Why NAPSLO backs regulatory reform for surplus lines

Earlier this summer, the U.S. House of Representatives unanimously approved the Non-Admitted and Reinsurance Reform Act (H.R. 1065). This legislation harmonizes the complex and inconsistent tax and regulatory compliance rules that surplus-lines brokers face in placing multistate risks. A companion bill, S. 929, has been introduced in the Senate. If enacted, this legislation would significantly increase the ease of purchasing surplus-lines insurance for all parties involved.
NAPSLO supports H.R. 1065 because it believes the bill would simplify the remittance of surplus-lines premium taxes to the states, establish a rule of one-state compliance on multistate risks, streamline access to the surplus-lines market for large commercial purchasers, and create uniform surplus-lines insurer eligibility standards for all states. I'll address these points one at a time.
Simplify the payment of surplus-lines premium taxes: The Non-Admitted and Reinsurance Reform Act would require all premium taxes due the states in a surplus-lines transaction to be paid to one state-the insured's "home state." The bill defines home state as the principal place of business for a commercial insured, or the residence of an individual insured. Most federal circuit courts look at the "total activity" of an insured to determine the principal place of business. Neither the insured nor the broker, for example, has the discretion to simply select a home state based on its tax rate. Also, given the courts' emphasis on the total activity of a corporation, there appears to be no basis for the speculation that the state of incorporation would be the principal place of business under H.R. 1065, as some have expressed concern.
It would be up to the states to determine how and on what basis the premium taxes paid on these transactions would be allocated and distributed. But for multistate risks, surplus-lines brokers no longer would have to pay taxes to each state. This would save brokers time and money, and provide certainty on tax payments.
One objective of H.R. 1065 and S. 929 is the creation of a uniform nationwide system for the reporting, payment, collection and allocation of surplus-lines taxes among the states. The states could establish a system through an interstate compact or via other procedures. However, if the states fail to establish a procedure, the surplus-lines tax would be paid to the insured's home state. In either case, the legislation would eliminate the uncertainty and confusion that have plagued surplus-lines brokers for decades regarding how premium taxes are allocated, how they are to be reported to states, and when they are to be paid.
Establish one-state compliance on multistate risks: H.R. 1065/S. 929 would eliminate the current confusion over which state or states have jurisdiction to regulate a multistate surplus-lines transaction by establishing a one-state compliance obligation. Since the enactment of Gramm-Leach-Bliley in 1999, non-resident surplus-lines licenses have become available in virtually every state. The result has been confusion over which state laws apply in a multistate surplus-lines transaction. For instance, if a policy covers risks in five states, is the surplus-lines broker required to:
o Be licensed in each state?
o Conduct five separate diligent searches under each state's laws?
o Validate that the surplus-lines insurer is eligible in each state?
o Provide five different policyholder notices or legends?
o Determine the regulatory requirements and which states have jurisdiction if the insurance is a casualty or liability policy that covers operations in each of the five states?
o Resolve the confusing question regarding in which states the risk exposures reside for a D&O, E&O or a products liability/completed operations policy?
These are not theoretical concerns. Surplus-lines brokers and retailers face these issues everyday, while the states' views and requirements have been inconsistent.
H.R. 1065 would eliminate this confusion and multiple compliance obligations by directing that the placement of surplus-lines insurance "shall be subject to the statutory and regulatory requirements solely of the insured's home State." It further states that only the insured's home state may require a surplus-lines broker to be licensed to conduct a surplus-lines transaction with the insured and preempts any other state laws that might apply to the placement, transaction or policy.
Streamline access to the surplus-lines market for large commercial purchasers: H.R. 1065 would allow surplus-lines brokers to place insurance on behalf of large, sophisticated commercial purchasers (as defined in the act) without having to satisfy a diligent-search requirement.
These purchasers, known as "exempt commercial purchasers," must employ a "qualified risk manager" who has the education and training to properly represent the insured in this type of transaction. The insured (a business entity or municipality) must also have paid in excess of $100,000 in property-casualty insurance premiums on a nationwide basis in the previous year. In addition, the insured must meet at least one of the following criteria:
o $20 million in net worth.
o $50 million in annual revenue.
o 500 full-time employees (or the purchaser can be an affiliate of a group with at least 1,000 employees).
If the insured is a municipality, it must have more than 50,000 residents. If the insurance purchaser is a nonprofit organization or public entity, it must have an annual budget of at least $30 million.
While the number of entities qualifying for this exemption may be limited, the surplus-lines broker working on behalf of such purchasers can procure the insurance without the impediment of a "diligent search."
Create uniform surplus-lines insurer eligibility standards applicable for all states: H.R. 1065 would create national eligibility standards for surplus-lines carriers by prohibiting states from imposing any eligibility requirements other than the criteria in the NAIC Non-Admitted Insurance Model Act for surplus-lines insurers domiciled in the U.S. Under H.R. 1065, states cannot prevent surplus-lines brokers from placing business with alien non-admitted insurers listed on the NAIC's Quarterly Listing of Alien Non-Admitted Insurers.
By using the NAIC Model Act requirements, H.R. 1065/S. 929 would establish either a state's minimum capitalization requirement or $15 million (whichever is greater) as the capitalization standard for domestic surplus-lines insurer eligibility. The NAIC Model Act also permits an individual state insurance commissioner to allow a company with a lesser amount of capitalization to be eligible under a specific set of circumstances, but in no case may the insurer have less than $4.5 million in capitalization. The company must also be authorized by its state of domicile to write the type of insurance that it seeks to write on a surplus-lines basis in other jurisdictions. As a result, alien insurers listed on the NAIC Quarterly Listing of surplus-lines insurers would, in effect, be eligible surplus-lines insurers in every state. The NAIC Quarterly Listing of Alien Insurers has had an impeccable record of retaining only solid and solvent insurers throughout its more than 40 years of existence.
H.R. 1065 would eliminate the current confusion regarding surplus-lines eligibility standards and create specific benchmarks for all states. It would also provide certainty to surplus-lines insurers regarding their eligibility status. H.R. 1065 would also reduce, if not eliminate, the number of occasions when a company is eligible in one state but not in another.
Solvency evaluation and financial examination for U.S.-domiciled carriers under H.R. 1065 would be conducted by the insurer's domiciliary state, as it is now–the same way it is handled for admitted insurers in the current state-based regulatory system. Nothing in H.R. 1065 prevents state surplus-lines stamping offices or insurance departments from conducting their own financial analysis of surplus-lines insurers.
NAPSLO strongly urges the enactment of this legislation.