WASHINGTON–State regulators are “very close” to endorsingfederal legislation that will establish surplus lines carriers'home state as their primary regulator, and their backing is animportant step for the bill to win passage this year, an industrylobbyist said yesterday.

However, state support is limited to Title 1 of the bill, H.R.1065, the Nonadmitted and Reinsurance Reform Act of 2007, accordingto Joel Wood, senior vice president and director of federal affairsfor the Council of Insurance Agents and Brokers.

He made his comments at the annual Capitol Hill visit of membersof the Risk and Insurance Management Society Inc.

“Reinsurance is another issue,” he said. He said the reasonstate regulators support the surplus lines portion of H.R. 1065 isthat “they believe that only through enactment of the legislationwill they have the momentum to create an interstate compact thatwill govern this.”

On other topics, Mr. Wood and a senior adviser to a member ofthe House Financial Services Committee who asked not to beidentified noted bipartisan support for legislation allowing riskretention groups to offer property insurance and movement onlegislation creating an optional federal charter.

“The last few months have been far more interesting than Ithought they would be,” Mr. Wood said. He cited the Paulsonblueprint for financial modernization released by the TreasuryDepartment in late March and the concerns voiced about the reportby state regulators.

He said a question remains as to whether support for an optionalfederal charter for insurers contained in the report “is the end ofthe OFC debate or the beginning of it.”

In Mr. Wood's view, state regulators “have gotten scared. Thereis motivation based on either fear or opportunity.” Specifically,he said, state regulators feel “there is going to be movement onthis over the next two to three years.”

On legislation concerning risk retention groups, Mr. Wood saidthe “catapult” for passage of this measure is provisionssolidifying the corporate governance standards for risk retentiongroups.

The legislative adviser said he was “bullish” on thelegislation, saying that the broad bipartisan support for thelegislation, as well as support from consumers and some potentiallyaffected industries, leaves him hopeful the bill can at least passthe House in this Congress.

On surplus lines, Mr. Wood noted that a bill has passed theHouse twice virtually unanimously, and “it has a mechanism forsharing regulation and taxes that everyone agrees to.”

But Mr. Wood cautioned that even if the legislation passes, somestates, such as Texas and California, “that like to go their ownway, are never going to come around on a full interstatecompact.”

Even if only 20 states agree to the compact, it will ensure thatthe only rules governing surplus lines insurance will be the rulesof the home state.

And, having a hearing before the Senate Banking Committee is acritical component to getting the bill passed this year. “We haveto have a hearing; getting oxygen is our No. 1 issue on this billright now.”

By “oxygen,” Mr. Wood meant getting the issue before the Senateduring the period when the Senate is dealing with housinglegislation, high gasoline prices, the budget, and the fact that2008 is a presidential election year.

Both Mr. Wood and Libby Baney, Washington counsel for theNational Association of Professional Surplus Lines Offices Ltd.(NAPSLO), said the final bill will have a definition ofsophisticated buyer that is acceptable to RIMS.

Specifically, Ms. Baney said, “the definition of sophisticatedinvestor RIMS members want will be in the bill.”

“That's guaranteed,” Mr. Wood said. He explained that such adefinition is important because RIMS members are the consumers ofsurplus lines insurance. “Who is the consumer? You are. TheConsumer Federation of America doesn't represent the market forthis product; you do,” he said.

“I will urge that if the Senate holds a hearing on the surpluslines bill, that a RIMS representative testify,” he said.

On the risk retention legislation, the congressional legislativeadviser said concerns had been voiced over whether the definitionof “property insurance” in the measure is too narrow or toobroad.

He said some people have argued that the definition is toonarrow, but others have argued that the current definition of thebill “pulls in personal lines.” Currently risk retention groups arelimited to providing liability insurance.

He also said some critics of the bill argue that it wouldrequire risk retention groups to participate in insurance guarantyfunds.

“That is a concern,” he said. “We don't want risk retentiongroups pulled into state guarantee funds.”

Both issues, he said, will be addressed in legislative languagebefore the bill is presented to the House Financial ServicesCommittee.

At an earlier panel, top legislative advisers of the SenateBanking Committee and the House Financial Services Committeerefused to allow press coverage of their remarks.

They included Kathleen Mellody, majority counsel of the CapitalMarkets Subcommittee of the House FSC; Robert Gordon, seniorRepublican counsel to the House FSC; Sarah Kline, majority counselof the Senate banking panel; and Andrew Olmem, minority counsel tothe Senate panel.

RIMS would not permit reporters to attend unless they signed anondisclosure and confidentiality agreement. National Underwriterwould not concede to that demand, and thus were barred fromattending the session. (For more on this, see Editor In Chief SamFriedman's blog at www.property-casualty.com.)