Congress gets serious about surplus lines insurance reform
Legislation passes House, heads for the Senate; but not all in the industry think it’s the answer as now written
Insurance regulatory reform efforts on Capitol Hill took a giant leap forward with the recent House passage of HR 1065, the Non-Admitted and Reinsurance Reform Act of 2007. Sponsored by Rep. Dennis Moore, D-Kan., and Rep. Ginny Brown-Waite, R-Florida, HR 1065 is virtually the same legislation as HR 5637, a bill introduced in the 109th Congress that passed the House on a bipartisan and unanimous vote of 417-0.
Will support for the insurance reform legislation continue in the Senate with passage of the companion bill S 929? Advocates for the legislation are hopeful, but cautious in their optimism. Some worry other insurance proposals such the optional federal charter could stall or distract lawmakers and postpone action on the bill. Yet no one seems to dispute the need for uniformity and consistency in the excess and surplus lines market.
“HB 1065 addresses long-standing tax and regulatory issues that grew worse over the years,” said Philip Ballinger Jr., executive director of the Surplus Lines Stamping Office of Texas.
Supporters of the Non-Admitted and Reinsurance Reform Act say the bill will put the fix on a long-standing concern — one-state or “home state” compliance on multi-state surplus lines risks — while leaving state regulation intact.
But not everyone in the surplus lines industry supports the bill in its entirety. Smaller surplus lines carriers that write in only one or two states and a few surplus lines state associations have voiced concerns over some provisions of the legislation.
The biggest problem, says Steve Finver, president of the Florida Surplus Lines Association, is the definition of “home state” is very vague in HR 1065. “We oppose the proposal as it is now because the way the law is written now, any organization or company could deem a ‘home state’ based just on an office being located there,” Finver said. That could potentially create a problem because other states would not be assured of getting their portion of the surplus lines taxes, or at least getting them at the rate required in the other states, he said. “Florida’s Citizens Property Casualty Insurance Co., the insurer of last resort that covers catastophe losses in Florida, would be forced to increase their assessments to cover the lost revenues,” he added.
At present surplus lines insurers are subject to different laws and regulations for each state in which a transaction occurs — an administrative nightmare for some companies. Section 102 of the reform legislation would establish a “home” state and make the insured’s home state’s statutory and regulatory requirements apply, including those with regard to producer licensing. All non-home state, non-admitted insurance laws and regulations are preempted.
Richard (Dick) Bouhan, executive director for the Kansas City-based National Association of Professional Surplus Lines Offices Ltd., (NAPSLO) says the number one benefit of HR 1065 “would be the uniform system of premium tax allocation and remittance for surplus lines premium taxes.”
In essence, H.R.1065 would allow the “home” state of the insured to be the only entity surplus lines insurers would need to comply with and, and would allow the home state to disperse the surplus lines taxes collected to all other states.
“Passage of 1065 and hopefully S 929 will significantly increase the level of efficiency in purchasing surplus lines insurance for all those involved in the transaction from the insurance company all the way to the consumer,” Bouhan said.
The Senate is expected to debate the bill later this summer and supporters are hopeful it will pass before the end of the year.
Lingering concerns
While enthusiasm runs high for the insurance reform legislation, concern over certain “gray” areas has kept the Georgia Surplus Lines Association and others from supporting it.
“The provision, specifically the principle place of business, is too gray we think,” said Jacque Schaendorf, president of Georgia Surplus Lines Association and chief operating officer of Atlanta, Ga.-based Insurance House. “What is the definition of home state? That’s what we see as damaging,” she said.
Bernie Heinze, executive director of the Pennsylvania-based American Association of Managing General Agents (AAMGA), noted the bill doesn’t clearly define whether the home state must disperse the tax money from a transaction.
“What exactly is the responsibility of the home state? Why should the state share the monies?” he asked. “Some states have clearly benefited from the surplus lines tax dollars and did not feel it necessary to disperse those tax dollars. Without a better definition, uniformity could be lost,” Heinze said. Although AAMGA supports the legislation, they have expressed concerns with its lack of specific direction.
The Excess Lines Association of New York (ELANY) echoes the same concerns.
“HR 1065 requires tax payments to the home state and while it intends the states agree to share the taxes, it does not to force the states to do so nor sanction them if they fail to do so,” said Dan Maher, executive director of ELANY.
Schaendorf predicts that if the legislation passed as is, the surplus lines market “would be chaotic.” There is “no follow up plan to talk about the compliance issues,” she said. “Nobody is prepared for the compliance issue,” she added. “Everybody is so excited and thinks it’s solving all the problems for tax filings but it’s extremely gray.”
Schaendorf added that her association and others have discussed their concerns with AAMGAand NAPSLO to work through the issues as a team. “We’re going to work on S 929; that’s the next piece.”
Interstate Compact
HR 1065 includes a provision that would allow states to create an interstate compact to more easily and fairly handle tax disbursement from surplus lines carriers to other states, but the bill fails to specifically addresses details of what type of compact or how it should operate.
According to ELANY’s explanation to its members, HR 1065 says that states may enter into a compact or otherwise establish procedures to allocate premium taxes.
Over the last year and a half, under the National Association of Insurance Commissioners’ (NAIC) Surplus Lines Task Force, interested parties have been working on a draft an Interstate Compact that will address the apportionment of taxes for each state. The compact approach would allow each state to charge its tax rate to the portion of the risk in that state. Also while the compact calls for uniform standards to bring a more uniform approach state-to-state, the compact commission may adopt such standards, but would not be required to do so.
ELANY’s Maher said that although his organization supports the concept contained both in the proposed NAIC compact draft and HR 1065, if necessary the compact and HR 1065 could work independently of each other. If ultimately both are passed into law, then both HR 1065 and the Interstate Compact would have to be amended to dovetail and work together.
“The latest draft of the compact is circulating now and will be reviewed by the NAIC at its fall meeting for possible adoption,” Maher said. He added that the National Conference of Insurance Legislators (NCOIL) will also review the draft of the Compact in the next few weeks and could possibly lend its support for the Compact in state legislatures.
Maher and others believe the adoption of an interstate compact helps to define “home” state better, while making the process efficient and better understood by all parties involved.
Sophisticated buyers
Other areas of the surplus lines reform legislation that some supporters say may need tweaking include the definitions of the sophisticated commercial buyer or the exempt commercial policyholder and the eligibility standards for a company to enter the surplus lines market.
HR 1065 includes a provision that would allow the surplus lines broker to place insurance on behalf of large, sophisticated commercial purchasers, as defined in the act without having to satisfy a diligent search requirement.
There remains some uncertainty as to a specific definition of a “sophisticated” buyer.
In addition, HR 1065 allows U.S. insurers that report a minimum of $15 million of policyholder’s surplus to enter the market. Some players have concerns that the threshold might be too low to guaranty financial security of the insurer.
Texas Stamping Office Executive Director Phil Ballinger said that despite the bill being 80 percent excellent, the eligibility question leaves a gaping hole.
“Other large states such as Texas, New York and California may have an issue with a $15 million benchmark. Why isn’t it higher?” Ballinger asked. “What about the company that has $15 million in surplus this year but had a $100 million in surplus last year? Is this company still a safe bet? Many states see the $15 million threshold as possibly too low.”
Despite some concerns, most supporters of the reform legislation remain hopeful it will pass this year.
“HR 1065 is the perfect example of what targeted federal regulation can do; that is address areas of concern, but allow the states to have control and continue to do the fixing,” said Paul Kangas, director of federal affairs for the Property Casualty Insurers Association of America.
The American Insurance Association, based in Washington D.C., a strong proponents of an optional federal charter, still wants the charter, but see the merits in the passage of H.R. 1065.
“Surplus lines brokers and admitted insurance companies share the same frustrations with doing business in inconsistent and disparate regulatory systems,” said Leigh Ann Pusey, AIA chief operating office and senior vice president, government affairs in a written statement. “The reforms in HR 1065 aim to improve availability for customers in this market segment and we support it.”
Neal Abernathy, president and chief executive officer of the Atlanta office of Swett & Crawford, said the bill should pass this time around and if it doesn’t it will be a gravely “missed opportunity for uniformity” in the surplus lines market.