House Committee Hears Concerns on Surplus Lines Reform Tax Issue

By | July 28, 2011

Just days after the surplus line reform legislation became effective, federal legislators heard comments from industry insiders on concerns regarding the implementation of provisions in the bill, including how states will come to consensus on surplus lines premium tax proposals.

In testimony submitted to the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity for a hearing on July 28 titled “Insurance Oversight: Policy Implications for Consumers, Businesses and Jobs,” agents, brokers, regulators and carriers took issue with some states’ efforts to implement the bill.

The Nonadmitted and Reinsurance Reform Act (NRRA), enacted into law on July 21 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandates that 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.

As a result of NRRA states have been updating their laws and some states have also included language to share taxes with other states through agreements or compacts. While the NRRA sought to simplify the regulatory structure governing surplus lines transactions for multi-state risks, some in the surplus lines industry say some states are moving forward with plans that may make things worse, not better, for the industry.

The Congressional mandate of making multistate surplus lines transactions and tax payments more uniform, efficient and streamlined for consumers, businesses and brokers is threatened by the Nonadmitted Insurance Multistate Agreement (NIMA), said the National Association of Professional Surplus Lines Offices (NAPSLO), in its testimony.

“NAPSLO is increasingly concerned that the NRRA is being implemented in many states (even as promoted by National Association of Insurance Commissioners) in such a way that they’ll make things worse – not better – for surplus lines stakeholders,” said NAPSLO’s President Letha Heaton, in testimony today. “Unfortunately certain state interpretation and implementation of the NRRA has, in NAPSLO’s view, been inconsistent with Congress’s intent.”

The NRRA would both streamline tax payment processes and to make more uniform, simple, and efficient licensing standards and other aspects of surplus lines regulation to enable brokers to more easily and efficiently comply with state requirements, Heaton said. By giving the “home state” the sole authority to regulate the surplus lines broker, the NRRA enables brokers to more easily and efficiently comply with state requirements, but according to Heaton, most states are focusing their attention on the tax payment and allocation issues, while neglecting the law’s other goal – to make more uniform, simple, and efficient other aspects of surplus lines regulation.

“States are prioritizing the voluntary tax-sharing provisions in the NRRA while ignoring the other regulatory efficiencies intended by the law,” Heaton said.

Agents and brokers too have found state efforts to implement the NRRA to be out of line with the original intent of the NRRA.

The goal behind the NRRA was to bring about common sense reforms of surplus lines rules at the state level, maintain state regulation while creating a structure that does away with conflicting and overlapping rules that made compliance sometimes impossible, said Clay Jackson, senior vice president and regional agency manager of Nashville, Tenn.-based BB&T Cooper, Love, Jackson, Thornton & Harwell.

Jackson, who testified on behalf of the Independent Agents & Brokers of America (IIABA), and The Council of Insurance Agents and Brokers (CIAB), said the states have done everything but create a “harmonious and rationale regulatory system” for implementing the surplus lines provisions of the NRRA.

“The fundamental thrust of the reform provisions was to require that only a single set of regulations govern a surplus lines transaction – those of the home state,” Jackson said in testimony. “This was accompanied by Congressional support for the creation of a single, state-based surplus lines regulatory system that would include a harmonious tax payment and allocation mechanism.” But that has yet to happen, Jackson said.

According to NAPSLO’s Heaton, “states are spending time and energy focusing on NIMA even while the NIMA system remains months away from being operational.”

NIMA is the surplus lines tax sharing proposal supported by the NAIC. However, a second tax allocation proposal, the Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT), supported by the National Conference of Insurance Legislators (NCOIL) and several industry groups, including NAPSLO and IIABA, has created a conflict in how NRRA compliance on surplus lines tax issues will ultimately take shape.

NAPSLO and other industry groups have consistently opposed the NIMA tax sharing system as currently drafted.

According to NAPSLO, “NIMA fails to create the non-tax regulatory efficiencies or uniformities envisioned by Congress; violates the NRRA requirement that ‘no state other than the home state … may require any premium tax payments for nonadmitted insurance,’ and; involves unnecessary and burdensome data reporting by brokers for the sole purpose of collecting taxes, including novel allocation requirements for casualty lines.”

“Specifically, NAPSLO strongly opposes NIMA’s current tax allocation methodology as it is wholly unworkable for the vast majority of the industry, and if implemented will result in new costs and fees levied on surplus lines consumers,” NAPSLO said in a statement.

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.

Nine of the largest states – California, Idaho, Illinois, Minnesota, New York, Pennsylvania, Virginia and Washington – opted out of any tax allocation system and will retain 100 percent of the surplus lines premium taxes that will paid by their home state insureds.

The remaining 21 states (and the District of Columbia) continue to evaluate surplus lines premium tax sharing, or not sharing, options.

“We have sent letters to all of those states, asking them to follow California, Illinois, New York, Pennsylvania and the other states who have opted out of the dysfunctional sharing mechanisms and to each create a simple, single-state regulation and taxation mechanism,” said Jackson. “We ask you to urge them to do the same,” he told the House committee.

States are not required by the NRRA to participate in any tax sharing system. However, the risk of losing surplus lines premium tax revenue is a powerful incentive for state legislators considering this issue to find a tax sharing option, said Susan Voss, Iowa’s insurance commissioner and president of the NAIC, in testimony.

“We expect that over time, given state legislative calendars and other issues, states may gravitate toward a solution that represents the largest percentage of premium taxes to help preserve their level of income,” Voss said.

Heaton says that NAPSLO views operations under the NIMA allocation system will be very difficult for brokers.

NAPSLO urges parties to abandon the NIMA tax allocation methodology and instead adopt one based on state by state premium data from the “Schedule T” section of annual financial statement submitted to the NAIC by surplus lines carriers, she said.

“Kentucky’s insurance commissioner has proposed a tax allocation formula to allocate taxes based on exposures. While NAPSLO favors a ‘Schedule T’ approach, it also believes the approach proposed by Kentucky presents a workable compromise that would be a vast improvement over the NAIC-NIMA tax methodology.”

About Andrea Wells

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

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