Congressional Intent of NRRA is Threatened by NAIC & State's Action to Implement NIMA Tax Sharing Agreement, NAPSLO Testifies to House Insurance Oversight Hearing

July 27, 2011 - The Congressional mandate of making multistate surplus lines transactions and tax payments more uniform, efficient and streamlined for consumers, businesses and brokers is threatened by the Nonadmitted Insurance Multistate Agreement (NIMA), NAPSLO said in testimony submitted to the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity for a hearing on July 28 entitled “Insurance Oversight: Policy Implications for Consumers, Businesses and Jobs.”

 

“NAPSLO is increasingly concerned that the NRRA is being implemented in many states (even as promoted by NAIC) in such a way that they’ll make things worse – not better – for surplus lines stakeholders,” said NAPSLO’s testimony. “Unfortunately certain state interpretation and implementation of the NRRA has, in NAPSLO’s view, been inconsistent with Congress’s intent."

 

The House subcommittee hearing is set for 10:00 a.m. (eastern) on Thursday and NAPSLO President Letha Heaton will be testifying before the subcommittee as part of an industry panel.

 

The NRRA was enacted in 2010 and mandated that beginning July 21, 2011 the insured's home state will be the only state with jurisdiction over surplus lines transactions and the only state that can require a tax be paid by the broker. As a result states have been updating their laws and some states have also included language to share taxes with other states through agreements or compacts

 

“As envisioned by Congress and supported by all stakeholders, the NRRA would both streamline tax payment processes and to make more uniform, simple, and efficient licensing standards and other aspects of surplus lines regulation to enable brokers to more easily and efficiently comply with state requirements,” the testimony said

 

By giving the "home state" the sole authority to regulate the surplus lines broker, the NRRA enables brokers to more easily and efficiently comply with state requirements. NAPSLO said in its testimony that, unfortunately, most states are focusing their attention on the tax payment and allocation issues, while neglecting the law’s other goal – to make more uniform, simple, and efficient other aspects of surplus lines regulation

 

“States are prioritizing the voluntary tax‐sharing provisions in the NRRA while ignoring the other regulatory efficiencies intended by the law. Moreover, states are spending time and energy focusing on NIMA even while the NIMA system remains months away from being operational.”

 

NAPSLO and other industry stakeholders have consistently opposed the NIMA tax sharing system because, as currently drafted, it:

• Fails to create the non‐tax regulatory efficiencies or uniformities envisioned by Congress;
• Violates the NRRA requirement that "no state other than the home state . . . may require any premium tax payments for nonadmitted insurance," and
• Involves unnecessary and burdensome data reporting by brokers for the sole purpose of collecting taxes, including novel allocation requirements for casualty lines.

 

Specifically, NAPSLO strongly opposes NIMA’s current tax allocation methodology as it is wholly unworkable for the vast majority of the industry, and if implemented will result in new costs and fees levied on surplus lines consumers. As part of its testimony, NAPSLO included comments from brokers on the difficulty they would have in operating under the NIMA allocation system.

 

To be consistent with the new federal law, NAPSLO believes that if states are going to share surplus lines premium taxes – something that is not required by the NRRA, the tax sharing methodology must be designed so that it:

• Relies on existing data, rather than requiring the creation of new categories of information,
• Is consistent with current industry practice, and
• Respects the home‐state rule that was established under the NRRA.

 

NAPSLO urges parties to abandon the NIMA tax allocation methodology and instead adopt one based on state by state premium data from the “Schedule T” section of annual financial statement submitted to the NAIC by surplus lines carriers. Kentucky’s insurance commissioner has proposed a tax allocation formula to allocate taxes based on exposures. While NAPSLO favors a “Schedule T” approach, it also believes the approach proposed by Kentucky presents a workable compromise that would be a vast improvement over the NAIC-NIMA tax methodology.