Ready or Not, New Surplus Lines Law Is Here

By | July 21, 2011

The implementation deadline for the Nonadmitted and Reinsurance Reform Act has arrived. States have been scrambling over the past year to update surplus lines laws that will conform with NRRA requirements, while agents and brokers have tried to prepare for changes on how they will process multi-state surplus lines accounts on July 21, 2011 and after.

Some in the industry say even as the NRRA takes effect, many players are just not ready.

“Most are way behind the curve,” says Richard Brown, a San Francisco based attorney who represents surplus lines brokers, insurers, and industry organizations in regulatory and surplus lines matters. Brown says the agents and brokers that are caught up on NRRA are few and far between.

The NRRA mandates that beginning July 21, 2011 the insured’s home state will be the only state with jurisdiction over multi-state surplus lines transactions and the only state that can require a tax be paid by the broker. The law also implements criteria that allow more sophisticated and larger commercial purchasers to be exempt from the diligent search requirement. In addition, the new law will require additional data reporting and changes surplus lines insurer eligibility rules.

Overall 43 states passed legislation in the last year to bring their state laws into compliance with the NRRA; three states (Iowa, Illinois and Colorado) adjourned without taking action; and four states (Michigan, Wisconsin, Massachusetts and South Carolina) and the District of Columbia have not passed any legislation related to NRRA. Of the 43 states, three states (Delaware, Oregon and New Jersey) have approved legislation but the governors have not taken action on the bills.

The most recent states to enact compliance legislation are California and Texas.

Phil Ballinger, executive director of the Texas Surplus Lines Stamping Office, says that like most states, his office has tried its best to update agents and brokers on what to do post-July 21. Despite these efforts, confusion remains, he says.

“We put out a bulletin at the end of June that was fairly detailed … but frankly agents have been calling us for a number of weeks panicked-stricken, looking for advice on what to do. And frankly we are not able to tell them what to do in much detail because it’s such a moving target.”

That moving target has to do with whether states will support a tax sharing allocation agreement to handle the allocation of surplus line premium taxes in the future.

As of the July 21 deadline, no such compact or tax sharing agreement is in place. But two proposals — Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT) legislation, supported by the National Conference of Insurance Legislators (NCOIL) and several industry groups, and another supported by the National Association of Insurance Commissioners, called the Non-admitted Insurance Multi-State Agreement (NIMA) — are creating chaos for agents and brokers when it comes to NRRA compliance.

Ten states and one territory (Connecticut, Florida, Hawaii, Mississippi, Nebraska, Nevada, Puerto Rico, Louisiana, South Dakota, Utah and Wyoming) have signed an agreement to be part of the NIMA and nine states have passed SLIMPACT.

According to Ballinger, there’s great difficulty for agents and brokers right now trying to program their systems for tax reporting and policy reporting because of the differences in NIMA and SLIMPACT. “So much for simplicity and uniformity,” he says.

“If you write a multi-state risk, the home state will determine how you report the premium. But if that home state has elected to join SLIMPACT, but two other states have elected to join NIMA that are on the same risk, it starts becoming something that is almost impossible to program,” Ballinger says. “I feel very sorry for the agents and the brokers. In their best efforts to comply at least for the foreseeable future, it’s going to be chaotic.”

Richard Bouhan, executive director of the National Association of Surplus Lines Offices (NAPSLO), says he understands why brokers may be concerned over what’s to come in an NRRA world, but believes the transition will be smoother than some anticipate.

“Change is always difficult,” Bouhan says. “Brokers have been working for quite some time on policies that will be effective on July 21 or after, and so have already been operating under the new NRRA rules.”

Bouhan notes that most surplus lines brokers won’t even be affected by the NRRA because most risks are not multi-state risks. “Some 90-95 percent of surplus lines risks probably are single state risks and are not going to change” under NRRA, he says

For surplus lines brokers impacted by NRRA changes, the new rules will make regulation and taxes for multi-state risks much simpler, according to Bouhan.

“The brokers pay now the tax that is due to one home state and only have to comply with that state’s placement laws for surplus lines. … That’s a lot clearer and better than we had,” he says.

Unlike some in the industry, Bouhan says he doesn’t anticipate many problems under NRRA. “I don’t think it’s going to be all that big of a problem.”

At least for now, the tax sharing issue is a non-issue, Bouhan says.

“As of the effective date of July 21, there will be no tax sharing arrangements existing that any states will be involved in,” Bouhan says. That doesn’t mean that state might not develop a tax sharing agreement down the road, he adds. “But as of the 21st of July, when this law becomes effective there won’t be any tax sharing agreements out there.”

Also, according to Bouhan, there is no compact clearinghouse at this time and the prospect of one in the near future doesn’t look great. That, too, is a non-issue as NRRA hits its effective date, he says.

Brown advises agents and brokers to understand their own state’s NRRA legislation, and any state in which the agency writes multi-state risks.

“Familiarize yourself with the state legislations,” Brown says. “Get your hands on your own state’s legislation. Download that thing and flip through it; you are looking for the four issues: home state, exempt commercial purchaser, data reporting and insurer eligibility.”

Most important, Brown says, is that brokers understand their state’s definition of home state.

“Somebody has to verify the home state, the principal place of business,” Brown says. And he advises his wholesale broker clients to push that responsibility onto the retail agent as much as possible. “The definition of home state; that’s where everybody gets hung up.”

Despite the forecasted NRRA hiccups, Ballinger says the legislation is a good thing for the surplus lines industry.

There are some things good about this legislation, he says. “The aspect that clarifies who regulates and taxes multi-state transactions … that’s good and a major step forward,” Ballinger says. But he doesn’t doubt there will be problems for brokers for at least a couple of years. “Some things are going to be very complicated for agents to comply with for a while.”

At least Bouhan remains optimistic. “I just don’t think it’s going to create that much of a problem,” he says. “But I may be surprised.”

About Andrea Wells

Andrea Wells is a veteran insurance editor and Editor-in-Chef of Insurance Journal Magazine. More from Andrea Wells

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