurance Department that it objects to efforts to impose a data call upon surplus lines insurers for the purposes of reconciling insurer data with broker data. 

Several states have made such requests and Delaware is the latest to impose such a requirement.   The reason given by Delaware for the “special investigation” was “the department needs this information to compare with information reported by surplus lines brokers.  This will assist the department in ascertaining whether surplus lines business is being written in compliance with the provisions of 18 Delaware Chapter 19.  It will also help the department determine if applicable surplus lines premium tax is being properly remitted.”

NAPSLO objected to such requests because the surplus lines industry has been historically regulated by the states through regulation imposed upon brokers. Delaware’s request for a large amount of data reporting by surplus lines insurers runs counter to the history of the surplus lines industry.  

The request imposes a burden surplus lines companies because they may not have stored such data in the normal course of business because they are not subjected to the same level of data reporting as admitted companies, according to Steve Stephan, Director of Government Affairs.   

“If a state insurance department has a reason to think that a broker is non-compliant or that all taxes have not been remitted, the department should focus its effort on investigations of the suspected brokers,” he said.  “To require all brokers and all insurance companies to report is an unreasonably burdensome method of trying to validate that surplus lines tax has been remitted.”

In addition, Mr. Stephan said the method is not likely to result in any definitive analysis as the records will be incomplete for a number of reasons. 

• First some surplus lines insurers will have independently procured insurance premium on their books that will not reconcile to a broker’s records;
• Second the broker may have reported the premium in a different time period since it could have been written in one calendar year, but the installments not received until the next.  The broker’s records and the company’s records may also report premium in different states because there is no uniform definition of the “location” of the insured;
• Finally, the broker is required to allocate tax among the various states.  Unfortunately the states are very inconsistent with respect to the allocation requirements so there is no way for a broker to comply with the patchwork of inconsistent allocation laws. The allocation methods chosen by the broker will not be reflected in a report and will not likely tie to anything in the insurer’s data.

NAPSLO has proposed an interstate compact for the formation of a “National Insurance Tax Clearinghouse” (NITCH) to resolve the problem caused by the inconsistent state surplus lines tax allocation laws.  A standard approach to allocation of the taxes through single-state compliance would alleviate the burden caused by the inconsistent patchwork of state laws.  

The proposed NITCH system would allow the states to accurately validate payment of the surplus lines taxes without the additional burden caused by industry-wide data requests.  Until a more workable enforcement mechanism is developed, NAPSLO would suggest that the industry-wide data requests be discontinued. 

BACKGROUND

NAPSLO is a national trade association representing the surplus lines insurance industry.  Surplus lines is a specialized segment of the insurance business that is also referred to as nonadmitted, specialty and/or excess lines.  Risks are placed with the surplus lines market when they cannot be placed in the admitted/licensed market. 

NAPSLO represents surplus lines insurance agents/brokers and surplus lines insurance companies.  NAPSLO has over 1,500 member offices in the United States, Canada, Germany, and England. Acting as a source of information, NAPSLO spends a great deal of time identifying and explaining the vital role surplus lines plays in the insurance industry, including tracking and informing members on current state and federal regulations. NAPSLO also provides networking and educational programs for its members and scholarship and internship programs for qualified students interested in careers in the insurance industry.

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