Brokers Still Split On E&S Reform Bill

A crowded Senate calendar could delay passage of a federal surplus lines reform bill this year, which apparently would be just fine with some brokers, but a big loss in the eyes of others, a debate here revealed.

Surplus lines brokers generally support the intent of the Nonadmitted and Reinsurance Act of 2007, which is to streamline regulation of excess and surplus lines transactions. But Ronald Gabor of Miami-based Gabor Insurance Services said he believes the bill is flawed.

“H.R. 1065 to me looks like a toy that was made in China. It's pretty in the package, but when you unwrap it, a part falls off that's going to kill a kid,” he said, going on to voice concerns of small regional brokers and state surplus lines offices during a panel discussion here at the annual meeting of the National Association of Professional Surplus Lines Offices.

Among other provisions, the bill calls for the home state of an insured to have sole authority over payment and allocation of premium taxes, and to be the sole regulator of E&S placements. This means, for example, that only the home state may require a license on an E&S placement.

A version of H.R. 1065 unanimously passed the House earlier this year, but with the Senate turning its attention to issues like extension of the Terrorism Risk Insurance Act, some experts believe action on the Senate version–S. 929–is unlikely this year.

Mr. Gabor, interpreting the home-state regulator provision, said there is no specific reference to “multistate policy” placements in H.R. 1065. He said an E&S filing on a single property in a single coastal state like Louisiana must be made in the insured's home state, not where the property resides.

If the home state is Colorado, a Colorado broker has to do it, but he doesn't have the aggregate, Mr. Gabor said, noting that insurers allocate aggregate limits to local agents. The Louisiana broker who does have the aggregate, but not a Colorado license, can't write it under H.R. 1065, he said.

Steven DeCarlo, president of AmWINS Brokerage, likes the implied intent of one part of the bill–to streamline tax payments on multistate risks. “You look at all the work, the effort, and you say, 'I just want to do it legally,'” he noted. That's what H.R. 1065 is attempting to do, he said. “Is it perfect? Of course not,” but at the end of the day, “I just want to do the right thing.”

But Mr. Gabor said “there's no requirement that the states share taxes, and the tax is based on the home state's tax rate,” citing huge state-by-state disparities in tax rates and expressing concerns previously aired by the Florida Surplus Lines Service Office and the Georgia Surplus Lines Association.

He believes tax distribution through a central clearinghouse would eliminate such problems, but larger brokers said they don't want to wait for perfect solutions.

Neal Abernathy, president and chief operating officer of Swett & Crawford in Atlanta, noted laws in some states that say “you've got to pay us all the taxes.” On multistate risks, “we're going to break one of those laws,” he said. “I'm not disagreeing with you, but we've got to do something,” he told Mr. Gabor.

Marshall Kath, CEO of Dallas-based Colemont Brokerage, said Florida objections are unfounded because of the state's large economy. Describing a hypothetical scenario where a Florida risk manager tells his general counsel the company should move to North Dakota to avoid paying $1 million in Florida surplus lines taxes, he said, “I'm going to hypothesize that's going to be a short conversation.”

“That's the disconnect for me,” he said. “In fact, if I were Florida, and I had that large an economy and that many people, I think I'd probably win economically on the home-state [definition]. If it were me, I would be quiet right now, because I think I'm going to get a windfall” because no one is changing domiciles over this.

Meanwhile, the idea of devising an interstate compact and clearinghouse to facilitate tax allocation is being pursued by a group of 60 interested parties through a separate effort aimed at regulators. The group, which includes NAPSLO, drafted a document outlining a compact for consideration by the National Association of Insurance Commissioners.

A few days before the NAPSLO meeting, the parties agreed to support the document known as SLIMPACT–an acronym for “The Surplus Lines Insurance Multistate Compliance Compact.” But some are positioning this as an alternative to H.R. 1065, rather than a companion effort.

NAPSLO believes the clout of the federal bill is probably needed to encourage states to join a compact, according to Steven Stephan, NAPSLO's director of government relations. “Theoretically, the compact could be an alternative [to H.R. 1065], but as a practical matter, it's extremely unlikely 50 states will act” without it, he said, noting that NAPSLO has unsuccessfully pushed the compact idea for decades.

Other compact advocates, including Dan Maher, executive director of the Excess Lines Association of New York, oppose H.R. 1065–in particular a provision to create uniform eligibility standards for E&S insurers. That will handcuff states' abilities to raise red flags about financial strength and could lead to insolvencies, he said.

Mr. Stephan disagrees. He said that under H.R. 1065, a U.S. company is subject to financial exams by its state of domicile, and the NAIC is the primary regulator for non-U.S. companies under a provision requiring alien insurers to be on the approved list of the NAIC's International Insurers Department.

“The reality is that the rating agencies are the de facto regulators anyway,” he said, suggesting another tier of financial analysis.

In addition, Mr. Stephan believes ELANY could continue to provide financial analysis to brokers as it does today, and that brokers are still likely pay attention to that, just as they do to A.M. Best ratings.

“HR 1065 is aimed at uniform insurer eligibility, but we think that's different than the state telling a broker, 'you can't use a company,'” he said, noting that any state department could still do that, acting on a financial report from a stamping office.

(Additional reporting by Arthur D. Postal.)