NU Online News Service, Sept. 12, 11:37 a.m. EDT

Regardless of which premium tax-sharing agreement is used to implement the federal surplus-lines reform law, it may not be around in the long run, says Richard Bouhan, executive director of the National Association of Professional Surplus Lines Offices (NAPSLO).

“I have my concerns,” he says. “A finite amount of money paid to participating states is accumulated and then redistributed. Some states will get more than they put in; some will get less.

“With that kind of system you get winners and losers,” Bouhan adds. “Some states may say, 'We're out of here.' Then you have a different set of winners and losers because the distribution changes.”

The Nonadmitted and Reinsurance Reform Act (NRRA), part of the Dodd-Frank financial-reform law, is meant to simplify the regulation of surplus lines by giving regulation, taxation and licensing ability to the home state of the insured. It also sets national standards for eligibility requirements and defines exempt purchasers.

(Some good information on all states' NRRA implementation can be found here.)

Beside these mandatory provisions, the NRRA allows states—voluntarily—to enter into tax-sharing agreements.

“Unfortunately, the effort and focus has been on this issue,” Bouhan says.

A dozen states have signed on with the National Association of Insurance Commissioner's (NAIC) Nonadmitted Insurance Multistate Agreement (NIMA), and nine have elected to join the National Conference of Insurance Legislators' (NCOIL) Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT-Lite).

NAPSLO supports SLIMPACT. The NCOIL option is “efficient and moves in the direction to create uniformity for a surplus-lines tax system,” says Bouhan.

Costs will be a factor in any tax-sharing pact. Bouhan says investments in computer systems to collect and process requested information from brokers will be borne by insureds. Cost-benefit analyses will ensue, and brokers will now be asked to give details about where risks are located in order to allocate shares to various states.

“It'll be time-consuming and costly,” he says. “I do not want our NAPSLO members saddled with these costs only to watch it collapse.”

Talks between NIMA and SLIMPACT representatives were delayed because Hurricane Irene caused the cancellation of the most recent NAIC meeting.

Bouhan, who is retiring from NAPSLO after 30 years, will be sticking around until June 2012 to deal with this issue and others that threaten to affect the association's rate and form freedoms.

The ever-present objective to protect these freedoms can become somewhat controversial at times. For example, NAPSLO was not an outspoken protester of the Terrorism Risk Insurance Act (TRIA), but it did have objections.

“The federal law did not distinguish admitted from nonadmitted insurers,” Bouhan says. The government was looking to mandate insurance coverage via TRIA, regulating forms.

NAPSLO lost its argument. But a lesson was learned.

“It showed us that acts of the federal government can quickly impinge upon our freedoms of rate and form,” he says. NAPSLO went out and did something it never had. It hired Washington lobbyists.

Though Bouhan says Washington representation is something NAPSLO's “founding fathers would have never thought we'd be doing,” it has worked. NAPSLO was at the table during initial discussions about federal legislation on surplus-lines standards more than five years ago.

Many of the principles the association outlined then—freedom of rate and form regulation, uniform licensing, and uniform premium-tax payments—wound up in the NRRA.

(Brady R. Kelley, most recently the chief financial officer for NAIC, will join NAPSLO on Sept. 12 as its new executive director.)