Surplus Lines Needs Not Met Under Optional Federal Charter Legislation

April 6, 2006

The Optional Federal Charter legislation, introduced in the U.S. Senate on Wednesday, does not address the premium tax remittance and licensing concerns of the surplus lines industry, according to the National Association of Professional Surplus Lines Offices, a national trade association representing the surplus lines insurance industry.

The bill, The National Insurance Act (NIA), was introduced by Senators John Sununu (R-NH) and Tim Johnson (D-SD). The NIA provides for a parallel system of state and federal supervision of insurers and insurance producers. The proposed system of insurance regulation is modeled after the current dual system of state and federal banking regulation.

“Unfortunately, NAPSLO’s proposals to solve the current tax remittance and licensing problems of the industry were not included in the NIA legislation,” said NAPSLO Executive Director Richard Bouhan. “As a result, the NIA remains incomplete by not addressing the concerns of the $35 billion surplus lines industry.”

The NIA provides for two types of federal insurance company charters – one for national life companies and another for national property/casualty companies. Insurers can opt to be either federally or state chartered and can convert freely between federal and state charters.

In addition, insurance producers can secure a federal insurance license and National Insurance Agencies can be chartered and federally licensed under the NIA. Federally licensed insurance producers as well as National Insurance Agencies would be allowed to sell insurance in any state on behalf of any national or state licensed insurer.

The federally chartered national insurers as well as the federally licensed insurance producers and National Insurance Agencies would be regulated by a Federal Insurance Commissioner in the Office of National Insurance which would be located in the Treasury Department.

NAPSLO believes the NIA could be improved by addressing surplus lines concerns on tax remittance and licensing issues. One proposal that was offered included creating a national/federal surplus lines license that would allow the holder of the license to procure or place surplus lines insurance in any state consistent with state surplus lines laws.

Under NAPSLO’s proposals, the holder of the federal surplus lines license could:

1) Remit all state premium tax due on a surplus lines transaction to the home state of the insured for distribution to all states where taxes are due;
2) Comply with only the surplus lines law of the home state of insured, in a multi-state surplus lines transaction; and
3) Place or procure surplus lines insurance for an exempt commercial purchaser or similar insurance purchaser as defined by state law without performing a diligent search.

“NAPSLO believes that establishing an optional federal surplus lines license would be beneficial to the marketplace,” said Bouhan. “Those acquiring the license would not have to secure numerous state surplus lines licenses.”

In addition, allowing the holder of the federal license to remit all surplus lines premium taxes to one state, to only have to comply with one set of state surplus lines laws on multi-state surplus lines commercial risks and to operate on a “level playing field” when insuring an “exempt commercial policyholder” in the surplus lines market would serve both the industry and insurance consumer well, Bouhan said.

Although the premium tax remittance, multi-state compliance and “level playing field” concerns are not included in the NIA, they are addressed, positively, in SMART Act which remains NAPSLO’s preferred approach in regard to federal insurance regulatory reform legislation. The House Financial Services Committee is currently considering the SMART Act.

Source: National Association of Professional Surplus Lines Offices

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