White paper outlines compliance & tax payment solutions

Februaty 15, 2006 - Two of the key regulatory issues facing the surplus line industry, multi-state compliance and premium tax allocation in a remittance, could be solved by developing a system of one-state filing for nonadmitted business and adopting an interstate compact, according to a white paper released this week by the Nation Association of Professional Surplus Lines Offices (NAPSLO).

The white paper was prompted by the growing number of multi-state risks and surplus lines transactions that are being plagued by tax allocation, tax remittance and multi-state compliance problems.

The NAPSLO Board established a special committee of brokers, surplus lines company executive and surplus lines stamping office managers to examine and recommend ways of solving the surplus lines premium tax remittance and multi-state compliance difficulties surplus lines brokers face.  

The Committee completed the report entitled: Regulation of the Surplus Lines Industry after Gramm-Leach-Bliley: The Future is Now and submitted it to the NAPSLO Board of Directors, who unanimously adopted the white paper. Following its adoption, the white paper was sent to the NAIC Surplus Lines Task Force.

The Future is Now addresses the opportunities and challenges as well as the problems and issues the surplus lines industry faces in overcoming the difficulties surrounding the current irrational and dysfunctional surplus lines tax remittance procedures and the duplicative and costly multi-state compliance requirements.  

ORIGINS
For decades, surplus lines brokers have faced with a conflicting and inconsistent labyrinth of rules and regulations in the allocation and remittance of surplus lines taxes to the states. Since the enactment of the Gramm-Leach-Bliley Act (GLBA) in 1999 which compelled virtually all the states to provide licensing authority for surplus lines brokers these tax remittance problems, although still significant, have become intertwined with and exacerbated by the multi-state compliance issues that the possession multiple state non-resident surplus lines licenses have created.   In effect, the advent of universal non-resident surplus lines licenses, among the states, has added an additional layer of confusion and complexity to an already perplexing, if not impossible, multi-state surplus lines premium tax remittance system.

While the industry faces challenges in complying with the regulations, the paper points out that E&S brokers desire to comply with applicable law in all states in which they conduct their business. It is in their interest to do so since noncompliance can jeopardize their licenses, their reputations and ultimately their ability to make a living.

SOLUTIONS
To solve the problems with multi-state compliance, the paper suggested developing a one-state filing system and that each state by new legislation, regulation or by written interpretation from the insurance department should address several points:

• Determine which transactions are subject to a resident E&S license versus a nonresident E&S license 
• Modify record-keeping requirements to authorize nonresident licensees to maintain all records in their resident state offices.
• Modify premium accounting and depository bank requirements providing that nonresident licensees who are in compliance with their home state requirements, are deemed to be in compliance with the requirements of the state where they have a nonresident license, and
• Modify any other vestiges in the laws or regulations, which contemplate only resident E&S licensees.

The framework for implementing these changes could be achieved through modifications to relevant Model Nonadmitted Acts of the NAIC and the National Conference of Insurance Legislators (NCOIL).

The white paper sets forth the concept of an interstate compact as a structure and coordinating entity for solving the surplus lines premium tax remittance and multi-state surplus lines compliance problem. In developing such a compact, the paper outlined 15 areas that needed to be considered, including:

• No state would be required to change the current tax rate charged.
• All states adopting the compact would be required to adopt new, simplified formulas for tax allocation.
• The allocation formulas would be based on the insureds prior year-end data, which is verifiable such as prior year’s payroll by state.
• E&S brokers would not have to be licensed in a state merely because of an allocation.
• If a state viewed the changes in allocation formula as potentially reducing revenue, they could adjust the rate after monitoring tax revenues for a year or two.

The National Insurance Tax Clearinghouse (NITCH) project, a concept originally developed by the NAIC and industry as a way to allocate the taxes but was not implemented, could be revived and become the data warehouse as a result of the compact.

A compact would not have to be adopted by all states to be successful. If states, which account for 60% of all E&S premiums were to adopt the compact, it would not only achieve success in part, it would likely persuade other states to follow.

The paper stated if the suggestions were implemented by most states, the E&S market would attain clarity, consistency and a level of harmonization of states laws greatly reducing the complexities in complying with E&S laws; reservation of a one state filing system for affidavits or other documents, and Interstate cooperation with states assisting each other in receiving fair shares of taxes due and in maintaining a state, not federal based system of insurance regulation.

The NAIC Surplus Lines Task Force will consider the paper at its March meeting and in view of the proposed federal SMART Act, which would mandate a solution to tax remittance and multi-state compliance, NAPSLO hopes that the NAIC will use the paper as way to develop a state-based solution to solve this pernicious problem.

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 1,300 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.