Several months ago, I mentioned HR 1056/SB 929, which is the federal Non-Admitted and Reinsurance Reform Act of 2007 (NRRA) that is intended to “streamline the regulation of non-admitted insurance and reinsurance.” In other words, the surplus lines and reinsurance markets.

Since a key focus of this bill is multi-state exposures, most would assume that the groups favoring it would consist of carriers and brokers that operate and are licensed nationally, or at least regionally. Local agencies, I assume, would perceive their general interests as being different from regional or national operations. However, it would be mistaken to ignore this pending federal piece of legislation because it is likely to become a law and would also affect local agencies' operations and business.

There are plenty of news articles and studies indicating that some residents are thinking about moving away from Florida, and along with them some business owners who are either partially or totally moving their operations north of the state line. This is due to, among other things, property taxes, but most especially the cost of hurricane insurance. This could have an impact on local agencies because businesses with multiple location operations that include Florida could be considered even bigger targets for non-Florida agents than they are now (if that's possible). And of course the Internet makes it much easier now for anyone to solicit and write business anywhere. All of those issues come into play with NRRA.

From what I've been able to piece together so far, unless something significant happens to derail existing momentum — and it would have to happen fairly soon — I think it's reasonable to expect NRRA to become law. And let's face it: the surplus lines industry isn't very well understood or appreciated by most legislators, consumers, or news groups. Therefore, many groups are in favor of just about anything that could cut the cost of insurance, regardless of the finer points of the law.

Florida Raises Concerns

On the national level, there is a lot of support for the NRRA bill. However, that is not the case in Florida, where both the Florida Surplus Lines Association and the Florida Surplus Lines Service Office have pointed out a number of deficiencies. Among the many concerns is the possibility that an insured would declare that their “home state” is something other than Florida, primarily for the purposes of achieving a lower insurance cost due to a lower surplus lines tax rate and no assessment fees. Looking at the past, current, and future assessments levied by the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation, one could see where that would be a strong motivation to declare a state other than Florida as the “home state.”

Additionally, there is the worry that if Florida is not listed as the home state, those sections of the bill dealing with broker licensing and enforcement provisions aren't really written to protect consumers from fraud and unfair claim practices. In other words, there is nothing that requires one state to enforce the laws of another state. Steven Finver, president of the Boca Raton-based Continental Agency of Florida and president of the FSLA, has put together an excellent and comprehensive set of documents on the topic, which can be read at the association's web site, www.floridasurpluslinesassociation.com.

NAPSLO's Stance

While the FSLA and the FSLSO have their objections to the NRRA bill, the National Association of Professional Surplus Lines Offices (NAPSLO) is of a different opinion. Steven Stephan, NAPSLO's director of government relations, offered the following thoughts.

Regarding the concern that some states may see a significant drop off in surplus lines tax revenue due to insureds choosing other states with lower tax rates and fewer fees, he's not sure that is a valid concern. Stephan said, “The NRRA requires payment to one state, so it is far simpler and far more transparent than the existing system where a broker allocates portions of the tax to the states where portions of the risk exposure reside. Any time the tax system is clearer, simpler, and more transparent, we think there is a good chance tax revenues will increase for all states.”

Regarding personal lines policies, Stephan feels that “with respect to the taxes due on a residence, it is my understanding that Florida has no income tax. As a result, it is highly unlikely an individual would attempt to establish a residence in another state to save surplus lines tax, at the risk of paying income tax to the other state.”

As to the belief or idea that a business owner or resident of a state would be able to “choose” their home state, Stephan points out several reasons why that is unlikely: 1) There is a tremendous amount of federal case law dealing with the term “home state” and such law is clearly opposed to “manipulating” rules defining home state; 2) Brokers would take on financial and legal risk by advising their clients to attempt to circumvent the well-defined concept of home state; and 3) An insured declares their home state to a variety of authorities; the secretary of state, the IRS, local city taxing authorities, etc. Arbitrarily changing that, or attempting to, would be risky on several fronts.

When asked about possible limitations relative to consumer protection if NRRA passes, Stephan points out that “the states would continue to have all the regulatory tools necessary following the implementation of the NRRA. The NRRA only pre- empts the insurer eligibility requirements to the extent that they differ from the NRRA, but the other regulatory tools would continue to be available. Florida could still remove a company from the eligibility list if it was of unsound financial condition, failed to pay claims promptly, or violated the laws of the state.”

He added, “I cannot envision a realistic scenario where a company or broker could commit a fraudulent act with impunity. Not only can the state remove their authorization if necessary, but if a company or agent is doing business with an insured whose home state is Florida without authorization from the state, that is a crime and can be punished regardless of whether or not the NRRA passes.”

Regarding a “compact” between the states, NAPLSO has in fact sponsored such an idea and has had meetings with a number of key organizations in support of a compact, including the National Conference of Insurance Legislators and the National Conference of State Legislators. According to Stephan, he is not aware of any reason NAPSLO would be opposed to a compact, but does believe that NRRA and a compact are separate issues.

Most of us would agree that any legislation will have issues to resolve, and it appears NAPSLO believes that this legislation is workable in its present form. They are clearly concerned that any major changes that require starting over and working back through the entire legislative process will delay action on this issue, possibly by as much as two or three years.

Scott Holeman, National Association of Insurance Commissioners (NAIC) communications director, offered the following update on the status of the legislation.

?At the 2007 winter meeting of the NAIC, the Government Relations Leadership Council (GRLC) discussed the bill and asked the Surplus Lines Task Force and the Reinsurance Task Force to consider the technical issues of the bill.

?In Dec. 2007, both The Surplus Lines (C) Task Force and The Reinsurance (E) Task Force held conference calls with regulators and industry representatives. These calls discussed technical corrections needed for the surplus lines and reinsurance components of the bill and resulted in a wide variety of technical concerns, issues, and suggestions being provided to the GRLC. The GRLC will use this information to review the bill.

Like most legislation, the progress is slow going, but due to its potential impact on Florida insureds, agents, brokers, and regulators, it bears watching.

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The Push to Pass the Federal Surplus Lines Act

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