NU Online News Service, July 20, 1:36 p.m. EDT

Texas, the nation’s third largest state in terms of surplus lines premiums, has enacted legislation that in theory allows the state to keep all the premium taxes generated by the surplus lines industry.

Texas, which in 2009 generated $4.3 billion in surplus line premiums, according to the latest confirmed data, joins California in enacting legislation that does not require the state to share surplus line premiums with other states.

California is the largest state in terms of generation of surplus premiums, bringing in $5.2 billion in premiums in 2009.

Texas enacted the law just two days before a new federal law goes into effect that was originally designed to reform and modernize regulation of the surplus lines industry.

The law, the Nonadmitted and Reinsurance Reform Act, is a provision of the Dodd-Frank financial services reform.

The Texas and California actions mean that “as the NRRA becomes effective, the majority of the largest surplus lines states have not entered into a compact and no clearinghouse has been established,” according to Richard Bouhan, executive director of the National Association of Professional Surplus Lines Offices (NAPSLO).

Under the law, the insured's home state will be the only state with jurisdiction over surplus lines transactions and the only state that can require a tax be paid by the broker.

As a result, states are bringing their laws into compliance. But to do so, states are using two different compacts—one favored by the National Association of Insurance Commissioners, called NIMA, and one favored by the National Conference of Insurance Legislators (NCOIL)—with different premium-sharing requirements.

Texas and California, though, have joined neither. “The bill enables Texas to tax 100 percent of multi-state risks if Texas does not join a tax sharing compact,” Bouhan says. “While there is no mention of compact in the bill, the Texas comptroller has authorized to have Texas join a compact based on authorization included in a 2007 law.”

He adds, “If Texas does join a tax compact, Texas would allocate taxes based on the compact agreement.”

The California law, A.B. 315, authorizes the imposition of surplus lines premium tax and independent procurement tax on 100 percent of premiums. It was signed by the governor Friday.