State regulators are “very close” to endorsing federal legislation that will establish surplus lines carriers' home state as their primary regulator, and their backing is an important step for the bill to win passage this year, an industry lobbyist said early this month.

However, state support is limited to Title 1 of the bill, H.R. 1065, the Nonadmitted and Reinsurance Reform Act of 2007, according to Joel Wood, senior vice president and director of federal affairs for the Council of Insurance Agents and Brokers.

He made his comments at the annual Capitol Hill visit of members of the Risk and Insurance Management Society Inc.

“Reinsurance is another issue,” he said. He said the reason state regulators support the surplus lines portion of H.R. 1065 is that “they believe that only through enactment of the legislation will they have the momentum to create an interstate compact that will govern this.”

On other topics, Mr. Wood and a senior adviser to a member of the House Financial Services Committee who asked not to be identified noted bipartisan support for legislation allowing risk retention groups to offer property insurance and movement on legislation creating an optional federal charter.

“The last few months have been far more interesting than I thought they would be,” Mr. Wood said. He cited the Paulson blueprint for financial modernization released by the Treasury Department in late March and the concerns voiced about the report by state regulators.

He said a question remains as to whether support for an optional federal charter for insurers contained in the report “is the end of the OFC debate or the beginning of it.”

In Mr. Wood's view, state regulators “have gotten scared. There is motivation based on either fear or opportunity.” Specifically, he said, state regulators feel “there is going to be movement on this over the next two to three years.”

On surplus lines, Mr. Wood noted that a bill has passed the House twice virtually unanimously, and “it has a mechanism for sharing regulation and taxes that everyone agrees to.”

But Mr. Wood cautioned that even if the legislation passes, some states, such as Texas and California, “that like to go their own way, are never going to come around on a full interstate compact.”

Even if only 20 states agree to the compact, it will ensure that the only rules governing surplus lines insurance will be the rules of the home state.

And, having a hearing before the Senate Banking Committee is a critical component to getting the bill passed this year. “We have to have a hearing; getting oxygen is our No. 1 issue on this bill right now.”

By “oxygen,” Mr. Wood meant getting the issue before the Senate during the period when the Senate is dealing with housing legislation, high gasoline prices, the budget, and the fact that 2008 is a presidential election year.

Both Mr. Wood and Libby Baney, Washington counsel for the National Association of Professional Surplus Lines Offices Ltd. (NAPSLO), said the final bill will have a definition of sophisticated buyer that is acceptable to RIMS.

Specifically, Ms. Baney said, “the definition of sophisticated investor RIMS members want will be in the bill.”

“That's guaranteed,” Mr. Wood said. He explained that such a definition is important because RIMS members are the consumers of surplus lines insurance. “Who is the consumer? You are. The Consumer Federation of America doesn't represent the market for this product. You do,” he said.

“If the Senate holds a hearing on the surplus lines bill, I will urge that a RIMS representative testify,” he said.

On legislation concerning risk retention groups, Mr. Wood said the “catapult” for passage of this measure is provisions solidifying the corporate governance standards for risk retention groups.

The legislative adviser said he was “bullish” on the legislation, saying that the broad bipartisan support for the legislation, as well as support from consumers and some potentially affected industries, leaves him hopeful the bill can at least pass the House in this Congress.

He also noted, however, that concerns had been voiced over whether the definition of “property insurance” in the measure is too narrow or too broad.

He said some people have argued that the definition is too narrow, but others have argued that the current definition of the bill “pulls in personal lines.”

Currently risk retention groups are limited to providing liability insurance.

He also said some critics of the bill argue that it would require risk retention groups to participate in insurance guaranty funds.

“That is a concern,” he said. “We don't want risk retention groups pulled into state guaranty funds.”

Both issues, he said, will be addressed in legislative language before the bill is presented to the House Financial Services Committee.

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Surplus Lines Bill Said To Get Key Backing

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