IF ANYONE would have guessed a year ago what the major insurance topic of 2005 would be, he or she probably would have assumed that it would be the congressional debate over federal versus state regulation of insurance. New York Attorney General Elliott Spitzer's announcements last October of inves- tigations into alleged fraud, “bid rigging” and other illegal practices in the insurance industry, however, may have trumped the federal/state regulatory discussions. Nonetheless, there is still a good chance Congress will move forward on the insurance regulation issue, and that could have major implications for all segments of the industry.
Changes in the market and a movement toward a global economy have encouraged some people to consider ways to make the insurance industry work more efficiently. One idea is to make the insurance industry more like the banking industry by allowing insurers to choose to be chartered and regulated by either the federal or state government.
NAPSLO has always believed that insurance is best regulated at the state level, however. If changes are to be made, we would prefer to have national standards that would be implemented by the states, rather than federal regulation.
Certainly, there is room for improvement. Currently, state surplus-lines tax laws are a labyrinth of conflicting and confusing rules and regulations. The system is so complex, and compliance is so difficult, that often it is impossible for a surplus-lines broker to fulfill its tax allocation and remittance obligations. This is particularly true for multistate risks.
Surplus-lines brokers and insurers face three difficulties:
- Allocation and payment of state surplus-lines premium taxes.
- Costly and multiple compliance requirements on multistate risks.
- A lack of understanding on the part of state insurance departments of the role and purpose of the surplus-lines market and its benefit to consumers.
Since the advent of nonresident surplus-lines licenses in virtually all states over the past five years, more and more multistate surplus-lines risks are subject to multiple state compliance. Currently 42 states offer reciprocal licenses. However, brokers continue to face a number of barriers in their attempts to procure the licenses, and the system is not efficiently reciprocal as intended.
In many ways, current difficulties can be traced back to the original surplus-lines laws. The first law was enacted in 1890 in New York and served as the model for the others. However, these laws did not contemplate that surplus-lines risks would cross state lines. Nor did they anticipate the wholesale insurance distribution system, which is a major mechanism through which surplus-lines products are distributed today. These surplus-lines laws also were enacted before the creation of state surplus-lines stamping offices, which now process and oversee nearly 70% of surplus-lines premiums, and also before nonresident surplus-lines broker licenses became available in almost every state. To make insurance procuring more efficient, state surplus-lines laws, as well as the National Association of Insurance Commissioners' model law, must be modernized to reflect the realities of today's insurance world.
One way these issues could be addressed would be through the establishment of national standards for state insurance regulation. This approach is currently under discussion in Congress as part of the proposed State Modernization and Regulatory Transparency (SMART) Act. NAPSLO hopes to see national standards established in the SMART Act for use in a state-based regulatory system. We at NAPSLO have four major points we want included in such legislation:
While the surplus-lines market is a small part of the overall insurance industry, its premiums have almost tripled in the past four years to more than $35 billion. That means a large number of businesses and individuals, who otherwise might have obtained insurance only with great difficulty or even might not have gotten it at all, were able to secure it from the surplus-lines market.
During the recent hard market, the surplus-lines market's share of total written premiums rose to more than 13%, which was quite a jump from its 1.6% market share when NAPSLO was formed in 1974. In addition, based on the information provided by the annual A.M. Best Review of the Excess & Surplus Lines Industry reports, the market has demonstrated that it is strong and solvent.
While the surplus-lines market has grown considerably in the past few years (doubling its share of commercial-lines business over the past 10 years, according to A.M. Best), it is still a small player in the insurance industry and does not expect to be the focal point of any regulatory discussions. Instead our segment must pick the issues on which we want to be heard and partner with other industry groups to increase our effectiveness.
To deal with a world in which, increasingly, proposed legislation could affect the surplus-lines market, NAPSLO signed an agreement in May with B&D Sagamore to provide the association with representation and lobbying in Washington, D.C., in both Congress and executive branch agencies. Maria L. Berthoud, B&D Sagamore's vice president, will represent NAPSLO, and her first priority will be representing us in the debate over the SMART Act.
We also want to be heard in the debate over contingency fees. Following a settlement reached by Marsh and McLennan Companies Inc. with New York Attorney General Spitzer and Howard Mills, the state's acting insurance superintendent, NAPSLO outlined the association's position on contingent compensation arrangements within the wholesale community. We believe that in a wholesale insurance transaction, the wholesaler simply responds to a retail producer's request to find and present a coverage offer acceptable to the producer's customer. The customer's decision to buy the offered coverage from the producer is not related to, and is independent of, any contingency arrangement the wholesaler may have with a carrier. Simply stated, the wholesaler is not party to the insurance-buying decision. That matter is solely between the retail producer and the insured. We hope legislators take this into account in the expected discussions at the state level on contingency-fee legislation. In discussions concerning both the SMART Act and contingency fees, care must be taken to ensure no unintended consequences result from new legislation.
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