NAIC Meeting: Surplus Lines Premium Tax Allocation Compromise Emerges

NU Online News Service, Nov. 8, 10:26 a.m. EST

NATIONAL HARBOR, Md.—The outline of a compromise over the uniform mechanism that will be used to implement the surplus lines and reinsurance modernization law, emerged at the National Association of Insurance Commissioner’s fall meeting here.

The insurance industry and regulators seem to be nearing an agreement on the use of a compromise surplus lines premium tax allocation formula developed by Kentucky — the concept supported by industry.

They are wrestling with creating the most efficient way to implement the Nonadmitted and Reinsurance Reform Act (NRRA), a part of the 2010 Dodd-Frank Act. The law became effective July 21.

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

The devil has been the inability to get the states to coalesce around creation of a single system to establish a simple and uniform method that would disburse premiums owed to states where the actual risk exists.

In further pursuit of the compromise, Brady Kelley, the new executive director of the National Association of Professional Surplus Lines Offices, will travel to Alaska on Nov. 8 to talk with Linda Hall, the state’s insurance commissioner.

“As part of the industry’s efforts in the implementation of uniform tax allocation approaches, which includes adoption of the Kentucky compromise, NAPSLO and Council of Insurance Agent and Broker representatives will be meeting with Alaska Insurance Director Linda Hall this week,” Kelley said in a statement.

 He said Hall has been deeply involved in the surplus lines tax allocation issue.

Even if state officials and the industry agreed on the ground rules for a uniform interstate compact, it would not deal with the fact that several large states (California and Texas, for example) have either passed legislation or adopted regulations that do not permit the sharing of surplus lines taxes they collect as the state of domicile with the state where the risk is located, industry officials acknowledged.

Meanwhile, states that have adopted the Nonadmitted Insurance Multistate Agreement (NIMA) have postponed implementation until Jan. 1 because the clearinghouse that would collect and distribute premiums on their behalf is not yet functional. 

The NIMA member states decided in a closed-door meeting Nov. 4 to take steps to incorporate NIMA as a means of limiting the liability of states involved in the system, which is led by regulators in Florida and Mississippi.

NIMA is the compact NAIC officials are supporting and addresses only the collection and allocation of surplus lines taxes. The National Conference of Insurance Legislators (NCOIL) supports the Surplus Lines Multistate Compliance Compact (SLIMPACT), which would do more to bring uniformity to surplus lines regulation in general, according to NAPSLO. 

Industry officials are concerned that the allocation formula used by NIMA states does little to simplify the allocation process.

They support the Kentucky allocation system, which allows brokers to continue to operate under a basically unchanged allocation system.

David Kodama, senior director of research and policy analysis for the Property Casualty Insurers Association of America, said the compromise, if it is approved, would replace NIMA's forced requirement to allocate all multistate lines of coverage—even in cases where the existing rating and underwriting process does not provide for such allocation (for example, for casualty premiums).

Kodama said PCI sees the compromise as a way to get NIMA and SLIMPACT on the same page regarding premium-tax allocation, and a “step towards a more comprehensive and compliant response to the regulatory modernization effort underlying the NRRA.”

Nicole Allen, senior vice president of strategic resources, said The Council is encouraged by the NIMA states’ discussion of the Kentucky compromise, and would strongly urge them to find common ground with the SLIMPACT states on an allocation formula.

“While we are not advocating that states join either agreement, we do want to see that the intent of the NRRA—a streamlined regulatory process for surplus lines—is realized,” Allen said in a statement.

She explained that the Kentucky compromise would require allocation of premium taxes for general liability and medical malpractice policies when they are rated on a state- or location-specific basis. 

“We support this allocation formula because we believe that is strikes a fair balance on the allocation of taxes for these coverages, as it uses information that is collected as a part of the underwriting process and does not impose additional data collection responsibilities upon surplus lines brokers,” Allen continued. 

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