Why surplus lines reform makes sense in 2006

The AAMGA is an international trade association comprised of 503 member agents, brokers, insurance, captive and reinsurance companies, Lloyd’s of London syndicates and underwriters, state stamping and surplus line offices and related entities all engaged in the wholesale insurance marketplace in the United States and the United Kingdom.The AAMGA’s 262 member managing general agents are located in all 50 states and are called upon to work with retail agents and their policyholder customers in all lines of insurance. In 2004, they wrote in excess of $23.9 billion in annual written premium, or approximately 72 percent of the gross excess and surplus lines premium written in the non-admitted market.

The 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 grass-roots support to enhance its passage.

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 like 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. These 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, and more.

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. These standards facilitate the open market; enhance competition; allow agents, brokers and insurers to be responsive to consumer needs, and offers flexibility in buying.

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 terms and conditions of coverage.

The AAMGA supports the Non-Admitted and Reinsurance Reform Act of 2006. Specifically, we believe the bill will:

This Act is an important step in sustaining the non-admitted 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 to improve industry value, competition, innovation and efficiencies while protecting the consumer.

Bernd G. Heinze is executive director of the American Association of Managing General Agents. This is his testimony before the U.S. House Committee on Financial Services.