Texas Likely Will Seek to Protect Its Piece of Surplus Lines Tax Pie

The federal financial services reform act signed by President Barack Obama in July 2010 contained a provision reforming the way surplus lines insurance premiums are reported and taxed. The Nonadmitted and Reinsurance Reform Act, or NRRA, was supported by the surplus lines insurance industry. When it goes into effect it will require surplus lines premiums to be paid only to the insured’s home state.

The states now have the difficult task of figuring out a way to allocate surplus lines premium taxes to the various states in which an insured might have business interests. The National Association of Commissioners and the National Council of Insurance Legislators are currently working on possible solutions, but the law goes into effect in July 2011, a short period of time to resolve big issues, according to Phil Ballinger, executive director of the Surplus Lines Stamping Office of Texas.

Under the new law only the home state home state of the insured can collect tax, Ballinger explained. “So, on multi-state risks, the states that are not the home state, if there isn’t a mechanism put in place over the next year for those states to get their pieces of the tax pie allocated back to them, redistributed back to them, then the home state keeps it all. And so, the failure of the states to address that is something that has significant revenue consequences, to varying degrees.”

There will be a shifting in where surplus lines premium is distributed among the states. As a result, “there’s going to be winners and there’s going to be losers, and it’s going to be interesting to see how that redistribution takes place over the next year or two,” he said.

Obviously states will be jockeying for those premium dollars and no state will want to give up its piece of the tax pie. Texas, which has a large share of the national surplus lines market, is one state that has been aggressive in protecting its own interests, Ballinger said. The state legislature in 2007 passed a measure giving the Texas Comptroller’s Office authority to establish a rule that says, “when Texas is the home state, it can, in fact, collect and keep 100 percent of the taxes,” he said.

Ultimately, Texas will act in its own best interest. “They would do that as, I guess, a self-defense mechanism to where, when they were not the home state, and there wasn’t anything in place for them to get their pieces of those transactions allocated back to them, then they would counter that by saying, ‘When we are the home state, we’ll keep it all, if it looks like we need to do that,'” Ballinger said.

The GAO Will Monitor

The Government Accountability Office has said it will monitor the effect of the surplus lines tax provision over time. The GAO appears to be interested in the influence the new system may have on the distribution of premium between the admitted and surplus insurance markets.

The focus appears to be on what effect the provision will have on the marketplace, Ballinger said. “Specifically, has some admitted business been driven to, or migrated to, the surplus lines market? So they’re basically trying to see, while helping out the surplus lines marketplace, have they accidentally had negative consequences on the admitted marketplace?”

Based on what he’s seen in Texas, Ballinger doesn’t think a new system of collecting and allocating surplus lines taxes will drastically change the market share allocation between the admitted and surplus markets. Business “that was going to be surplus lines was surplus lines anyway,” he said. “I suspect in this GAO context, it will be the same.”

The Federal Insurance Office

The Dodd-Frank bill also creates a Federal Insurance Office. Ballinger and others believe the FIO will primarily focus on international insurance arena. He cautioned, however, that its creation could lead to a greater role of federal regulators in the domestic insurance market.

“FIO, generally, its role is to be involved in international insurance issues where the federal government properly belongs. It doesn’t really have any specific preemptive authority over state regulation. So it’s primarily a watchdog, and an international issues type of regulatory office.

“However, they are required to report back to Congress, on whether or not the federal government should have a larger role in state regulation. So you basically have federal regulators, specifically bank regulators, reporting to Congress on whether or not the federal government should have a larger regulatory role. So, my goodness, what conclusions do you think you’ll get from those people, you know? My belief is, over time, it’s just another leverage point for the federal government to get involved in regulation of insurance.”

Topics Texas Legislation Excess Surplus