NU Online News Service, Nov. 16, 10:55 a.m.EST

The states have “botched implementation” of the surplus-linesprovisions of the Dodd-Frank financial services reform law, aninsurance broker tells Congress today.

The broker, Steven Monroe, chief compliance officer, U.S. andCanada, for Marsh, Inc., says the issue demonstrates that thestates will not modernize insurance regulation “without federalpressure, and, even then, they will not go easily.”

Monroe also voices concern that state implementation of thesurplus-lines law raises constitutional issues, one of which wasthe Constitutional provision reserving foreign affairs to thefederal government.

Specifically, he mentions state efforts to subject premiums paidon foreign risks to U.S. taxes. Monroe says collection of suchtaxes has the potential to expose insurance agents and brokers toprofessional-liability claims from insureds who—after being told bytheir agent or broker to pay 100 percent of the premium tax to astate—are informed by a non-U.S. jurisdiction that such paymentsare insufficient to satisfy tax liabilities to that non-U.S.jurisdiction.

Monroe, testifying on behalf of the Council of Insurance Agentsand Brokers, makes his comments before the Housing and CommunityOpportunity Subcommittee of the House Financial ServicesCommittee.

With his comments focusing on implementation of the “Nonadmittedand Reinsurance Reform Act,” Monroe says that although “we arehopeful that the NRRA's non-tax provisions will be implemented asCongress intended, we are very concerned by the implementation ofthe tax provisions of the law.”

He explains, “Despite the clear intent of the NRRA, the stateshave not yet adopted nationwide uniform requirements, forms, andprocedures that provide for the reporting, payment, collection, andallocation of premium taxes for nonadmitted insurance.”

He points to the lack of a single allocation formula, asinterests still work to find a compromise between the NonadmittedInsurance Multi-State Agreement (NIMA) and the Surplus LinesInsurance Multi-State Compliance Compact (SLIMPACT).

Monroe says “a number of states” are considering—and one hasadopted—policies that will tax 100 percent of the premium on asurplus lines transaction, including premium covering risks locatedoutside the U.S.

Monroe says he does not believe that this was Congress' intentwhen enacting the NRRA. “The language of the statute providesnot only that the insured's home state is the only state that mayregulate or impose taxes on a nonadmitted insurance transaction,but also that the states may form a compact to share taxes amongthemselves if they so wish,” Monroe says.

“This evidences Congress' intent that premiums attributable torisks in a foreign jurisdiction were not considered to fall withinthe ambit of the NRRA,” Monroe adds.

He notes that imposing tax on foreign risks would leave brokersand insureds in the same position as before NRRA's enactment,except that instead of potential double taxation among the statesthey would face double taxation by the state and foreignjurisdictions.