The Nonadmitted and Reinsurance Reform Act

After decades of frustration and brutal disappointment, the vexing and seemingly intractable tax payment and regulatory compliance problems surplus lines brokers face on multi-state risks are about to be solved. The long-awaited solution benefiting consumers and brokers will occur when the U.S. Senate passes S 929/HR 1065, also known as the Nonadmitted and Reinsurance Reform Act (NRRA).

In June, the House of Representatives approved by a unanimous voice vote a companion bill (HR 1065). The House passed similar legislation last September by a vote of 417-0. Unfortunately, the Senate did not take it up. This year, Senators Bill Nelson, D-Fla., and Mel Martinez, R-Fla., introduced S 929 and the National Association of Professional Surplus Lines Offices Ltd. (NAPSLO) is urging a quick approval.

The enactment of S 929/HR 1065 will bring, after decades of utter “chaos,” order and uniformity to the tax payment and regulatory compliance requirements regarding surplus lines policies with multi-state exposures. This legislation will make the surplus lines market more efficient for consumers with multi-state exposures. It will rationalize and simplify the tax remittance and compliance responsibilities surplus lines brokers must discharge in such transactions. This efficiency will reduce the cost of regulatory compliance, and consumers will benefit because they ultimately bear those costs.

A daunting burden

In contrast to the admitted market where policies having multi-state exposures are governed by the rules and regulations of one state — usually the state of the principal place of business or the residence of the insured — multi-state surplus lines transactions currently are subject to the rules and regulations of each state in which an exposure exists. That creates multiple, duplicative and often dissimilar regulatory compliance requirements for the surplus lines broker engaged in a multi-state transaction.

In addition to the maze of multiple state regulatory compliance requirements in a multi-state surplus lines transaction, the surplus lines broker is obligated to allocate and remit the proper amount of premium tax to each state in which an exposure exists. The calculation and transmission of those premium tax monies to the various states is a significant administrative burden. The burden is exacerbated by the historic failure of states to adopt a uniform national allocation formula for apportioning surplus lines premium taxes and a simple system to pay them. Consequently, the premium tax calculation and remittance process on multi-state surplus lines transactions is daunting and often impossible.

I am often asked by surplus lines brokers how they can confidently comply with the labyrinth of state regulatory compliance regulations and tax remittance rules on a multi-state surplus lines risk. My answer to them is: “You can’t.”

But, if S 929/HR 1065 does pass, my answer will be: “You can.” The Nonadmitted and Reinsurance Reform Act has made it possible.

Home state rules

To eliminate the compliance problem and simplify the surplus lines premium allocation and remittance process, S 929/HR 1065 stipulates that placement of surplus lines insurance is subject to the “statutory and regulatory authority of the insured’s home state,” defined as the insured’s principal place of business or for individuals, their state of residence. The legislation also states that “no other state other than the home state of the insured may require any premium tax payment for (surplus lines) insurance.” With those simple legislative statements, two of the most troublesome aspects of insuring surplus lines risks — multiple state compliance and multiple tax payments to states — are eliminated.

By directing both the regulatory and tax jurisdictions for multi-state risks to be the state of the insured’s principle place of business or the state of residence for individuals, surplus lines brokers only have to comply with the licensing, placement and tax payment laws and regulations of the insured’s home state. That will clarify the regulatory responsibilities a broker has on a multi-state surplus lines risk and simplify the tax payment process.

An interstate compact

With the tax distribution process no longer a requirement of the surplus lines broker, S 929/HR 1065 urges states to “adopt a nationwide or uniform procedure, such as an interstate compact, that provides for the reporting, payment, collection and allocation of premium taxes for (surplus lines insurance).” Many of us have long advocated the creation of an interstate compact as an important component to the overall solution to tax and compliance problems and urge states to enter into such an agreement under the structure provided.

As I testified in June 2006 before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, this Legislation is the right policy at the right time.

I make that same statement today and urge the Senate to follow the House and enact S 929/HR 1065.