Passage Of Surplus Lines/Re Reform Bill Hailed, But Some Want Broader Measure

However, officials of the Reinsurance Association of America and the Financial Services Roundtable said the reforms approved by the House for surplus lines and reinsurance should be a part of more comprehensive insurance reform legislation.

"The support for this legislation is to be commended," said RAA President Frank Nutter. "The Act is a notable acknowledgement that reinsurance regulation needs to be streamlined and modernized." But at the same time, he added, "the RAA continues to support federal legislation that ensures a single regulator for all purposes for reinsurers and for uniformity of regulation for reinsurance at all levels of government."

Steve Bartlett, president of the Financial Services Roundtable, which represents large multinational insurers, said in a letter to all members that although "this measure is meaningful," its passage will mean that the U.S. insurance industry "will receive only a narrow and incremental improvement to the efficiency of regulation."

Instead, Mr. Bartlett said, Congress should "build on this progress toward uniformity, by moving quickly to pass comprehensive insurance reform for all lines of insurance as part of financial regulatory reform."

The legislation would subject surplus lines transactions to a single set of regulations–those of an insured's home state or principal place of business–regardless of the location of the risk.

The bill would also establish a clear requirement that all surplus lines premium taxes be paid to each insured's home state. An interstate compact has been drafted that would facilitate the transfer of the premium taxes to other states involved, as appropriate.

According to insurance industry officials, the practical effect of the legislation would be to provide incentives to states to create an interstate compact that would govern multistate surplus lines placements.

The bill would also require all surplus lines carriers to meet certain financial, capital and other criteria.

The legislation would allow brokers representing large policyholders to go directly to the nonadmitted market to buy coverage. The Risk and Insurance Management Society, which represents large buyers, won a provision broadening the definition of a "qualified risk manager," which is required to gain expedited access to the nonadmitted market.

The National Association of Insurance Commissioners did not formally support the legislation, according to insurance industry lobbyists, because the state regulators object to the provisions dealing with reinsurance.

Under those provisions, primary responsibility for regulation of a reinsurance transaction is assigned to the insured's home state, and application of other state laws is prohibited. As a result, it bars state insurance regulators from interfering in reinsurance agreements of ceding insurers domiciled in other states.

According to several industry officials, the NAIC opposes the reinsurance provisions because it has drafted its own reinsurance regulatory proposals and is seeking support for them over those included in the measure the House passed.

The reason is that the House legislation takes a home-state regulatory approach, while under the NAIC proposal the NAIC would approve states to regulate reinsurance transactions.

In addition, under the House bill current state requirements that foreign reinsurers post 100 percent collateral for transactions would remain the same. Under the NAIC measure, the collateral requirement would be reduced for some reinsurers judged more creditworthy. Florida has already reduced the 100 percent requirement for ceding reinsurers highly ranked by credit rating agencies.

Several property and casualty insurance industry trade groups voiced strong support for the legislation and urged the Senate to approve it. These include the American Association of Managing General Agents, Council of Insurance Agents and Brokers, Independent Agents and Brokers of America, National Association of Mutual Insurance Companies, National Association of Professional Surplus Lines Offices, and the Property Casualty Insurers Association of America. RIMS also backed the bill.

David A. Sampson, PCI's president and chief executive officer, called the legislation "an important step toward reforming and streamlining our current insurance regulatory system."

Marliss McManus, NAMIC's senior director of federal affairs, said the bill "will help to streamline the surplus lines and reinsurance markets while respecting the regulatory authority of the domiciliary state. If enacted, it would help provide much-needed clarity for surplus lines insurers, their policyholders and the economy."

"Adopting this reform legislation is a practical solution to longtime marketplace problems," said CIAB President Ken A. Crerar. "The result will be lower costs to insurance consumers and greater access to affordable products."

Charles E. Symington Jr., IIABA's senior vice president for government affairs, called the bill "an excellent example of a pragmatic approach that helps bring targeted reform to the state insurance regulatory system." He added that "we look forward to working with the Senate for passage this Congress."

NAPSLO President John Wood said his surplus lines organization is "very pleased to see the strong support the House members gave the bill, and we hope the Senate will follow suit. This is an important piece of regulatory reform that will help both consumers and the industry."

AAMGA Executive Director Bernard Heinze noted that his group has been working on surplus lines modernization and reform for many years alongside other industry trade associations. "We appreciate the vote of confidence of the House of Representatives in the surplus lines marketplace today by passing H.R. 2571," he said.

R.C. Chaffin, vice president of the AAMGA and liaison to its Governmental Affairs Committee, said the industry's focus "must now shift to the Senate by continuing our efforts in working with members of the Senate Banking Committee and others to ensure passage of S. 1363 as a stand-alone bill, or part of an overall insurance/financial services reform package during the remainder of this legislative session."

Deborah M. Luthi, a member of RIMS board of directors and director of enterprise risk management services at Matheson, said "RIMS views the surplus lines industry as central to the nation's economic health, and H.R. 2571 will serve to bolster the industry by not only making this insurance more available but more cost effective as well."

She added that "it is imperative the Senate move its version either separately or as part of a larger effort to reform the financial regulatory structure this year."