House Eyes Federal Law To Regulate Surplus Lines

The legislation "is a very targeted remedy to an identified problem," said Rep. Richard Baker, R-La., chairman of the Capital Markets Subcommittee, whose staff drafted the bill.

Rep. Brown-Waite explained that brokers and carriers dealing in surplus lines over multiple states face a "myriad" of state tax, licensing and other requirements, adding that "often times, these regulations will conflict with each other."

H.R. 5637 seeks to remedy the problem by establishing a "home state" system, in which the state of domicile of the insured would serve as the authority for a multistate surplus lines insurance transaction. Additionally, premium taxes would be paid entirely to that state, which would then be charged with distributing the funds to other states.

Scott Sinder, general counsel for the Council of Insurance Agents and Brokers, said his group "has been seeking this type of reform for decades," adding that the myriad state rules and regulations governing nonadmitted insurance places a heavy burden on a broker seeking to obtain coverage for a multistate risk.

Brokers and buyers seeking to obtain surplus lines coverage are faced with a number of burdensome requirements, including how to pay premium taxes, witnesses noted.

Janice Ochenkowski, vice president of the Risk and Insurance Management Society, as well as senior vice president of Chicago-based property manager Jones Lang LaSalle, said the transactions occur in one of three ways. In some states, the calculation and payment of taxes is handled by the broker or agent, while in others the buyer is responsible.

She added that in still other states, however, the broker is paid for premium taxes and calculates how much and where each payment should be made. The broker then is required to send the money back to the buyer, who then sends it to the various regulators.

Additionally, Rep. Moore said some states have little or no laws regarding how premium taxes should be allotted in multistate transactions, while one–Kentucky–allows its various counties and municipalities to handle the issue themselves.

The National Association of Insurance Commissioners, he said, has tried to resolve the issue, but has thus far been largely unsuccessful. While many state regulations are built on the same basic principles, according to the Mr. Sinder, the details of each state's requirements force brokers and carriers to undertake duplicate and needless administrative procedures and disclosures.

"It's not satisfying the substantive requirement that's difficult–it's satisfying the procedural [requirements]," he said.

Richard Bouhan, executive director and general counsel for the National Association of Professional Surplus Lines Offices, said he has been working with the NAIC on surplus lines tax issues for "a decade and a half" but has met with little success in trying to enact a multistate solution.

NAPSLO proposed an interstate compact to deal with premium tax allocation issues as recently as the last NAIC quarterly meeting, he said, adding that "the idea was sort of panned" by the NAIC Surplus Lines Task Force. "We've just not been successful," he said, although he noted it is understandably difficult to reach a consensus on issues among over 50 jurisdictions.

In a note to members of the CIAB obtained by National Underwriter, Ken Crerar, CIAB president, said introduction of this bill is "very significant," adding that "we believe there is a very good chance the House will pass this legislation this year due to the strong support of Rep. Baker." He said the legislation would "correct intractable flaws in the state-by-state regulation of commercial insurance."

Charles E. Symington Jr., senior vice president for government affairs and federal relations at the Independent Insurance Agents and Brokers of America, said bipartisan sponsorship means the bill is doable, "unlike controversial proposals such as the [Senate's] optional federal charter [bill]."

State regulations are in conflict and regulators for decades have been unable to reconcile their differences, he noted. "With respect to multistate commercial insurance placements, the current system benefits no one–least of all the policyholders who ultimately pick up the tab," he said.

Rep. Baker said he is optimistic that a bill to streamline regulation and pricing for certain commercial insurance products could move this year. Industry lobbyists and congressional staffers later said privately that the bill is likely to pass the House, but Senate action was more problematical.

As one of the authors of the State Modernization and Regulatory Transparency Act (better known as SMART) along with Financial Services Committee Chairman Mike Oxley, R-Ohio, Rep. Baker asked the witnesses if H.R. 5637 would serve as an effective "test case" for a new incremental approach to the more broad-based SMART initiative to establish federal standards for state regulators to follow, which has run aground due to strong opposition from the states.

Tom Minkler, chairman of the Government Affairs Committee for the IIABA, agreed that the bill could serve the purpose of opening the door for broader federal standards legislation. "This is actually the beginning of SMART," he said.

CIAB's Mr. Sinder noted that while the general approach taken by H.R. 5637 may be similar to SMART, it should be "even easier" for regulators to accept because they are not being given orders by the federal government. "You don't need any federal standards here," he said, alluding to the "home state' aspect of the bill.

No member of the NAIC was at the hearing to offer testimony. The NAIC–whose members have voiced concerns over federal efforts to regulate insurance, which under the McCarran-Ferguson Act has been left to the states–had a measured reaction to the bill. A representative said in an e-mail that the group "is presently analyzing the provisions" of the legislation and would "monitor" last week's congressional hearing. "As always, the NAIC will offer any technical guidance as appropriate."

Still, NAIC's absence was a concern for Rep. Paul Kanjorski, D-Pa. "Before moving, we need to hear from the NAIC," he said, noting that "good public policy" should include input from all interested parties, and that the NAIC is "certainly interested" in surplus lines issues. "Even if we ultimately disagree, we must engage them in constructive dialogue," he said.

While state regulators might take some solace in those comments, others made by Rep. Kanjorski are likely less heartwarming, including his opinion that a proposed optional federal charter "merits further attention" from Congress.

Rep. Edward Royce, R-Calif., also voiced support for an optional federal charter, citing "widespread agreement that our nation's regulatory system impedes the ability of insurance consumers to get coverage at the lowest possible cost." The need for a bill such as H.R. 5637, he said, is "prima fascia evidence" that Congress needs to play a role in insurance regulatory matters.

Rep. Sue Kelly, R-N.Y., took the opportunity to open another issue for the committee–calling for a reexamination of the NARAB proposal, first introduced in the 1999 GLB bill to press states into adopting reciprocity on agent and broker licensing.

Reciprocity was supposed to eliminate the burdens placed by states on nonresident agents. "NARAB has reduced but not eliminated these burdens," she said, noting that some larger states have not gone along with the NAIC reciprocity model, while others have started to implement their own versions that reduce its effectiveness.

"I believe the time has come for this committee to reexamine NARAB," she said.