Why surplus lines reform makes sense in 2006
The American Association of Managing General Agents (AAMGA) commends efforts to modernize commercial insurance markets while maintaining the state-based system of insurance regulation and the surplus lines market’s fundamental precept of freedom from rate and form. We support the provisions of the Non-admitted and Reinsurance Reform Act of 2006 (HR 5637) pending in the House of Representatives and are actively engaged in developing additional grassroots support to enhance its passage.
Economic infrastructure
The surplus lines market is essential to our nation’s economic infrastructure. It provides protection and security to national industrial and local commercial businesses, those associated with operation of major public facilities such as airports, schools, municipal utilities, and some of the largest port facilities in the country.
In the private sector, key commercial enterprises and consumers similarly rely on the surplus lines marketplace. Those risks include, for example, those associated with electrical generation, oil production and refining, heavy construction, private aviation, ski resorts, trucking companies, restaurants and small businesses, aerospace manufacturing, mining, agriculture, nursing homes and day care centers, large and small commercial and residential construction projects; maritime risks from jet skis to tanker vessels, and every day risks from Main Street to Wall Street.
All states and jurisdictions have promulgated laws to protect consumers by controlling eligibility standards of surplus lines insurers and requiring specialty licensed brokers and agents to assist the consumer. Those standards:
• Facilitate the open market; enhance competition;
• Allow agents, brokers and insurers to be more responsive to consumer needs; and
• Provide flexibility in buying decisions.
However, our members, as well as their customers, face increasing processing and compliance costs due to inconsistent standards in the various states. For example, depending on rules of a home state and the nature of a multi-state risk, volumes of affidavits confirming the completion of a diligent search, the completion and filing of state tax payment forms and related materials are necessary to adhere to individual state requirements.
Further, for multi-state managing general agents, brokers and insurance companies, the various state licensing, continuing education requirements and non-reciprocal state regulations place added burdens and unnecessary costs on the insurance transaction— without a commensurate increase in value to consumers.
The Non-Admitted & Reinsurance Reform Act of 2006
Insurance is the DNA of capitalism and free market entrepreneurship. Providing the availability of security from risk stimulates the growth of business; provides incentives for research and development that help to create jobs and positive returns on investment; and, for the public and private consumer, affords continuity and recovery from fortuitous events based on the terms and conditions of coverage.
The Non-admitted and Reinsurance Reform Act of 2006 and other efforts to modernize regulation will:
• Enhance the speed to market of new and needed insurance products and services;
• Stimulate open competition and the creation of innovative risk products specifically addressing or manuscripted to the needs of the consumer;
• Establish and mandate a uniform, simple tax allocation formula and system for multi-state risks, making the payment of proportionate tax more equitable and efficient;
• Allow for automatic export for exempt commercial purchasers — the sophisticated insurance buyers as defined in the Act — without the burdensome diligent search requirements, thus allowing the surplus lines marketplace to work more efficiently and specifically to the needs of the consumer, insurance companies, wholesale and retail agents and brokers;
• Facilitate uniform and consistent compliance requirements for surplus lines agents and brokers now that the insured’s home state will have authority and regulatory primacy;
• Encourage individual initiatives toward sustained growth to protect increased risk exposures;
• Establish a uniform and consistent licensing system created by the national insurance producer database; and
• Allow a more equitable and efficient framework within which an insurance purchaser can work with their agent or broker of choice, without being forced to engage in time consuming and wasteful transactions in an inefficient network borne solely by the perceived need of multi-state compliance.
The Act is an important step in sustaining the nonadmitted insurance market’s effective, efficient and economical services, while streamlining the processing, licensing and compliance components of insurance transactions. Most importantly, it will develop a uniform foundation on which essential state-based regulation can continue without restraining the creativity, investment and security provided by the surplus lines market.
The AAMGA looks forward to working to further develop the specifics and implementation of commercial insurance reform and modernization so as to improve industry value, competition, innovation and efficiencies while commensurately also providing protections to the consumer.
Bernd G. Heinze is executive director of the American Association of Managing General Agents. This column was taken from his recent testimony before the U.S. House Committee on Financial Services. AAMGA is an international trade association comprised of 503 members engaged in the wholesale insurance marketplace.