Modernizing Surplus Lines Regulation
In the summer of 2010 sweeping financial services reform legislation, which includes significant changes to surplus lines regulation that NAPSLO had been working on for years, was approved and will go into effect in July 2011.

NAPSLO has established a special section of its website to keep members of the industry, regulators, and legislators informed regarding the new law and its implementation. Information on the background of the law, the impact on the various parties, educational events about the bill, and monitoring related regulation and legislation to implement the bill will be included on the website. A set of Frequently Asked Questions about the bill are also available to download.

Legislation & Surplus Lines
The financial services reform legislation approved in July 2010 touches all segments of the economy. Included in the more than 2,000 page bill are the 10 pages of the Nonadmitted and Reinsurance Reform Act. The NRRA implements a home-state tax and compliance system with the insured’ home state regulating the transaction and will require only one license from the insured’ home state for a multi-state surplus lines placement.

The surplus lines modernization provisions will make access for insurance consumers to the surplus lines market quicker, more efficient and the payment of surplus lines premium taxes to the states less burdensome for the consumer and broker.  The legislation also establishes that only one state, the home state of the insured, can regulate a multistate surplus lines transaction.

A summary of the bill is available for download.

Impact on Surplus Lines Brokers
Surplus lines brokers will return to a single-state tax payment system that existed across the country until multi-state tax requirements started to appear in the mid 1980’ and multi-state compliance requirements were imposed following the adoption of Gramm, Leach, Bliley early in this decade.

Brokers will no longer have to comply with the tax provision of all states where portions of the risk reside. They will make a single tax payment to the home state of the insured.

Brokers will be required to comply with the placement laws of the insured’ home state exclusively but other multi-state compliance obligations such as multi-state policyholder notices, diligent searches, export list searches, policy fee rules, exempt commercial purchaser rules and eligibility list searches for a single policy placement no longer will apply. A broker will need a producer’ license from the insured’ home state to write a multi-state risk.

State Responsibilities
With the change to a return to single-state tax payment system, state legislators have a high level decision to make. They can opt for a tax allocation procedure consistent with the Congressional statement of intent, such as an interstate tax compact, or they can allow the single state tax system to become effective on the effective date of the NRRA.

The NRRA also contains an expression of congressional intent to require “ uniform requirements, forms and procedures” for the reporting payment and collection of premium tax.   A state would need to adopt uniform requirements, uniform forms and  payment dates would be needed, but states could implement whatever tax rates and assessments that currently exist under the home state law.

Legislative History of the NRRA
The NRRA was the result of efforts to reform surplus lines regulation. In last 2003 NAPSLO contacted the House Financial Services Committee regarding including surplus lines reforms in the state insurance regulatory legislation the committee was drafting.

In early 2004, NAPSLO offered proposals to use federal law to make the state surplus lines premium tax payment system rational and efficient and simplify the compliance process on multi-state surplus lines risks. NAPSLO’ ideas on surplus lines regulatory reform were included in the State Modernization and Regulatory Transparency (SMART) Act, however the proposal did not advance.

In mid-2006 the surplus lines provisions, along with the reinsurance sections of the SMART Act, were introduced together as The Nonadmitted and Reinsurance Reform Act (NRRA) and in June NAPSLO testified at a hearing before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprise. In September the House passed the NRRA for the first time by a vote of 417 to 0.

The House eventually passed the NRRA four times.   In the Senate the bill was introduced in 2008 and in July 2008 NAPSLO was one of eight organizations asked to testify before the Senate Banking Committee on insurance regulatory reform. (Highlights of NAPSLO's testimony are in the Video section of our website.)

Following the 2008 economic crisis the NRRA provisions were included in financial services reform legislation passed by the House in 2009 and the Senate in 2010 and were included in the conference committee approved bill in June 2010.  The bill was signed into law in July 2010.