NRRA: An Overview & Status Update on This Critical Legislation

The positive effect of the NRRA becoming the law of the land is that the industry "will see a system where there is one-state compliance, one-state taxation, national standards for company eligibility, and national exempt-commercial-purchaser rules," says Richard Bouhan, who was NAPSLO's executive director until mid-September and who is staying on through June of next year to assist with legislative issues, such as NRRA.

But the states are divided into three different camps on the mechanism to share premium taxes between the insured's home state and other states where the risk is insured.

One of the options is the Surplus Lines Multistate Compliance Compact, or SLIMPACT, which currently has nine states signed on to it. Another is the Nonadmitted Insurance Multistate Agreement, or NIMA, which has the backing of 11 states and Puerto Rico, according to Rep. George Keiser, R-N.D., president of the National Conference of Insurance Legislators (NCOIL).

A third is where individual states have passed laws or imposed rules that are silent on sharing revenues. These include California, Texas and Illinois.

Hank Halderman, co-chair of the NAPSLO legislation committee, says that it is "a good sign that virtually all states have taken steps to conform to the NRRA or to acknowledge its pre-emption."

He said that means that the "core element of NRRA has been incorporated into state laws and rules."

But, he acknowledges that in the premium-taxes-sharing area, "there is a far amount of inconsistency."

And, that inconsistency, he says, creates confusion and dislocation.

SIGNIFICANT PLUSES—AND SERIOUS PROBLEMS

"The general passage of NRRA—and [its stipulation that] only the home state regulates the transaction, is a significant step forward for our business," Halderman says. "While we work our way through the transition period, especially with respect to allocation, there will be problems that we will have to deal with—but we should not lose sight of the significant plus."

He says that the "significant plus" is that before July 21, in a home-state transaction, the industry had to deal with the separate and conflicting laws of every state in which there was an exposure insured. As of July 21, Halderman says thanks to NRRA, "it is only the laws and rules of one state that apply to any given transaction."

He adds: "Prior to passage of NRRA, there were conflicting state laws that could be applicable to one transaction, making it impossible to comply with all the applicable rules and laws. 

"Certainly," Halderman continues, "elimination of that problem makes things easier and less costly. Most importantly, it allows us to more effectively utilize the non-admitted marketplace on behalf of our clients." 

But Nicole Allen, senior vice president, strategic resources, for the Council of Insurance Agents & Brokers (the Council), argues, "I don't think that the current environment, where there are basically three methods of compliance with NRRA, can continue." She says it is just "not sustainable."

Allen adds, "I hope that the states involved in the SLIMPACT and NIMA agreements can come together on a common allocation formula and the use of a common clearinghouse, and we are encouraging those states to do that."

But, she says, "Who knows?" The states could decide at some point that they'll go the route that some of the bigger states such as California and Illinois are taking—retaining 100 percent of the taxes for themselves.

"That would certainly be the easiest method for our members to comply with the NRRA," Allen asserts. 

"We supported NRRA because the complexity of the surplus-lines regulatory system made it nearly impossible for our members to ensure they were in compliance with all the appropriate laws and regulations," Allen says. 

"And we do now have a much more streamlined system. And while there will be some bumps in the implementation, the surplus- lines marketplace will ultimately be the better from enactment of NRRA," Allen says.

THE KENTUCKY COMPROMISE

State regulators who support SLIMPACT are coalescing behind a compromise method proposed by Kentucky as the preferred means of allocating premium taxes to the states in the most equitable manner.

David Leonard, NAPSLO legislation co-chairman, says, "The Kentucky proposal presents a workable methodology that would be a vast improvement over other tax methodologies under discussion, and we hope that other state groups will also adopt the proposal."

Allen says she doesn't have a sense for a time frame on SLIMPACT and NIMA states coming to any agreement, noting that the Council supports the allocation formula known as the "Kentucky compromise" that received preliminary support from the SLIMPACT states because it more closely represents how surplus-lines brokers operated before NRRA became effective in terms of allocation.

"We would welcome and support adoption of this formula by the NIMA states, and we have contacted regulators about our support," Allen says.

She adds, "We will continue our work to ensure that NRRA is implemented as Congress intended."

NIMA: "IMPOSSIBLE TO IMPLEMENT"

Both Halderman and Allen agree that the allocation methodology currently being used or proposed for use by NIMA "is impossible to implement in many cases."

Allen adds that the Council "does not support NIMA for two reasons: It addresses only the collection and allocation of taxes and does nothing to promote greater uniformity in other areas of surplus-lines regulation; and the allocation formula used by the NIMA states does little to simplify the allocation process.

"In fact," Allen continues, "it has made the process in some cases more unwieldy because it would require the allocation of casualty lines, which is generally not required under current regulatory schemes." 

Interestingly, Halderman says his own experiences, and that of other NAPSLO members he deals with, indicates that states are not complaining now that they are being short-changed—but they are expressing concerns that they may be short-changed in the future.

"By and large, the states are coming to brokers [for the necessary premiums data]," Halderman says. "But at least one state has indicated an intention to seek data from insurers." 

NAPSLO, Halderman says, "is working to clarify that it is the broker that is the proper source of that information." 

NCOIL ON SLIMPACT

The compact issue essentially boils down to state regulators, headed by the National Association of Insurance Commissioners (NAIC), supporting NIMA; and NCOIL, supporting SLIMPACT.

The NAIC declined comment on the issue, but Susan Nolan, a spokesperson for NCOIL, says her group supports SLIMPACT because it is "the only existing surplus-lines tax-collection and allocation proposal to respond fully to the intent of the NRRA and those who lobbied for surplus-lines reform."

She adds that NCOIL will continue to work with any and all states that have not yet joined SLIMPACT, as the organization looks to add a 10th state, and more, to the list of those already supporting it. 

(SLIMPACT can only begin acting as a clearinghouse ­—i.e. having the legal authority to process premiums between the participating states—when 10 states, or states constituting 40 percent of the nation's surplus-lines premiums, join.)

Says Nolan: "We are attempting to make them aware of the many benefits that SLIMPACT offers, including proper delegation of state authority; accountability and transparency in its voting and governing structure and processes; a viable allocation formula supported by the industry that worked for reform; as well as the consistency that NRRA asked for, as evidenced in its uniform policyholders' notice and foreign-eligibility requirements."

She says NCOIL is now finalizing appointment of its four members—one from each NAIC zone—to serve on the SLIMPACT Commission Legislative Committee. 

The National Conference of State Legislators also will choose four members.

"While NCOIL wants to work toward one uniform approach, and has invited the NAIC to join SLIMPACT, NCOIL cannot support an approach that does not have accountability and transparency, that allows decisions to be made behind closed doors, that is subject to change without due process, and that has an allocation process that has been described by the industry as more burdensome than what is in place now," Nolan says.

Nolan notes that the NAIC and NCOIL intended to deal with the issue at the NAIC summer meeting in Philadelphia—but that event was cancelled because of weather issues.

"Since the cancellation, NCOIL has not been approached by the NAIC [nor] had any communications with them," Nolan says.  "We have not heard from the NAIC regarding its early November meeting agenda [with regards to] surplus lines."