In My Opinion

In 2010, the U.S. Congress passed the Nonadmitted and Reinsurance Reform Act (NRRA) as part of the Dodd-Frank Wall Street Reform legislation. To modernize the U.S. regulatory structure, the legislation allows only the home state of the insured to collect premium tax payments for nonadmitted insurance absent an agreement.

Dodd-Frank is very clear—it encourages the states to "enter into a compact or otherwise a procedure to allocate" these taxes among the states. The lack of a comprehensive agreement could prove very detrimental to states like Florida that could lose nearly $15 to $20 million in annual tax revenues. The result is that states are now confronted with two very important questions: 1) whether to join a tax-sharing agreement, and 2) if so, which agreement to join. 

A year after Dodd-Frank has taken effect, two competing agreements have emerged. A coalition of states developed the Nonadmitted Multistate Agreement (NIMA), while surplus lines brokers and agents, along with the National Conference of Insurance Legislators (NCOIL), are in favor of an alternative agreement called SLIMPACT. Florida has decided to join NIMA. 

I appreciate the efforts of all involved parties for undertaking the legal and logistical research for creating these alternatives. My goal is not to criticize the alternative, SLIMPACT, but to highlight the differences to allow states to make informed decisions.  It behooves all states to consider joining one of these agreements.

Delegation of Authority
While NIMA is an "agreement" among states, SLIMPACT is actually a "compact."  Although this nuance may seem innocuous, the difference creates several legal and public policy concerns. In Florida, as in other states, a compact that delegates the state's regulatory authority to a non-government entity may not necessarily be constitutional. Although it should be noted that Florida has joined a number of compacts, none of these compacts have delegated regulatory authority to another group. The NIMA agreement is only for the purpose of allocating taxes and does not delegate regulatory authority; therefore, more states may have the opportunity to join NIMA. Governance Structure
Under NIMA it will be the states (and elected officers representing these states) that will ultimately manage and administer this agreement. One of my greatest concerns about the SLIMPACT agreement is that it currently proposes allowing some of the members of the "Operations Committee" to be from the insurance industry and law firms. This would allow private entities to directly manage one of state government's core functions: tax collection. NIMA allows the states to retain this authority.

Operational Readiness
Dodd-Frank established a clear statutory deadline (330 days from the passage of the legislation) for an agreement to be in place to begin collecting and distributing taxes this year. The deadline was June 16, 2011; NIMA met the deadline. In addition, NIMA has already created premium allocation formulas, specified required data elements, and enumerated tax allocation definitions and methodologies that will allow NIMA to begin promptly following the creation of the clearinghouse.

Perhaps most important of all, NIMA can potentially tap into software already developed by the Florida Surplus Lines Service Office (either directly or through a contracting arrangement) to provide a seamless transition for tax collections as envisioned by Dodd-Frank. Although SLIMPACT also has some commendable ideas, one reason that many states are gravitating to NIMA is due to efficiency; NIMA will be the first agreement to become operational. The longer states wait to join an agreement—any agreement—the greater the tax revenue that will be lost.

In Conclusion: This is Not a Competition
Given the current state government budget shortfalls across the country, it is not surprising that states are currently in the process of evaluating the financial advantages and disadvantages of joining a tax distribution agreement for nonadmitted insurance.  Frankly, it is unrealistic to think that all 50 states will join any agreement. For the remaining states that wish to join an agreement, they must make a decision: NIMA or SLIMPACT.

I certainly appreciate all of the contributions made by the SLIMPACT coalition, and SLIMPACT has done considerable work to create a feasible plan. Regardless of which agreement states select, we should respect that decision. In fact, I believe we should use this as an opportunity to encourage constructive dialogue and conciliation among the states as we continue to work together in the state-based regulatory system.  Although SLIMPACT is not without its own merits, I encourage states to select NIMA for the simple reason that it is best positioned to quickly implement what Congress intended: a uniform system that equitably distributes tax revenues based on risk.