U.S. Surplus Lines Bill Draws State Opposition

Anyone who thought passage of federal legislation reforming regulation of surplus lines markets would be a slam dunk had better think again, as opposition is growing in both Florida and Georgia.

Specifically, regional brokers in Georgia are concerned they may lose business to companies in larger states, while their states may lose revenue to larger jurisdictions.

At issue is a provision in both the House and Senate bills reforming surplus lines regulation that establishes the state insurance commissioner of the “principal place of business” of a company as the chief regulator and recipient of taxes on the transaction.

Meanwhile, the board of the Florida Surplus Lines Service Office has issued a policy statement opposing the bills because it feels enactment of federal legislation “will set a precedent for regulating surplus lines insurance and eliminate the opportunity for states to establish regulatory standards to reflect unique market conditions and provide the consumer protections state policymakers believe important for their constituents.”

In addition, the board said, “this federal proposal limits the state's taxing authority by limiting its ability to collect the premium receipt tax and related surplus lines policy information.”

While opposition is currently centered among members of the Florida and Georgia surplus lines associations, industry officials said they expect the National Association of Insurance Commissioners to also weigh in soon on the issue.

Steven Stephan, director of government relations for the National Association of Professional Surplus Lines Offices, based in Kansas City, Mo., said he believes some of the concerns are legitimate, although NAPSLO supports the federal regulation.

Mr. Stephan said the concern of the Georgia and Florida surplus lines brokers is that some people and businesses “will try to game” the system by having the taxes go to the state of “principal place of business” or “principal residence,” even though the property being insured might be in another state–for example, for a vacation home.

However, Mr. Stephan believes the problem can be resolved through a minor change in definition in the legislation, and therefore is unlikely to derail industry support of the legislation.

That is especially so, Mr. Stephan said, given that the primary sponsors of the legislation are Florida's two U.S. senators–Democrat Bill Nelson and Republican Mel Martinez.

However, Sean Fisher, head of the Florida Surplus Lines Services Office, said opposition to the bill is strong in his state, and he believes the state Surplus Lines Organization has also voiced opposition to the bills to members of the state legislature.

Steven Finver, president of the Florida Surplus Lines Organization in Boca Raton, was out of the country and unavailable for comment as this story went to press.

Mr. Fisher said his board supports a voluntary interstate compact approach as the preferred solution “for providing one set of rules governing all multistate placements–subject to adequate consumer protection–a uniform tax allocation formula and a single policy reporting platform or system.”

The specific concern of the Georgia Surplus Lines Association is use of the term “home state” in the definition of the primary regulator under the proposed bills–S. 929 in the Senate and H.R. 1065 as introduced last year in the House.

“This means every multistate insured will be forced to go to its home state to place its nonadmitted insurance for all states,” the Georgia Surplus Lines Association argued in comments on its Web site.

“For example, a subsidiary in Florida or Louisiana of a company headquartered in New York will have to go to New York to obtain insurance, or else the surplus lines broker will have to go to New York to place it,” the organization said.

“A New York broker is not likely to have a windstorm allocation from a company that will allow the broker to place Florida or Louisiana business, nor is the New York broker likely to understand the needs of a risk in Florida or Louisiana,” the group added.

The Georgia group said this means “the Florida or Louisiana broker often will not find an insurer that does business in New York, nor will the Florida or Louisiana broker know how to navigate the New York Insurance Department unless he or she moved down from New York.”

“The willing insurer in Florida or Louisiana may not be acceptable to the New York Insurance Department. Examples of problems that would be encountered in various states are infinite,” the group explained in its Web site comments. “Your insureds will be the losers.”

At the American Association of Managing General Agents annual conference in the Bahamas last week, AAMGA executives acknowledged they had received e-mails from representatives of Florida and Georgia questioning AAMGA's support of the federal legislation and revealing concerns about the “home state” definition.

With little time to react in preparation for the annual meeting, AAMGA's immediate past president, Scott Anderson, sent out an e-mail affirming the group's position on behalf of the board.

“Whether or not the legislation goes through, we want to facilitate a method of having a common single payment [of taxes] from the general agents,” Mr. Anderson said at a press briefing, adding that AAMGA expects at a later date to more fully address the issues raised by Florida and Georgia, which AAMGA currently believes are based on a misinterpretation of language in the bills.

AAMGA Executive Director Bernie Heinze said he's optimistic about the passage of federal surplus lines reform this year. “It makes sense for business,” he said, adding, “if there weren't a good chance, we doubt that 417 members of the U.S. Congress would have passed this last year”–referring to the unanimous approval of a predecessor bill in the House last year.

Mr. Heinze also said that members of the House Financial Services Committee had advised AAMGA that the bill would go forward in this session, although this has been delayed by an effort to pair the bill with one that has revenue cost attached to it.

The surplus lines bill is revenue enhancing as it will provide more premium taxes to the states, he said, also predicting that there will be hearings in the Senate on surplus lines reform this year.

(Additional reporting by Susanne Sclafane.)