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2009 In Review – Surplus Lines Legislation/Regulation
Regulators and legislators were busy at the federal and state level in 2009, leading with passage of the NRRA language twice by the House of Representatives, once on its own and a second time as part of the financial services reform bill. The NAIC also looked at a number of surplus lines issues, as did many states. The following outlines what took place in 2009.
FEDERAL The Nonadmitted and Reinsurance Reform Act (NRRA) of 2009, HR 2571 and S 1363, was introduced in both the U.S. House and Senate again in 2009. The Senate version was introduced by Senators Evan Bayh, D-Ind. and Sen. Mel Martinez, R-Fla., and cosponsored by Senators Bill Nelson, D-Fla., and Mike Crapo, R-Idaho on June 26, 2009. In May, Representatives Dennis Moore, D-Kan., and Scott Garrett, R-N.J., introduced the same legislation (HR 2571) in the House of Representatives. It passed the U.S. House unanimously Sept. 9, 2009. The bill has been included in a package of financial reform measures proposed by Senator Dodd, Chairman of the Senate Banking, housing and Urban Affairs Committee. It was also included as an amendment to the financial reform package (HR 4173) that passed the House in late December. The bill has passed the House unanimously three time and many in the industry are hopeful the legislation will bring reform to the dysfunctional multi-state surplus lines tax system that has plagued the industry for so long. The NRRA is included in a bill that is in excess of 1100 pages and, among other things, puts new controls on large and systemically significant institutions and creates a consumer protection agency. Some portions of HR 4173 and similar legislation in the Senate are likely to draw stiff opposition so it is too early to guess what direction the financial reform bills may ultimately take. The Medicare Secondary Payer regulations (42 U.S.C. 1395y(b)(7) have been adopted and many in the surplus lines industry have concluded that the regulations apply to surplus lines insurers. The regulations require a search of a data base of named prior to paying a claim.
The NAIC Surplus Lines Task Force also decided to allow a survey of the task force members regarding their views on the surplus lines multi-state compliance compact (SLIMPACT) proposed by a group of interested parties. The SLIMPACT draft was completed several months ago and the drafting group is trying to determine if there are changes that would make it more palatable to the Task Force. NAPSLO worked with some stamping offices to draft the survey and it has now been submitted to members of the surplus lines task force. The survey results were not released because the survey respondents were not told their responses would be made public. The NAIC released their conclusions from the survey and all states wanted a uniform allocation method, but only half thought a compact was the best method to allocate taxes.
The Surplus Lines Task Force (SLTF) is also examining the applicability of the multi-state exemption in the Producer Licensing Model Act to surplus lines brokers. The exemption in the PLMA provides that only one producer’s license from the home state of the insured is required to write a multi-state risk. The SLTF decided to research the issue and submitted a survey to the SLTF members. NAPSLO objected to the survey question which asked if “an exemption from nonresident state producer licensing in situations where there is a multi-state risk would impact a state’s ability to properly record and collect surplus lines premium tax.” The survey should have asked if their statutes required a license for a policy written in another state if some of the risk exposures resided in their state. Since the question drafted seemed to insinuate the license would help with tax collection, the response was predictable.
In response to the survey, several states have submitted comments to the SLTF and took the position that a license should be required in every state where any portion of the risk resides to facilitate collection of the tax. NAPSLO has argued there are constitutional limitations and state law limitations on the ability of a state to require a license for a transaction occurring entirely in another state. The matter is not yet closed and the discussion will likely continue into next year.
Multi-State Tax Working Group The NAIC Multi-State Tax Working Group (MSTWG) held a number of calls throughout the year to discuss a survey of the states regarding various regulatory issues involving surplus lines insurance. The survey has been released to the regulators but has not been completed. The survey is intended to identify which regulatory matters are set by statute and which matters are set by department policy. The issues that are set by department policy could possibly be addressed by a uniform tax reporting form while those that are set by statute would require an act of the legislatures. One of the goals of this group is to investigate the feasibility of a uniform tax reporting form.
The work of the MSTWG has centered on the proposed uniform electronic tax reporting, using uniform data elements, based on a modification of preexisting reporting software (Sircon) for those states where it would be feasible to do so. A proposed uniform reporting form has now been drafted and has been circulated for comments. Clearly a uniform reporting form would help streamline a burdensome process, but the success of this project would require a high level of cooperation among the states. NAPSLO compiled the comments of numerous brokers and submitted them to the MSTWG. The work on this project will likely continue at least through most of 2010.
The NAIC Multi-State Surplus Lines Premium Tax Working Group held a call on Oct. 15 and distributed a proposed uniform surplus lines affidavit. Although a uniform affidavit is a great idea, the proposed affidavit form is more onerous than many states presently require. NAPSLO is concerned that a uniform affidavit should have taken a more mainstream approach.
NARAB Working Group NAPSLO has been working with the NAIC's NARAB Working Group regarding the practice of requiring a non-resident P&C license as a precondition for the issuance of a non-resident surplus lines producer's license. In NAPSLO’s view this practice could be construed to violate Graham-Leach-Bliley requirements for non-resident reciprocal licensing. Graham-Leach-Bliley required at least 29 states to enact reciprocal licensing requirements by 2002. If the states had failed to do so, the National Association of Registered Agents and Brokers would have came into existence
On March 27, 2009, NAPSLO submitted a second round of comments to the NAIC NARAB working group explaining that surplus lines wholesalers do not generally conduct a diligent search, so there is no need to require the underlying P&C licenses for wholesalers. The NAIC NARAB Working Group met again on June 15, 2009 and issued a report that concludes, among other things, that a surplus lines wholesaler should not be required to obtain underlying P&C licenses from a state unless the wholesaler is involved with the diligent search of the admitted markets. The NARAB Working Group also issued a draft framework for implementation of the changes.
The NARAB Working Group met again on via teleconference on Aug. 6 2009 and approved a timeline for evaluation of the reciprocity issues including abolishing requirement to obtain a P&C license as a prerequisite for licensing non-resident surplus lines wholesalers who are not required to perform a diligent search. A survey was submitted to the states Oct. 15 to determine their compliance with GLB including the issue regarding surplus lines wholesalers. NAPSLO has now submitted several rounds of written comments on this issue and it looks as though the licensing burden on surplus lines wholesalers will be reduced. Several states have submitted survey responses and NAPSLO has submitted comments to several of them. This project should ultimately help streamline the surplus lines producer licensing system that has been a burdensome process for surplus lines wholesale brokers.
Producer Licensing Working Group NAPSLO also urged the NAIC's Producer Licensing Working Group to apply the multi-state risk exemption in the Producer Licensing Model Act to surplus lines brokers. The exemption provides that a single license from the insured's home state is all that is required to write a multi-state risk. The working group had previously indicated the exemption applied to surplus lines producers as well as producers on the admitted side. The working group recently changed their position so the exemption applies "at a minimum to admitted business" thus leaving the states the option of requiring a surplus lines broker's license from every state where any portion of the risk resides. NAPSLO objected that there appeared to be no policy reason for requiring multiple licenses to write a single policy with multi-state exposures on the surplus lines side, but a single license is all that is required for admitted policies. The surplus lines brokers do collect a multi-state tax, but there are many other more important duties performed by all producers, such as advising the client, binding the risk, collecting the premium, issuing policies etc. To single out the surplus lines broker for more onerous regulatory treatment based upon a concern that the surplus lines tax (which is typically 3-5%) will be mishandled, is unjustified. In addition, the license does not alleviate the risk that the tax will be mishandled. The producer licensing working group has now handed off this issue to the surplus lines task force. NAPSLO has submitted three rounds of extensive comments on the issue and the discussions will continue into next year.
Reinsurance Task Force On July 27, the NAIC Reinsurance Task Force released its draft of the "Reinsurance Regulatory Modernization Act (RRMA)." The revised draft was intended to correct constitutional deficiencies identified in the initial draft. There is a remaining issue of whether the NAIC's proposal to require the President to select members of the reinsurance review board from the list nominated by the NAIC violates the “appointments clause” of the constitution. It appears as though the NAIC will attempt to substitute the RRMA language for the reinsurance portions of the Non-admitted and Reinsurance Reform Act. The RRMA is considered more controversial than the reinsurance language in the NRRA because it eliminates or reduces collateral requirements for the highly rated reinsurers. The NAIC’s bill is also much larger in scope in that it requires a federal agency to be formed, complete with a board appointed by the President and approved by the Senate.
States Taxing Gross Surplus Lines Premium NAPSLO has prepared a paper identifying the states that continue to have statutes on the books taxing the gross surplus lines premium as opposed to an allocated share. The working groups at the NAIC and the National Conference of State Legislators are interested in this information because they are attempting to formulate a solution to the multi-state tax problems. Many of the states identified, in practice, tax only an allocated share of the premium. The states have been surveyed a couple of times in recent years and with a couple of exceptions, verbally indicated they tax only an allocated share. NAPSLO believes the states should adopt allocation statutes so the laws on the books are consistent with the practice applied by the state tax collectors. Unfortunately, since many states may be facing budget shortfalls, 2009 was not be the best time to be discussing revenue issues. NAPSLO has sought to identify states where it is feasible to seek such a reform in this environment of declining state revenues.
Surplus Lines Law Group The surplus lines law group met March 26-27 in
Stamping Office Data The January through June 2009 stamping office statistics released by the Surplus Lines Stamping office of Texas showed for the first time Florida had the largest surplus lines premiums among stamping offices for a six-month period. That distinction had belonged to
State Update ALABAMA—An Alabama bill would allow a surplus lines insurer to become approved without completing the 5-year seasoning requirement, but would require such insurers to make an additional deposit with the state.
"An eligible surplus lines insurer shall include in each policy, binder and cover note an
NAPSLO is opposed to the Department of Insurance approving any form issued by a surplus lines company because it violates one of the guiding principles of surplus lines insurance - freedom from form regulation. The Department politely responded and indicated this was the mechanism for requiring companies to either use the published wording approved by the department or file their own version.
Alaska Bulletin 08-08 contains surplus lines premium codes for surplus lines monthly summary premium reports effective as of Dec. 12, 2008. The premium reporting forms have been updated and are on the Alaska Division of Insurance website.
Section 1765 requires training for surplus lines producers and their staffs, including non-resident producers. The
AB 784 would have addressed the issue of what duties can be performed by a
The Silvers v.
A ballot initiative has been filed that would attempt to restrict the collection of both a commission and a broker fee in connection with the same risk. There is at least one preliminary opinion that it would not apply to surplus lines insurance, but the language is extremely broad. The ballot initiative cannot go forward until the requisite number of signatures are collected. NAPSLO will continue to monitor its potential impact on surplus lines brokers.
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