Things have changed a bit for the surplus lines industry since the Non-admitted and Reinsurance Reform Act, (NRRA) part of the Dodd-Frank Wall Street reform legislation, passed in 2010.
The NRRA’s implementation has provided more uniformity in the regulation and taxation of surplus lines insurance, simplifying what some say had been a burdensome compliance system for multi-state risks. However, even now, years later, some states still grapple with one very important element – how to handle surplus lines tax revenue.
The majority of states – 46 states – currently utilize the “home state” approach facilitated by the NRRA. This process allows the home state of the insured to assess and retain 100 percent of the tax on a multi-state surplus lines risk at the home state rate in accordance with that state’s laws and regulations.
But there is another option known as the Non-Admitted Insurance Multi-State Agreement (NIMA). NIMA also allows states to report, collect, allocate and distribute surplus lines tax revenues consistent with the NRRA, but its participating states share tax revenues rather than keeping 100 percent of the home state tax for multi-state risks.
Five states (Florida, Louisiana, South Dakota, Utah and Wyoming) and Puerto Rico participate as full members in NIMA. Most recently, Tennessee and Wisconsin joined NIMA as associate members for a 12-month, cost-free trial period.
Thus two years after NRRA’s implementation there still is not unanimity and conformity within the surplus lines industry over tax-sharing in general and the cost-effectiveness of NIMA to states and consumers.
Some argue that NIMA is a bad deal for states and consumers.
“The frictional costs are much more than the benefits,” says Richard Brown, a San Francisco-based attorney who represents regulators, insurers, reinsurers, agents and brokers, and commercial insureds in insurance regulatory and related matters nationwide. “There’s really no economic advantage to being a NIMA participant and the NIMA cost clearly increased the cost of insurance for insurance buyers.”
The Surplus Lines Clearinghouse, which contracts with the Florida Surplus Lines Service Office (FSLSO), serves as NIMA’s central collector and allocator of surplus lines premium tax payments for multi-state surplus lines policies – for a fee. The FSLSO also serves as the technology platform provider and has provided all Clearinghouse administrative duties since July 1, 2012.
“They can run NIMA for the next 20 years and the results are going to essentially be the same,” Brown says. “Just look at the structure. Who are the winners in this program? Florida clearly is. Louisiana looks like it’s doing pretty well.”
Brown’s assessment is based on an industry cost/benefit analysis of NIMA states that the National Association of Professional Surplus Lines Offices (NAPSLO) and The Council of Insurance Agents & Brokers (CIAB) conducted earlier this year.
NAPSLO and CIAB support the home state approach and have always believed that the amount of taxes collected and shared among NIMA states would be insignificant in relation to the cost to support the tax filing and allocation process handled through the Clearinghouse. To confirm their belief, the two industry groups began asking NIMA states for information in June 2013.
“We sat down with the NIMA states and actually traveled to South Dakota in June of last year,” says Brady Kelley, executive director of NAPSLO. “At the time, the information we had was limited. …So in June, we met with South Dakota and other NIMA states. We said, ‘It would be helpful if we knew the actual data.'”
Kelley says that while some information was provided, it was not complete. NAPSLO and CIAB entered a public information request at the end of 2013 requesting more data from NIMA states.
NAPSLO said it received 18 of the 30 individual state reports for the period of July 1, 2012, to Sept. 30, 2013.
NAPLSO and CIAB concluded that during the first five quarters of the NIMA Clearinghouse operation, NIMA jurisdictions shared approximately $1.1 million in tax receipts. According to data published by the Surplus Lines Clearinghouse, $533.2 million of premium reported through the Clearinghouse to NIMA jurisdictions resulted in filing fees of $1.6 million in the Clearinghouse’s first year of operation. As a result, $1.1 million in Clearinghouse taxes shared over 15 months is far less than the Clearinghouse filing fees of $1.6 million over 12 months of operation, according to the NAPSLO analysis.
“We believe these facts clearly illustrate the reality of insignificant tax allocations in relation to the cost to the industry and insureds to support the tax allocation process,” the analysis said.
Kelley says NAPSLO and CIAB recognize this comparison excludes some state data, but they don’t believe that the missing data would change the overall cost/benefit scenario of the NIMA allocation process.
“We think it shows that the taxes they’ve collected and allocated are smaller than the fees they’ve charged to do it,” he says.
As NIMA grows and adds more states that could change, Kelley admits, but that’s only if NIMA grows.
“There’s obviously the possibility that it grows and the cost benefit disparity gets worse,” he says. “There’s that possibility, too, but we don’t see it growing because we don’t have many states that are concerned about the tax impact of the NRRA, and we don’t see states lining up to join the system.”
According to NIMA supporters, NAPSLO and CIAB have it all wrong.
“These industry groups continue to assert erroneous conclusions regarding the viability of tax sharing based on incomplete data and misleading comparisons,” South Dakota Insurance Director Merle Scheiber, who serves as the chair of NIMA, told Insurance Journal.
Scheiber says the actual cost associated with the allocated taxes is $138,040, which is “significantly less than the $1.6 million that NAPSLO continues to claim is the cost of allocating taxes.”
NAPSLO’s numbers are incomplete and therefore inaccurate, says Harvey Bennett, spokesperson for the Florida Office of Insurance Regulation.
The $1.6 million referenced by NAPSLO is referring to transaction fees collected for all multi-state policies reported to the Clearinghouse, Bennett says. The $1.1 million referenced is referring to the surplus lines taxes allocated among the NIMA states based only on data provided to NAPSLO by Florida, Louisiana, Wyoming, and Utah and it does do not include data from Puerto Rico and South Dakota.
Bennett says comparing a portion of the reported premium and taxes to the Clearinghouse transaction fees charged on the total reported premium provides an inaccurate cost benefit analysis.
“Clearinghouse fees are charged to fund the operational services provided by the Clearinghouse and are not limited to the costs associated with the allocation of taxes among the NIMA participating jurisdictions,” Bennett says. “In fact, the cost to allocate taxes is $0.00 as the reporting system utilized by the NIMA states allocates the taxes automatically. Yet, NAPSLO uses this comparison to assert that the cost of administering a tax sharing agreement outweighs the benefits to states, brokers and policyholders.”
Bennett also argues that the services provided by the Clearinghouse to brokers and the NIMA states are comparable to those functions performed by national stamping offices. “Likewise, the Clearinghouse transaction fee is comparable to most fees charged by stamping offices that provide similar services to the Clearinghouse,” he says.
“You have to look at what the Clearinghouse does for all states,” he says. “That’s how you can begin to judge its cost effectiveness.”
But some of the states that operate stamping offices disagree with that assessment of NIMA.
“While the stamping office has no particular say in the decision to join NIMA, I can’t conceive of Texas doing it because 100 percent of home state tax retention appears to work well for this state,” says Phil Ballinger, executive director of the Surplus Lines Stamping Office of Texas.
“The only figures that have been made available from NAPSLO, and only then after a public information request, it’s as if the data is not voluntarily wanting to be disclosed by the participants in NIMA, $1.6 million in cost to collect $1.1 million … that sort of speaks for itself doesn’t it,” according to Ballinger.
The debate over the cost of tax sharing is not preventing NIMA and the Clearinghouse from actively searching for new members.
In 2013, NIMA created an associate membership to increase awareness of NIMA benefits. As an associate member, interested states may use NIMA services without incurring any associated costs or risks. The first states to join as associate members were Tennessee and Wisconsin.
“Wisconsin began collecting multi-state data through the Clearinghouse on July 1, 2014, and Tennessee will begin collecting surplus lines data through the Clearinghouse on Oct. 1, 2014,” says Tiffany Maruniak, Clearinghouse manager, Florida Surplus Lines Service Office.
“Wisconsin and Commissioner Nickel made the decision to join NIMA in order to take advantage of all the information services NIMA provides,” says J.P. Wieske, legislative liaison and public information officer, Wisconsin Office of the Commissioner of Insurance. So far, Wieske says his state hasn’t run into any problems with NIMA or the Clearinghouse.
Tennessee joined NIMA as an associate member to test the NIMA system to evaluate potential efficiencies in the reporting and collection of multi-state surplus lines policy information.
Tennessee Insurance Commissioner Julie Mix McPeak said her agency has not had any concerns with the early implementation and will be in a better position to evaluate the system after Oct. 1, when Tennessee agents begin using the Clearinghouse for policies in which Tennessee is the home state of the insured.