Conflict With NAIC Over Dodd-Frank Surplus Lines Provisions Heating Up

The NAIC proposal, Mr. Wood said, "is worse than the states doing nothing."

In an interview with NU earlier this month, Louisiana Insurance Commissioner James J. Donelon, chair of the NAIC's Surplus Lines Implementation Task Force, described the task force's plan as a "bare bones" approach that addresses the allocation of E&S premium taxes, but does not deal with the issue of uniform regulation of surplus lines transactions. (See NU, Oct. 18, page 30.)

"We will take whatever action is necessary to proceed down a path that leads to uniformity," Mr. Wood said, echoing frustrations of other trade group representative, who also criticized the NAIC's failure to streamline the multistate taxation system with uniform reporting requirements, forms and procedures.

"Our congressional sponsors of this legislation had every expectation that it would resolve the issues when they passed it," Mr. Wood said. "Passage of the bill was based on the expectation that the states would use this as the launching point for an interstate compact that would implement it."

Mr. Wood added that he has already contacted the industry's congressional supporters "to tell them some states were already throwing in the towel on uniformity even before they mounted the effort to create a compact."

"Fortunately, NCOIL has spoken with great strength of the importance of the states acting to implement this measure promptly," he said.

According to NCOIL President Rep. Robert Damron, D-Ky, NCOIL's SLIMPACT-Lite compromise authorize the creation of a governing commission to:

o Establish allocation formulas to help states share premium tax dollars.

o Devise uniform payment methods and reporting requirements for insureds and surplus lines brokers

o Set national eligibility standards surplus lines insurers.

o Devise a single policyholder notice to replace the various forms used across the country.

o Require a state to create a single tax rate for surplus lines insurance, allow states to charge their own rates, and set uniform payment due dates in order to streamline taxation.

Mr. Damron said, "SLIMPACT-Lite could represent the breakthrough that stakeholders have been searching for since the president signed Dodd-Frank in July."

He said its structure is familiar to legislators in the 36 jurisdictions that have already approved an Interstate Insurance Product Regulation Compact.

Mr. Damron added that the powers of the governing body of SLIMPACT-Lite "have been limited from the original SLIMPACT draft "to focus on those issues that are addressed by Dodd-Frank or are otherwise most needed to streamline surplus lines taxation and regulation."

"We look forward to airing the proposal…and believe that the state leaders in attendance will be able to advance a consensus proposal that state legislatures will welcome next year," he said in a statement released in advance of Friday's meeting.

Representatives of The Council of State Governments, NAIC and the National Conference of State Legislatures were expected to attend.

Nicole Allen, CIAB senior vice president, strategic resources, praised the "SLIMPACT-Lite" proposal, noting that it not only attempts to address the issues associated with the collection and allocation of surplus lines taxes, but that it also promotes "the development and adoption of uniform surplus lines regulatory standards in compacting states, including eligibility standards."

By contrast, the NAIC proposal is running into unanimous opposition from industry. In a letter sent to the regulatory group last Monday, six trade groups said the NAIC proposal "continues, by contract," the burdensome system Congress sought to eliminate through the new law.

The federal legislation dictates that for any multistate placement of surplus lines, the only state whose rules govern are those of the state that is the "principal place of business" for the insured. Those rules include diligent search requirements (declinations), premium tax allocations and eligibility standards.

The trade groups said that the NAIC's proposed implementation measure, the Nonadmitted Insurance Multi-State Agreement (NIMA), "frustrates the spirit and letter" of the federal law.

The trade groups that signed the letter, written to Commissioner Donelon, were the American Insurance Association; the American Association of Managing General Agents; The Excess Line Association of New York; the National Association of Mutual Insurance Companies; the National Association of Professional Surplus Lines Offices, Ltd.; and the Risk and Insurance Management Society.

The letter said that the clear intent of the law was to create a streamlined tax system that involved uniform requirements, forms and procedures. "NIMA not only fails to establish uniform requirements, forms and procedures, but instead continues, by contract, the burdensome system that Congress sought to eliminate," the letter said.

"NIMA will perpetuate unnecessary bureaucratic data reporting, with dozens of data elements and hundreds of state-specific tax nuances for every policy issued," the letter continued.

The letter noted that the reason the NRRA was adopted was to replace this "dysfunctional system with a single-state payment system that included uniform requirements, forms and procedures."

NIMA, the letter said, "circumvents the NRRA and continues with the existing system through a contract between insurance commissioners."

The letter added that the proposed model law violates the NRRA requirement that "no state other than the home state…may require any premium tax payments for nonadmitted insurance," that it will create unnecessary and burdensome data reporting by brokers, and that it fails to create an infrastructure for a proposed clearinghouse.

The Property Casualty Insurers Association of America added its own criticism in a separate letter to Commissioner Donelon.

"For years, industry educated Congress on the need and benefit of NRRA to create a streamlined tax system that involved uniform requirements, forms and procedures," said the letter signed by David Kodama, PCI senior director, research and policy analysis.

"NIMA not only fails to address that uniformity standard, but it creates an uncertain taxing arrangement via an 'agreement' between insurance commissioners with questionable binding authority," the letter said.

Like the other groups, Mr. Kodama said the proposed model law violates the NRRA requirement that no state other than the home state may require any premium tax payments for nonadmitted insurance. NIMA instead has each participating state agree to "require" payment of their applicable surplus lines premium taxes via a clearinghouse, he said.

The proposal "perpetuates burdensome data reporting," he said, adding that the model, as drafted, will require detailed data reporting for policies delivered by brokers for the sole purpose of remitting taxes on E&S policies with exposures in multiple states.

"The NIMA system will continue to require complex reporting systems that Congress sought to streamline through the new law," Mr. Kodama said.

Commissioner Donelon's office did not respond to repeated requests for comment.