WASHINGTON–Federal legislation mandating uniform rules for surplus lines carriers and brokers was heartily endorsed Wednesday by witnesses testifying at a House Financial Services Committee hearing on the bill.

But state regulators did not participate in the hearing, and several members of the committee used the hearing as a platform to propose further steps that Congress could take to preempt state regulation, including creating an optional federal charter for insurers.

Another proposal was that the Committee re-examine whether the National Association of Registered Agents and Brokers proposal first used in the 1999 Gramm-Leach-Bliley Act should be retooled to force more states into the fold, especially the larger ones still missing in action–as well as to ensure continued state compliance.

At issue in the hearing was a legislative proposal by Reps. Ginny Brown-Waite, R-Fla., and Dennis Moore, D-Kan., the Non-admitted and Reinsurance Reform Act, H.R. 5637. The bill would establish a uniform system of premium tax allocation and collection for surplus lines, and bar states from asserting the extraterritorial application of their laws.

The legislation “is a very targeted remedy to an identified problem,” said Rep. Richard Baker, R-La., the chairman of the Capital Markets Subcommittee, whose staff drafted the bill.

Rep. Brown-Waite explained that brokers and carriers dealing in surplus lines coverage over multiple states face “myriad” state tax and licensing and other requirements, adding that “often times, these regulations will conflict with each other.”

H.R. 5637 seeks to remedy the problem by establishing a “home state” system. Here the state of the insured's domicile would serve as the authority for a multistate surplus lines insurance transaction. Premium taxes would be paid entirely to that state, which would then distribute the funds to the other states.

Scott Sinder, general counsel for the Council of Insurance Agents and Brokers, said the group “has been seeking this type of reform for decades,” adding that the myriad of state rules and regulations governing nonadmitted insurance coverage places a heavy burden on a broker seeking to obtain coverage for a multistate risk.

Brokers and buyers seeking to obtain surplus lines coverage are faced with a number of burdensome requirements, including how to pay premium taxes, said Janice Ochenkowski, vice president of the Risk and Insurance Management Society and senior vice president, risk management, for Chicago-based property manager Jones Lang LaSalle.

She said the transactions occur in one of three ways. In some states, the calculation and payment of taxes is handled by the broker or agent, while in others the buyer is responsible.

In some states however, she noted, the broker is paid for premium taxes and calculates how much and where each payment should be made. The broker then is required to send the money back to the buyer, who then sends it to the various regulators.

Richard Bouhan, executive director and general counsel for the National Association of Professional Surplus Lines Offices, said he has been working with the NAIC on surplus lines tax issues for “a decade and a half” but has met with little success in trying to enact a multistate solution.

NAPSLO proposed an interstate compact to deal with premium tax allocation issues as recently as the most recent NAIC meeting, Mr. Bouhan said, adding that the idea was “panned” by the NAIC Surplus Lines Task Force. “We've just not been successful,” he said, noting that it is understandably difficult to reach a consensus on issues among 50 jurisdictions.

As one of the authors of the State Modernization and Regulatory Transparency (SMART) Act along with full committee Chairman Mike Oxley, R-Ohio, Rep. Baker asked the witnesses if H.R. 5637 would serve as an effective “test case” for the approach as the more broad-based SMART effort has run aground due to strong opposition from the states.

Tom Minkler, chairman of the Government Affairs Committee for the Independent Insurance Agents and Brokers of America, agreed that the bill could serve the purpose of opening the door for broader federal standards legislation. “This is actually the beginning of SMART,” he said.

No member of the NAIC was at the hearing to offer testimony, which was a concern for Rep. Paul Kanjorski, D-Pa. “Before moving, we need to hear from the NAIC,” Rep. Kanjorski said, noting that “good public policy” should include input from all interested parties, and that the NAIC is “certainly interested” in surplus lines issues. “Even if we ultimately disagree, we must engage them in constructive dialogue,” he said.

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House Committee Endorses Surplus Lines Rules

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