Brokers Support New Federal Bill to Reform Surplus Lines Insurance Regulation

June 20, 2006

In a step that is being applauded by insurance brokers, Reps. Ginny Brown-Waite, R-FL, and Dennis Moore, D-KS, have introduced federal legislation requiring states to establish a uniform system of regulation for the surplus lines industry.

The new bill is a slimmed-down version of the proposed State Modernization and Regulatory Transparency Act (SMART), which deals with regulation of all lines of insurance and faced a lengthy legislative process. Waite and Moore pulled out pieces of the SMART legislation that target non-admitted insurance and reinsurance, in an effort to speed the legislation’s path through Congress.

Rep. Richard Baker, R-LA, chairman of the House Financial Services Committee’s Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, has scheduled a hearing on the new bill, the Nonadmitted and Reinsurance Reform Act of 2006, for Wednesday, June 21.

Several trade groups, including the National Association of Surplus Lines Stamping Offices and the Council of Insurance Agents and Brokers, said they will testify in support of the legislation at that hearing.

“We are extremely gratified that this legislation has been introduced to correct intractable flaws in the state-by-state regulation of commercial insurance,” said Ken A. Crerar, president of The Council. “This is an area where various state regulations are in conflict, and state regulators for decades have been unable to reconcile their differences. With respect to multi-state commercial insurance placements, the current system benefits no one, least of all the policyholders who ultimately pick up the tab.”

Surplus lines insurance is insurance for unique, unusual or very large risks for which coverage is unavailable in the admitted market. Although surplus lines is considered to be “unregulated,” in reality the surplus lines marketplace is subject to regulatory requirements that impede the effectiveness of the market and increase costs to surplus lines consumers, according to The Council.

“We are quite happy with the bill,” said Dick Bouhan, executive director of The National Association of Professional Surplus Lines Offices, Ltd., based in Kansas City, Mo. “A lot of the material in the legislation are issues which we have discussed with the committee and we have publicly supported in the past.”

Some of these issues include the requirement that only one state, or the home state of the insured, may require any premium tax payment for nonadmitted insurance. Under the legislation, the amount of any premium tax payment for nonadmitted insurance would be determined on the basis of any compact or procedures entered for allocation among the states.

“The remittance of taxes is an absolute mess,” Bouhan said in a March interview with Insurance Journal. “There is not [currently] an allocation formula.”

The new legislation also provides that no other state, except the home state of the insured, would regulate nonadmitted insurance. Additionally, no other state could require the surplus lines broker to be licensed in order to sell, solicit or negotiate nonadmitted insurance products except the home state of the insured.

“When surplus lines activity is limited to a single state, regulatory problems are minimal,” said Crerar. “When activity encompasses multiple states, however, regulatory compliance is difficult, if not impossible, due to the crazy-quilt of state laws and regulations.”

The bill would also provide that surplus lines premium taxes be paid to the insured’s home state. The states are then free to allocate the premium tax as they determine. “The contrast in approaches — from the simple straightforward approach in the Baker bill to the convoluted, burdensome approach of the states — could not be greater,” said Crerar.

“We now have a situation in which surplus lines brokers are getting licensed in a number of these states” because of multi-state risks, according to NAPSLO’s Bouhan. “[Brokers] have to comply with virtually every state with which there’s an exposure.”

The legislation aims to solve these problems by investing regulatory authority in the home state of the insured.

Other original sponsors of the legislation include: Reps. Darlene Hooley, D-OR; Steve Israel, D-NY; Joseph Crowley, D-NY; Tim Holden, D-PA; Melissa Bean, D-IL; Debbie Wasserman Schultz, D-FL; David Scott, D-GA; Richard Baker, R-LA; Tom Feeney, R-FL; Pete Sessions, R-TX; Vito Fossella, R-NY; Spencer Bachus, R-AL; Rick Renzi, R-AZ; and Michael Fitzpatrick, R-PA; and Judy Biggert, R-IL.

“Clearly, this issue has very strong bipartisan support, and we are hopeful this legislation can come to a vote in the House in short order,” Crerar said.

When asked why federal legislators decided to target surplus lines and reinsurance first in their attempt to dissect the SMART Act, Bouhan joked, “I guess they thought that surplus lines and reinsurance were the least controversial issues.”

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