Legislation designed to ease the regulatory burdens on surplus lines insurers was approved by a House Financial Services Subcommittee last week, and industry officials say it is likely to be taken up on the House floor in September.

Although the measure was approved by a voice vote in the Capital Markets Subcommittee with no opposition, some members argued that more work needs to be done to alleviate the concerns of the National Association of Insurance Commissioners and others.

Rep. Richard Baker, R-La., who chairs the subcommittee, said the bill "focuses on two specific sectors of the market that are, in my opinion, in need of reform." He said the bill worked to help streamline the surplus lines market and to protect reinsurance arbitration agreements from some state regulators whom he said have been trying to apply their state's laws extraterritorially.

Rep. Baker noted that many interested parties--including surplus lines insurers, buyers and brokers--had expressed support, and that the committee has also received input from the NAIC and "now incorporated many of their recommendations into the bill."

Among the changes made, Rep. Baker said, was the inclusion of language that "encourages the states to work together and form a traditional compact or some other mechanism" for the allocation of premium taxes. Another change would add 12 months to the amount of time the states would have to work out such an arrangement.

Absent such a mechanism, the bill would mandate that all premium taxes on multistate surplus lines contracts be paid to the insured's home state, which would then be charged with allocating the funds accordingly.

Rep. Paul Kanjorski, D-Pa., the ranking minority member of the subcommittee, said "we have moved unusually fast" to bring the bill, HR 5637, to a vote. He thanked Rep. Baker for consulting with the NAIC, noting that committee staffers had done a great deal to incorporate their recommendations into the bill.

He added, however, that more work needs to be done on the bill before it is voted on by the full committee, in such areas as due diligence and disclosure requirements, as well as ensuring that state guaranty funds would not be weakened. "The professed intent of the bill is to streamline regulation, not deregulate surplus lines," the congressman said.

Additionally, Rep. Kanjorski mentioned that the Consumer Federation of America had written a letter to him and other committee members expressing opposition. In the letter, CFA officials said the bill would establish a "feeble and complex oversight regime" that will provoke states to compete against each other to weaken oversight in some cases.

The letter--signed by Travis Plunkett, legislative director, and J. Robert Hunter, director of insurance--said that if enacted, the bill could also "leave insurance consumers vulnerable in the event of insolvency." They said CFA opposes the bill because it is based on many faulty assumptions, including the fact that it assumes large buyers of insurance don't need protections normally provided in an insurance transaction, such as protection from deceptive sales practices.

"The investigations and settlements pursued by New York Attorney General Eliot Spitzer refute this assumption," they wrote. "Large, sophisticated commercial consumers of insurance were duped into paying too much for insurance through bid-rigging, steering, undisclosed kickback commissions to brokers and agents, and through other anticompetitive acts."

"We need to tread carefully when considering such matters," said Rep. Kanjorski, adding another concern that the bill's stated definition of the term "qualified risk manager" was overly broad and ran afoul of an agreement reached between Republicans and Democrats during the debate on extending the Terrorism Risk Insurance Act. "This bill would allow an entry-level, recent college graduate with a degree in risk management to serve as a qualified risk manger," he said.

In response, Joel Wood, senior vice president of government affairs at the Council of Insurance Agents and Brokers, said, "CFA does not represent the consumers of surplus lines products--RIMS does," referring to the Risk and Insurance Management Society.

"It's a shame that in their incessant hatefulness toward the industry, they've come down on the side of nanny-state bureaucracy to the detriment of real consumers, who they don't represent," he added.

Rep. Kanjorski also expressed some concern that the passage of "piecemeal reforms" such as HR 5637 could hurt the chances of more comprehensive legislation, such as the proposal to create an optional federal charter. He supported the bill, however, noting that he would not "let the perfect become the enemy of the good."

Rep. Baker took a different view of the bill, seeing it as a stepping stone to further reform rather than a potential impediment. He described HR 5637 as the "first significant step in our longer journey toward uniform insurance regulation."

The Independent Insurance Agents and Brokers of America applauded the bill's approval by the subcommittee. "This is a good piece of legislation that will help alleviate the inefficiencies and expenses which ultimately affect policyholders, in addition to independent agents and brokers," said Charles Symington, IIABA's senior vice president of government affairs and federal relations.

"We believe it is the right bill at the right time," said Mike Ardis, director of communications and technology at the National Association of Professional Surplus Lines Offices. "This legislation will bring much-needed relief to the complex and confusing surplus lines regulatory process, and we are grateful that many of NAPSLO's concerns are directly addressed in the bill."

On the changes to the bill--notably the provisions encouraging the interstate compact--Bernard Heinze, executive director of the American Association of Managing General Agents, said his group has been working with the NAIC on the compact, adding that it "will not stand in the way of getting the bill passed or getting the reforms in place."

He said the AAMGA has also been working with the National Conference Of Insurance Legislators on the issue, as well as the American Legislative Exchange Council.

Indeed, AAMGA is hosting a meeting in St. Louis on Sept. 8--the day before the next quarterly NAIC meeting--to discuss the reforms and implementation, and already has over 40 regulators signed up to attend, he noted.

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