NU Online News Service

ORLANDO, Fla.--Regulators' proposed solution to the allocation of surplus lines taxes met industry opposition as regulators worked on a proposal to present to state legislators by the beginning of the year.

Critics do not believe the proposal will achieve what Congress intended when it passed the Nonadmitted and Reinsurance Reform Act (NRRA) as part of financial reform under the Dodd-Frank Act.

Meeting last week, Louisiana Insurance Commissioner James J. Donelon, chair of the National Association of Insurance Commissioners' (NAIC) Surplus Lines Implementation Task Force, underscored the importance of the group's work and the need to complete a plan soon to allocate surplus lines taxes. He said that legislators will need the model proposal in place to present to their legislative bodies as sessions begin next year.

He said not everyone will be happy with the result but hoped the final plan would be adopted by the NAIC with "a super majority."

Under the task force's current proposal, states would enter into an interstate compact for the purpose of collecting taxes and setting the rules governing the surplus lines industry.

However, industry criticism primarily focused on the failure of the compact to streamline business and make filing easier for the excess and surplus lines insurance industry.

Commissioner Donelon made a point of noting the objections of the National Association of Professional Surplus Lines Offices (NAPSLO), which said in a letter that "the system devised to collect this relatively small amount of revenue creates an enormous burden."

Addressing the task force, Steven Stephan, director of government relations for NAPSLO, said, "We agree that a solution is needed, but how that is done is the challenge."

The comments of NAPSLO echoed the sentiments of other associations, including the American Association of Managing General Agents (AAMGA), the Council of Insurance Agents and Brokers (CIAB), and Excess Line Association of New York (ELANY). These associations touched on complexity issues and said the plan failed to address the reality of the regulatory relationship between company and states.

The American Insurance Association (AIA) expressed concerns over the adequacy of confidentiality protections that should be addressed in a compact.

Roger Smith, managing director of Marsh USA Inc., boiled down the expense side of the issue for brokers to the task force. He told regulators that his firm last year paid $60 million in surplus lines taxes to states, costing Marsh $20 million to process.

The firm has the advantage of sophisticated software to allocate those payments, he said, but the software is now programmed with over 25,000 rules to calculate the taxes. A compact, he said, would add another layer of rules to the system, he noted.

"This is a complex challenge we all face no matter what is adopted," he told regulators. He also noted that going forward, "from a broker's standpoint, we cannot operate on a multistate basis without a uniform system."

Commissioner Donelon summed up the positions of regulators to two points of view. As expressed by Brian Gaudiose, deputy commissioner of agent regulation for Virginia, the NAIC's proposal needs to be all encompassing, dealing with both the collection of taxes and determination of which state will regulate companies in the industry.

The other view, expressed by Steve Parton, general counsel for the Florida Office of Insurance Regulation, is that the issue before the NAIC is wholly a tax collection issue, and the simplest possible plan should be adopted to attain that goal.

Often discussed as the remedy is SLIMPACT, an acronym for Surplus Lines Insurance Multistate Compliance Compact--an interstate compact that is supported by NAPSLO and the other groups. SLIMPACT has been described as a streamlined program where taxes are paid by the surplus lines brokers and companies into a compact and the compact members allocate the money under a formula to the states.

Gaudiose argued that without a comprehensive approach that also addresses regulation, the industry will not buy into the plan and opt to directly pay taxes to their home state and let the state worry about how it allocates the funds.

"Without the industry buy-in, it is not going to work," he said, adding that whatever is ultimately decided, it must be easy to use.

Parton said that the task force's attempt at creating a multistate compact was "putting together two issues that do not meet very well. Taxes are separate issues from regulation."

He added that the NAIC needs to adopt a tax allocation plan, and the task force can always come back to the issue of regulation later if necessary.

"We are now at a decision-making point," said Commissioner Donelon, who has scheduled a telephone conference call to hammer out a solution with task force members for next Tuesday.

The alternative would involve meeting in person again within the next 10 days and cobbling together a plan to be voted on by the entire body of NAIC membership before the end of the year, he said.

Special Reports /

NAIC Hears Objections to Proposed Surplus Lines Tax Collection Fix

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