Multistate Surplus Line Business Presents Many Challenges

Surplus line producers have benefited greatly from the Gramm-Leach-Bliley Act. Since the act’s passage in 1999, most states have amended their laws to allow for nonresident licenses for surplus line producers. These producers can now, in most cases, eliminate the extra time, administrative burden and expense of courtesy filings for policies where all or part of the risk is located outside of the producer’s home state.

With this newfound efficiency, however, has come a whole new set of problems, namely a patchwork of laws that are too often confusing or conflicting and the ongoing tussle over the allocation of taxes and payment of taxes on multistate risks.

My experience is that surplus line producers desperately want to comply with the laws of the various states. Too often, however, the regulations, regulatory practices and the laws themselves present a barrier to compliance. Hardly a week goes by where I don’t receive a call from some local or nonresident producer caught in the tangled web of surplus line regulation and multistate risks.

When it comes to payment and collection of taxes, especially in today’s environment of state budget woes, the regulators can be even more demanding. With insureds’ businesses increasingly crossing state and national borders, nonresident licenses subjecting producers to more state laws, and regulators giving these transactions more scrutiny (and heftier fines) as they search for dollars to fill their budget gaps, the surplus line producer is caught in the proverbial perfect storm.

The surplus line industry, regulators and legislators, have worked on this problem in the past without success. The perceived cost and effort required to implement a workable solution have usually stood in the way of definitive action. However, there are a number of things working in our favor right now that make this, I believe, the perfect time to create real solutions to these problems.

First, more and more producers are caught, more and more often, in the aforementioned perfect storm. Pain is a powerful motivator and is the force behind many changes. As the industry suffering increases, the motivation for change increases exponentially. Second, there is currently a significant push among many state legislators who attend the National Conference of Insurance Legislators (NCOIL) and many regulators at the National Association of Insurance Commissioners (NAIC) to create more uniform regulatory approaches for many reasons, not the least of which is the threat of federal encroachment in this area of insurance regulation.

Third, many of the state stamping offices, under the guidance and leadership of the National Association of Professional Surplus Lines Offices (NAPSLO), stand ready to devote significant resources to creating and implementing a workable solution. So, we have the triple threat versus the perfect storm.

What would a solution to these problems look like? Ideally, any solution would have to be simple and fair. Simple, because when compliance is simple, more people will comply. Fair, because the states will be more likely to sign on to a solution if they feel they will be getting their fair share of allocated taxes.

A solution that meets both these requirements is currently brewing in a subcommittee of NAPSLO’s Legislative Committee. Under the leadership of Dan Maher, executive director of the Excess Line Association of New York, the subcommittee has developed a white paper, Regulation of the Surplus Lines Industry After Gramm-Leach-Bliley: The Future is Now, that endorses the creation of an interstate compact, which is a treaty agreement among those states that adopt it. Following is a brief outline of the proposed solution and interstate compact:

If the producer is in compliance with one set of state laws (the producer’s or insured’s home state, for instance), he would be deemed in compliance with all other states’ laws applicable to that risk;

Participating states would not need to change tax rates or conform to some uniform tax structure;

Producers would have access to a computer-based matrix that would assist them in determining allocation and tax rates on a state-by-state basis;

Producers would file multistate risks in a single location which would capture the allocation data and report it to a central surplus line tax and data clearinghouse. The clearinghouse would report data to participating states and producers so the taxes could be appropriately paid.

Of course, the devil is in the details and the details are still being worked out. The alignment of forces ready to tackle this problem, however, signals that this is a solution whose time has finally come.

The NAPSLO white paper can be downloaded by visiting the home page of the Surplus Line Association of Illinois. Please join me in supporting these efforts wherever you can.

David Ocasek joined the Surplus Line Association of Illinois in 1991 and has been executive director since 1998. He also teaches an accredited continuing education course for Illinois insurance producers, which covers the Illinois surplus line laws and regulations. He can be reached at docasek@slai.org.