NU Online News Service, Nov. 8, 10:26 a.m.EST

NATIONAL HARBOR, Md.—The outline of a compromise over theuniform mechanism that will be used to implement the surplus linesand reinsurance modernization law, emerged at the NationalAssociation of Insurance Commissioner's fall meeting here.

The insurance industry and regulators seem to be nearing anagreement on the use of a compromise surplus lines premium taxallocation formula developed by Kentucky — the concept supported by industry.

They are wrestling with creating the most efficient way toimplement the Nonadmitted and Reinsurance Reform Act (NRRA), a partof the 2010 Dodd-Frank Act. The law became effective July 21.

The law states the insured's home state will be the only statewith jurisdiction over multistate surplus lines transactions, andthe only state that can require a tax be paid by the broker.

The devil has been the inability to get the states to coalescearound creation of a single system to establish a simple anduniform method that would disburse premiums owed to states wherethe actual risk exists.

In further pursuit of the compromise, Brady Kelley, the newexecutive director of the National Association of ProfessionalSurplus Lines Offices, will travel to Alaska on Nov. 8 to talk withLinda Hall, the state's insurance commissioner.

"As part of the industry's efforts in the implementation ofuniform tax allocation approaches, which includes adoption of theKentucky compromise, NAPSLO and Council of Insurance Agent andBroker representatives will be meeting with Alaska InsuranceDirector Linda Hall this week," Kelley said in a statement.

 He said Hall has been deeply involved in the surpluslines tax allocation issue.

Even if state officials and the industry agreed on the groundrules for a uniform interstate compact, it would not deal with thefact that several large states (California and Texas, for example)have either passed legislation or adopted regulations that do notpermit the sharing of surplus lines taxes they collect as the stateof domicile with the state where the risk is located, industryofficials acknowledged.

Meanwhile, states that have adopted the Nonadmitted InsuranceMultistate Agreement (NIMA) have postponed implementation untilJan. 1 because the clearinghouse that would collect and distributepremiums on their behalf is not yet functional. 

The NIMA member states decided in a closed-door meeting Nov. 4to take steps to incorporate NIMA as a means of limiting theliability of states involved in the system, which is led byregulators in Florida and Mississippi.

NIMA is the compact NAIC officials are supporting and addressesonly the collection and allocation of surplus lines taxes. TheNational Conference of Insurance Legislators (NCOIL) supports theSurplus Lines Multistate Compliance Compact (SLIMPACT), which woulddo more to bring uniformity to surplus lines regulation in general,according to NAPSLO. 

Industry officials are concerned that the allocation formulaused by NIMA states does little to simplify the allocationprocess.

They support the Kentucky allocation system, which allowsbrokers to continue to operate under a basically unchangedallocation system.

David Kodama, senior director of research and policy analysisfor the Property Casualty Insurers Association of America, said thecompromise, if it is approved, would replace NIMA's forcedrequirement to allocate all multistate lines of coverage—even incases where the existing rating and underwriting process does notprovide for such allocation (for example, for casualtypremiums).

Kodama said PCI sees the compromise as a way to get NIMA andSLIMPACT on the same page regarding premium-tax allocation, and a"step towards a more comprehensive and compliant response to theregulatory modernization effort underlying the NRRA."

Nicole Allen, senior vice president of strategic resources, saidThe Council is encouraged by the NIMA states' discussion of theKentucky compromise, and would strongly urge them to find commonground with the SLIMPACT states on an allocation formula.

"While we are not advocating that states join either agreement,we do want to see that the intent of the NRRA—a streamlinedregulatory process for surplus lines—is realized," Allen said in astatement.

She explained that the Kentucky compromise would requireallocation of premium taxes for general liability and medicalmalpractice policies when they are rated on a state- orlocation-specific basis. 

"We support this allocation formula because we believe that isstrikes a fair balance on the allocation of taxes for thesecoverages, as it uses information that is collected as a part ofthe underwriting process and does not impose additional datacollection responsibilities upon surplus lines brokers," Allencontinued.