Legislative Report
Federal charters, national standards reviewed

Federal Issues
by Richard M. Bouhan, Executive Director

The past year was an eventful one legislatively for the surplus lines industry with the House passage of H.R. 5637, the Nonadmitted and Reinsurance Reform Act of 2006, 417-0.

Unfortunately, H.R. 5637 was not taken up by the Senate and the process starts over this year with  the 110th Congress under Democratic control.   

Despite changes in Congress, the bipartisan support shown in 2006 gives us hope the House and Senate will consider and enact surplus lines legislation modeled after H.R. 5637.

However, in contrast to the Republican leadership which focused on the national standards for state insurance regulation which culminated in the drafting the SMART Act (State Modernization and Regulatory Transparency Act of 2004) and in the House passage of H.R. 5637, the new Democratic leadership has a different focus and different priorities.  For example, new Insurance Subcommittee Chair Paul Kanjorski (D-Penn.) finds favor with the optional federal chartering (OFC) approach as a potential model for insurance regulatory reform.  This is in contrast to his predecessor Rep. Richard Baker (R-La.) who was a promoter of the national standards idea through the SMART Act.

Committee Chairman Barney Frank (D-Ma.) appears not to have insurance regulatory reform as a priority as previously Chair Michael Oxley (R-Ohio).  Chairman Frank major priorities are housing, executive pay and pensions.

This is not so say that that federal legislation reforming surplus lines and reinsurance will not occur under a Democratic Congress.  The change in the party control of Congress to the Democrats means that the industry has a somewhat bigger burden to make its case and urge Congress into action.

National Standards/SMART Act/H.R. 5637
When the 109th Congress began, NAPSLO proposed that the SMART Act contain national standards for surplus lines.   Specifically, NAPSLO suggested that the surplus lines broker pay all premium taxes due on a surplus lines transaction (including multi-state transactions) to one state, be responsible for fulfilling only one state's requirements for multi-state surplus lines transactions and be allowed to place insurance on behalf of an 'exempt commercial purchaser' with a surplus lines company without having to conduct a Òdiligent search.Ó  Each of these NAPSLO ideas was included in the surplus lines section of the SMART Act.  

The one NAPSLO request that was not written into the SMART Act was for a statement that the states could not interfere with the surplus lines freedom of rate and form. 

Of surplus lines provisions the SMART would have been enacted, surplus lines brokers would have remitted premium taxes on surplus lines policies to a single state, with the states, themselves, being responsible for the distribution of tax monies to the various states on multistate surplus lines risks using a uniform allocation formula.  

In addition, the SMART Act would have established uniform standards for domestic surplus lines company eligibility as well as for alien insurers listed on the NAIC Quarterly Listing of Alien Insurers. Also the states would have been required to participate in the NAICÕs national producer database for licensing of surplus lines brokers. 

Since the SMART Act was never brought up for consideration, the House Financial Services Committee in the middle of 2006, passed a variation of the SMART Act,  H.R. 5637, which would have reformed state surplus lines and reinsurance regulation in ways similar to those proposed in the SMART Act.  

H.R. 5637, introduced by Reps. Ginny Brown-Waite (R-Fla.) and Dennis Moore (D-Kan.), would have applied single-state regulation and uniform standards to the regulation of the surplus lines/nonadmitted insurance and reinsurance marketplaces.  

Many of the billÕs provisions, including the creation of a uniform system of premium tax allocation and remittance, uniform standards for producer licenses, one-state compliance on multi-state surplus lines risks, and direct access to the surplus lines market for sophisticated purchasers, are concepts long endorsed by NAPSLO and promoted with members of Congress during meetings over the past two years.  NAPSLO will continue to promote these ideas in the new Congress.

Optional Federal Charters
It appears that the major insurance regulatory reform approach now being discussed in the 110th Congress is Optional Federal Chartering (OFC), not national standards or the SMART Act.  

OFC, as currently proposed, allows for both state and federal governments to charter and regulate insurers.  This is similar to the current regulatory scheme for banks. under which state-chartered and federally chartered banks operate side by side. Insurers could choose between federal and state charters/regulators. The proposals also would allow federally chartered insurers to write commercial insurance free of rate and form restrictions. 

The National Insurance Act (NIA) of 2006, which  is an OFC proposal introduced in the last Congress by Senators John Sununu (R-NH) and Tim Johnson (D-SD) would have allowed property/casualty and life insurers the option to be chartered by the federal government rather than state governments.   

Although introduced in the 109th Congress, no hearings were held and no votes were ever taken on the proposal.  Like HR 5637, it will have to be re-introduced in the new Congress.

The NIA would have created an independent Office of National Insurance within the U.S. Treasury Department to oversee a parallel system of regulation and supervision for the insurers and producers opting to be licensed or chartered at the federal level. The collection of filing fees, user fees, examination fees and direct assessments of those insurers that chose federal regulation would provide funding for the federal regulator. 

NAPSLO believes that any federal chartering scheme must permit insurance holding companies to have both state and federally chartered subsidiaries. This would afford consumers ready access to traditional surplus lines products, free of filing requirements, while at the same time granting access to the products that federally chartered insurers would bring to the marketplace.

Moreover, NAPSLO does not believe that Congress would allow, under an OFC approach, federally chartered insurers complete freedom of rate and form.  Further, under OFC, all insurers will be subject to some Congressional guidelines aimed at meeting social and economic goals.  

NAPSLO is in dialogue with the drafters of OFC proposals to assure that surplus lines gets as fair a treatment under OFC as possible.

State Issues
by Steven P. Stephan, JD, CPCU, ASLI Director of Government Relations

While the end of the year is traditionally a slower time legislatively as the various state houses are not in session, there have been a number of issues involving national insurance organizations and the various state insurance departments that NAPSLO has been involved with over the past few months.

NAIC
NAPSLO participated in the creation of a report to the NAIC Surplus Lines Task Force December 9 regarding the creation of an interstate compact as a solution for surplus lines multi-state tax and compliance problems.  NAPSLO staff members chaired two subcommittees (compact governance and compact drafting) involved in the project.

NAPSLO submitted written objections to the NAIC statistical information task force regarding medical malpractice statistical reporting.  NAPSLO also made verbal objections at the NAIC meetings in San Antonio. Specifically NAPSLO objected to including surplus lines companies in the medical malpractice closed claim reporting model law. 

NCOIL
NAPSLO participated in a presentation at the fall meeting of the National Conference of Insurance Legislators in Napa Valley.   Specifically, NAPSLO gave a presentation on how an interstate compact could resolve multi-state compliance problems facing surplus lines brokers. 

US Department of Transportation
NAPSLO prepared written objections to a proposed federal regulation that would allow Canadian companies to write insurance on motor carriers without becoming eligible surplus lines carriers

California
NAPSLO submitted written objections in California in connection with a hearing in which a broker was being reclassified as an agent of the company.  California had imposed a fine on the company for the acts of a producer that was previously considered to be a broker.  NAPSLO will continue to follow developments in this litigation.

Colorado 
NAPSLO previously submitted written objections to ColoradoÕs proposed amendments to the surplus lines regulations that, among other things, required data reports from surplus lines companies. 

The regulations have now been amended and many of NAPSLOÕs suggestions were included in the amendments.  Unfortunately the state left in the provision requiring data reporting from surplus lines companies.

Delaware
NAPSLO submitted written objections to a proposed bulletin in Delaware regarding notices to be provided to insureds.  

Specifically, the notice required a surplus lines company to submit notice that the policyholder should immediately begin seeking alternative property insurance upon termination. NAPSLO requested that surplus lines insurance be left outside the scope of the bulletin.

Georgia
Georgia legislation was being considered that would reverse a court holding that makes a surplus lines broker the ÒagentÓ of the surplus lines insurance company.  NAPSLO provided suggestions for improving the language in the proposed legislation that would have further insulated the broker from liability.   

Illinois
NAPSLO prepared written objections to Illinois specifically requesting that surplus lines be left out of a proposed regulation regarding medical malpractice data reporting. 

Iowa
NAPSLO prepared written objections to Iowa regarding a proposed law that would allow examination of surplus lines insurance companies.  

Louisiana
NAPSLO is following developments in Louisiana where rumors continue to fly regarding an assessment on surplus lines insurance.  NAPSLO also followed the developments surrounding Advisory Letter 06-05, which prohibited issuance of cancellation or non-renewal notices for Katrina damaged property until after December 31, 2006.

Massachusetts
Massachusetts created a brochure explaining the surplus lines market to consumers and NAPSLO provided comments during the drafting process.