Doing nothing really does something—a lot of state regulators are likely to be angry at the outcome.
The Dodd-Frank wall street reform and consumer protection act, signed into law by President Obama last July, includes a key provision that The Council and commercial insurance brokers had been advocating for years: the reform of state regulation of the surplus lines insurance market.
Dodd-Frank’s surplus lines provision, taken directly from the Nonadmitted and Reinsurance Reform Act (NRRA), which passed the House four times in recent years, addresses the full spectrum of surplus lines regulation. It establishes uniform standards for insurer eligibility; limits regulation of a surplus lines transaction to the home state of the insured; allows automatic export to the surplus lines market for sophisticated commercial purchasers; and requires state participation in a national producer licensing database.
Perhaps most importantly, the NRRA says that only a single state—the home state of the insured— can require the payment of surplus lines premium tax. The home state can require risk allocation information from the broker in addition to payment, but it’s up to the states to allocate (or not) among themselves.
This model may be the best outcome for all concerned. Compliance would be simple, straightforward and inexpensive.Tweet
Most of the NRRA reform provisions go into effect July 21—one year after enactment of Dodd-Frank. Given the timing, the states are under some pressure to act quickly to make their laws and regulations conform to the new federal standards. True to their nature, the states have not taken the opportunity offered by NRRA to develop a single set of uniform rules for surplus lines regulation. Instead, we have competing approaches pushed by the state regulators through the National Association of Insurance Commissioners (NAIC) and by the state legislators through the National Conference of Insurance Legislators.
The NAIC is pushing a narrow approach designed to address only the tax collection and allocation issue. The regulators adopted the “Nonadmitted Insurance Multi-State Agreement” (NIMA) in December. NIMA would create a central clearinghouse for reporting, collecting and distributing surplus taxes, and prescribes uniform allocation and reporting methods. State regulators have been supporting legislation in their individual states to give them authority to enter into NIMA and require them to share surplus lines premium taxes only with other states who are signatories to the agreement.
In contrast, NCOIL, which is a group of state legislators from across the country, is advocating for Slimpact—the Surplus Lines Insurance Multistate Compliance Compact. Slimpact takes a much more comprehensive approach than NIMA to satisfying the reforms provided for in the Nonadmitted and Reinsurance Reform Act. Slimpact addresses not only the tax collection and allocation issues, but the other regulatory issues addressed in NRRA, such as insurer eligibility, insured “home state” determinations, commercial purchaser exemptions, and so forth. It provides for the creation of a governing commission made up of the compacting states that will, essentially, have authority to make decisions in connection with these surplus lines regulatory policy issues. Importantly, a state that becomes a member of the compact will only be authorized to allocate premium taxes with other members. Slimpact can only be created if 10 or more states, or states with at least 40% of all surplus lines premium coverage, enter into the compact.
Only six states have enacted legislation that would allow the state insurance regulator to enter into a NIMA-type agreement, and only Kentucky and New Mexico have enacted legislation adopting Slimpact. Legislation pending in about 30 other states would provide the state insurance regulator with authority to either enter NIMA or join Slimpact—or both, in some cases.
A few state legislatures are considering bills that would tax 100% of surplus lines premiums and keep it all for their state. New York and Washington have already adopted such a law. At the most recent NAIC meeting in Austin, legislators and regulators continued to disagree about the relative merits of their respective approaches. Absent an agreement, however, the default will be a no-allocation model in which taxes are paid to the home state based solely on the home state’s tax formula.
Compliance would be simple, straightforward and inexpensive (at least by comparison). On the state side, simplicity also should result in enormous cost savings. The potential benefit of allocation—a “fairer” distribution of proceeds—may be illusory, and the cost for attaining such perceived equity is probably unwarranted.
In this instance, the moniker often applied to the NAIC—“No Action Is Contemplated”—is living up to its name.