NAPSLO issues white paper on compliance, taxation issue

Legislative and regulatory activity picked up during the start of 2006 at the state and federal levels and NAPSLO is working on several of the issues.

In a continuation of efforts to work towards a solution regarding the surplus lines premium tax remittance and multi-state compliance issues, the special NAPSLO committee examining the issue recently issued a white paper outlining proposed solutions.

The white paper, Regulation of the Surplus Lines Industry after Gramm-Leach-Bliley: The Future is Now, explains that 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 non-admitted business and adopting an interstate compact.

The paper, available on NAPSLO's website, was prompted by the growing number of multi-state risks and surplus lines transactions plagued by tax allocation, tax remittance and multi-state compliance problems.

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

The Committee completed the report 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 Task Force announced at the December National Association of Insurance Commissioners (NAIC) meeting that it would address these issues during the upcoming year. The paper was discussed at the March NAIC meeting in Orlando. 

The Task Force took the paper under advisement and asked NAPSLO to speak with the various stamping offices  to get their views on the subject and report back at the summer meeting.

The Task Force also approved a change in U.S. surplus lines trust fund requirements for certain alien insurers listed by the NAIC's International Insurers Department.

Under the new rules, Lloyd's syndicates must maintain 30% of the first $200 million in surplus lines liabilities, 25% of the next $300 million, 20% of the amount between $500 million and $1 billion and 10% of all liabilities in excess of $1 billion.

Other alien carriers will follow a similar schedule but there will no longer be a cap on the trust fund for new IID listed firms. Existing carriers will see the cap increase from $60 to $100 million.

Lloyd's will still be required to maintain the $250 million backstop trust fund which is to be used to pay U.S. policy holders in the event a syndicate trust fund is inadequate.

Surplus lines issues also came up at the Producer Licensing Working Group, which announced plans to create a new technical subgroup charged with collecting  information and drafting recommendations on improving the efficiency of the surplus lines licensing and premium tax payment systems. The subgroup would examine the issues and report back to the Working Group by the December meeting.

Optional Federal Chartering
NAPSLO Executive Director Richard Bouhan was part of a panel of nationally recognized experts on insurance markets and regulation discussing proposed optional federal charter (OFC) for the insurance industry.

The program, sponsored by Indiana State University, was part of the Networks Financial Institute's third annual insurance summit at the Ronald Reagan International Trade Center in Washington, D.C. 

Mr. Bouhan reviewed NAPSLO's support for the State Modernization and Regulatory Transparency Act (SMART) and stated that since the  Optional Federal Charter proposals didn't address the surplus lines concerns and as a result NAPSLO was not supporting the current proposals.

Mr. Bouhan also said for both the SMART Act and OFC proposals, there needed to be an effort to get more consumers involved in the process, as without public support it may be difficult to get a bill approved.

Following the presentation, members of the Senate Banking Committee approached NAPSLO to gather input on the OFC proposals and ways to address the industry's concerns.

Under the various federal chartering proposals, insurance companies could apply for federal charters that would allow them to be governed by a federal insurance oversight organization instead of by state insurance departments.

Under federal standards, which NAPSLO supports, states would regulate the industry but do so under a set of nationwide regulatory standards. 

NAPSLO's view is that the federal standards approach is more beneficial to the industry because it maintains the surplus lines  mechanism and offers opportunities to improve efficiency on conducting surplus lines placements. 

In the States
Louisiana - With the assistance of representatives of the Louisiana Surplus Lines Association, NAPSLO was able to voice its objections to Emergency Order No. 23 issued by Commissioner Robert Wooley of Louisiana.  This emergency order applies to surplus lines insurers as well as admitted insurers and prevents these insurers from canceling or non-renewing any property risk or policy covering property which has not been reconstructed or on which a claim is pending.  

NAPSLO's objections to applying this emergency rule to surplus lines policies were made to Commissioner Wooley.   But he insisted that, in this emergency situation, he must impose the same rules on surplus lines carriers as he imposes on admitted carriers.   However, he noted that surplus lines carriers still have freedom of rate and form under Emergency Order No. 23.   He has suggested surplus lines carriers not "abuse" this freedom.  

Commissioner Wooley announced his resignation effective February 15. The new acting commissioner is current Deputy Insurance Commissioner Jim Donelon, who is a former Louisiana state senator. In 2004 he was  a faculty member for the NAIC/NAPSLO School for Regulators.  

Colorado - NAPSLO contacted Colorado Insurance Commissioner David Rivera outlining the benefits of stamping offices nationally and pointing out the loss that the Colorado Insurance Department, as well the insurance consumers of Colorado, would experience if the Colorado stamping office were eliminated and incorporated into the Insurance Department.

The stamping office is expected to be spared at least for a short period of time since the legislature refused to grant the department the two additional positions it requested in order to close the stamping office and bring its responsibilities into the department.

California - In January, NAPSLO worked with the law firm of LeBoeuf, Lamb, Greene & MacRae on an amicus brief that the California Surplus Lines Association, NAPSLO and the  IBA West filed in B2B v. Zurich Specialties, Inc.  This case held that surplus lines wholesaler brokers have a "duty of care" to third parties even if they do not have privity of contract or any direct relationship with the third party. 

The case is being appealed to the California Supreme Court and the defendants, Zurich Specialties, Inc., indicated they would appreciate an amicus letter from the wholesale industry.  

The CSLA retained LeBoeuf, Lamb, Greene & MacRae to write the amicus brief and NAPSLO joined that brief along with other organizations.  

This is a significant case and has some very ominous implications should California start to impose third party liability on insurance wholesalers.  If allowed to stand, such a ruling could spread to other states.