House approves surplus lines bill, Awaiting action in Senate

The Non-Admitted and Reinsurance Reform Act of 2006 (H.R. 5637) known as the NRRA was passed in September 2006 by the U.S. House of Representatives by a vote of 417-0, marking a major milestone for NAPSLO and the E&S industry.  Unfortunately, Congress adjourned before the Senate could take up the bill in 2006. However, a version of that act (H.R. 1065) was passed by the House, unanimously, in June 2007. A similar bill (S 929) has been introduced in the Senate and that body is expected to consider the legislation when it returns from its summer recess next month.

Enactment of the NRRA is NAPSLO's primary legislative goal in Congress.  Its passage would create, for the first time, a set of coordinated nationwide rules for regulation and tax remittance for multi-state surplus risks.

Difficulties in regard to premium tax allocation and remittance and regulatory overlap on multi-state risks have plagued our industry for decades.  Over time, NAPSLO has tried to work with the states, the NAIC and NCOIL to solve these problems. These efforts have been unsuccessful and the situation has reached a point where a national solution to these problems is critical.

The reason a solution to these multi-state difficulties has now become crucial to our industry is two-fold.  

First, over the past six or seven years, the surplus lines premium volume has tripled and its market share has expanded from around 5% of the commercial lines market to nearly 15% with the total volume reaching nearly $35 billion annually.  As a result of this growth, there is an increasing number multi-state risks entering the surplus lines arena. 

Second, due to the passage of the Gramm-Leach-Bliley Act in 1999, every state now offers a non-resident surplus lines broker license and it is unclear whether a surplus lines broker must possess surplus lines licenses in each and every state in which a portion of a surplus lines exposure exists in a multi-state transaction.  

As a result of these factors along with the states' failure to create a coordinated and universal tax and regulatory compliance system for multi-state surplus lines risks, surplus lines brokers today are faced with costly, repetitive, complicated and often inconsistent obligations in multiple states when placing coverage on multi-state surplus lines risks.  

The NAPSLO Board finds this situation unacceptable and a major obstacle to the continued viability of the surplus lines market and success of NAPSLO broker and company members.  

NAPSLO, initially, responded to this critical situation several years ago by proposing the creation of an interstate compact. The problem with using an interstate compact is that a compact tends to be adopted slowly and not all states agree to join them.  A more immediate, uniform, and comprehensive solution to these pressing problems was needed. 

In early 2004, as House Financial Services Committee began drafting the SMART Act, (State Modernization and Regulatory Transparency Act) which was aimed at bringing more uniformity and efficiency to the state regulatory system, NAPSLO took these tax and compliance problems to Washington, D.C. in the hope of finding solutions.  This effort, ultimately, resulted in NRRA which now stands on the precipice of enactment.

When enacted, NRRA will establish a consistent set of nationwide rules for brokers to use in calculating and remitting surplus lines premium tax and in complying with state laws and regulations on multi-state surplus lines risks.  

Moreover, these rules would have immediate nationwide effect (on the effective date of the Act) and not require individual state action.  NAPSLO believes that these much needed and long awaited reforms will benefit the entire industry and will continue to strenuously work for enactment of the NRRA.