As of July 21, per the Nonadmitted and Reinsurance Reform Act(NRRA), insurance brokers and agents will be required to remitpremium taxes only to the home state of the insured.

But with less than two months to go before NRRA becomes the lawof the land, clarity and uniformity in regulation of thenonadmitted or surplus-lines industry seems as distant as it wasbefore the landmark reform-and-modernization legislation wasenacted by Congress as part of the Dodd-Frank financial-serviceslaw.

Because only 27 states have passed laws implementing the NRRA asof now—and because the legislation they have passed implementingthe law is all over the map—the stage is being set for another WarBetween the States.

One implication of all this is that larger states could have atruly advantageous position. States like New York, California,Texas, Florida and Louisiana comprise approximately 55.4 percent ofthe nation's nonadmitted revenues, so under the present situation,smaller states would have to go to them to secure their share ofthe premium taxes.

The legislation supported by some industry groups and groups oflegislators—such as the National Conference of InsuranceLegislators and the Council of State Governments—is the SurplusLines Insurance Multistate Compliance Compact, or SLIMPACT. Thiscompact complies with the legislative intent of the NRRA byestablishing a system where states can properly disburse thepremium revenue to the other appropriate states.

Of the 27 states whose legislatures have approved NRRAcompliance legislation, six states did not include wording toauthorize a compact. Nebraska's legislation only authorizes the useof the Nonadmitted Insurance Multistate Agreement (NIMA), sevenstates authorized SLIMPACT-lite and 13 states authorized a compactin general.

Several of the states authorizing a compact have language in thebills requiring the passage of additional legislation, or requirethat the insurance department conduct an examination of benefitsand costs to the state and then present the findings before joininga compact.

The industry generally views NIMA as falling far short of thegoal of the NRRA, which is providing the insured's home state withthe authority to collect all the tax from the broker who sells theinsurance (and then leaving it up to the state to determine whetherand how to distribute parts of the tax to states where thepurchaser of the insurance also maintains facilities).

Louisiana Insurance Commissioner James J. Donelon, chair of theNAIC's Surplus Lines Implementation Task Force, acknowledges thatNIMA is not a broad regulatory compact and only addresses thecollection of taxes.

While states had several years to anticipate the enactment ofthe NRRA, the current slow pace in establishing a uniform policymeans it could take an extensive period to get a compact operationrunning.

To assist brokers on tax-payment issues, the NationalAssociation of Professional Surplus Lines Offices (NAPSLO) has beenworking with the NAIC and the states to develop model bulletins toprovide information to brokers to explain the process that will bein place as of July 21, according to NAPSLO Executive DirectorRichard Bouhan.

Bouhan notes that the SLIMPACT clearinghouse, needed to allocatepremiums to all other affected states, does not go into effectunder the law until 10 states establish the compact.

"Until that happens," he said, "there is no authority forSLIMPACT to allocate the appropriate share of taxes to the otherparticipating states."

SYSTEMICALLY IMPORTANT

In other news, federal regulators appear to be slowing downtheir decision-making as to whether a nonbank will be declaredsystemically important and therefore subject to oversight by theFederal Reserve Board as well as state regulators.

The federal regulators appear to be reacting to pressure frommembers of Congress, who are being lobbied by insurers clearlyconcerned about being corralled into the federal regulatorynet.

In comments last week at a Senate Banking Committee hearing, theregulators stated clearly that such designations will be limitedand will only take place after rules are in place detailing thedesignation process.

And a key part of such rules will be an analytic framework, theregulators said, another demand of large insurers.

Moreover, acting Comptroller John Walsh says there is "broadconsensus" among federal regulators to issue a new proposal onassessing systemic risk before issuing a final rule on what firmsare systemically significant.

That means a final decision as to which insurers will be subjectto both federal and state regulation under the new Dodd-Frank lawis still a number of months away.