San Francisco--Surplus lines insurers could see one of their keymarket advantages undermined if federal lawmakers decide toauthorize an optional federal charter rather than simply setregulatory benchmarks for each state to follow, an industrylobbyist warned here.

With the looming prospect of federal legislation that wouldseverely impact its members, the National Association ofProfessional Surplus Lines Offices, Ltd., hired a former lobbyistfor the Independent Insurance Agents & Brokers of America torepresent NAPSLO's interest in Washington earlier this year.

According to that lobbyist--Maria Berthoud, vice president ofB&D Sagamore, a subsidiary of the Washington-based law firmBaker & Daniels--one of the first items on the agenda of theSenate Banking Committee in 2006 could significantly change theplaying field for the surplus lines industry.

"From intelligence I've been garnering on the hill" whiledelivering messages to lawmakers about what NAPSLO is, "I found outthat there is a bill that is going to be introduced in theSenate...before the SMART bill that [senators] are calling OptionalFederal Charter legislation," Ms. Berthoud reported. The OFClegislation--called the National Insurance Act--is set to beintroduced by Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D,she said.

The bill, if passed, "would dramatically impact surpluslines--if not eliminate the need for surplus lines," she said,"because national insurers would have the same ability that surpluslines insurers have right now."

NAPSLO prefers legislation that would set forth federalstandards for state regulation, like the SMART, or StateModernization and Regulatory Transparency Act being drafted in theHouse.

In a memo to NAPSLO Executive Director Richard Bouhan dated July8 (available on NAPSLO's Web site), Ms. Berthoud explained that theNational Insurance Act draft, which she expects "to be dropped inthe Senate at the beginning of 2006," would allow standard insurersto write in every state by only meeting the requirements of oneregulatory entity. That "would give those insurers the qualities ofa surplus lines insurer," she said in the memo.

The ability to write in all states would also increase thenumber of licensed insurers in each state, she wrote. That, inturn, "may reduce the need for a buyer to seek coverage from anunlicensed insurer, which would have a severely negative impact onthe surplus lines industry."

The memo went on to explain that one potentially beneficialprovision of the National Insurance Act allows state-charteredinsurers to be affiliated with national insurers under a holdingcompany system.

This could "allow surplus lines insurers to remain viable," shewrote, explaining that it would permit a structure that includes astate-chartered surplus lines insurer (which would remain free ofrate and form regulation under state law) and an affiliatednational insurer, subject to some federal rate and form regulationsbut able to write coverage in each state while only meeting oneregulator's requirements.

Ms. Berthoud reviewed the history of the federal government'sinterest in insurance--and catalysts for action--at a legislativebreakfast conference held during the NAPSLO annual meetinghere.

She also delivered a good news/bad news message, suggesting thatSMART is "truly the only vehicle that has a chance of passage.Otherwise, we will be looking at federal regulation."

The session began with Mr. Bouhan introducing Ms. Berthoud and ashort video titled "Insuring Our Freedom."

"The surplus lines market will not be the focus of any [federal]legislation, but a matter of adding or dropping a few words couldhave impact on this market," the video narrator ominouslyannounced.

With that in mind, NAPSLO has a specific message for federallawmakers, Mr. Bouhan said, noting that members want to see fourpoints included in any legislation:

o A statement that the surplus lines market is free of rate andform regulation.

o Clarification and possible expansion of an "automatic export"provision, which is essentially a waiver of the diligent searchprovision for sophisticated buyers. Currently two categories ofexempt buyers are defined, but only one has an automatic exportoption.

o A provision spelling out simpler tax processes allowingsurplus lines brokers to remit state premium taxes on multistaterisks to one state--the insured's home state,

o Expansion of one-state compliance on multistate risks fromsophisticated insureds to all commercial insureds.

At one point, Ms. Berthoud suggested that NAPSLO and the IIABAwere virtually alone in their support of a middle-ground SMARTbill, with the American Insurance Association, the Council ofInsurance Agents and Brokers, and the American Council of LifeInsurers supporting an OFC framework.

NAPSLO has also remained alone in opposing the extension of theTerrorism Risk Insurance Act beyond its scheduled Dec. 31expiration, although the group has clarified a position articulatedlast year when NAPSLO leaders cited the high cost of documentingrejections of terrorism coverage.

"We were against the extension of TRIA in the present form," Mr.Bouhan told NU at this year's meeting. "We still oppose theextension of TRIA, but we recognize there are areas such asworkers' comp, the life insurance area, and maybe some trophyproperty areas where reinsurance is sparse and a backup would benecessary."

"We'd also like to see that be voluntary," Mr. Bouhan added. "Wereally don't think highly of TRIA."