IN AN ARTICLE in this month's issue, agents and brokers discuss how they interact with the E&S marketplace. One of those agents, John Tallarida, senior vice president of the Heffernan Group in Palo Alto, Calif., cited one problem retailers can face. He explained that after investing a lot of time working with a surplus-lines broker on a large account, a retailer may discover that the client has exposures in a state in which the surplus-lines broker is not licensed. At that point, Tallarida says, the retailer might have to bring in another surplus-lines broker–just to remit the required premium tax in that jurisdiction.
This is the sort of headache that a new bill before Congress, the Nonadmitted and Reinsurance Reform Act (H.R. 5637), is intended to relieve. The bill was introduced in June by Rep. Ginny Brown-Waite (R-Fla.) and Rep. Dennis Moore (D-Kan.). Late last month, it was approved by the House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. A few days later, it got the OK from the committee itself. Let's ignore the bill's relatively short reinsurance section and consider how it might affect the E&S industry.
One of the bill's provisions would solve the premium-tax dilemma by barring any state other than the insured's “home state”–that is, the state “in which an insured maintains its principal place of business or principal residence”– from requiring the payment of premium taxes on a surplus-lines transaction. Rather, for a given insured, its home state could require the insured or its surplus-lines broker to file tax allocation reports annually showing how much of the insured's premium is tied to exposures in other states. Then the home state could distribute the appropriate amount of premium taxes to those states. H.R. 5637 encourages the creation of interstate compacts or other vehicles to facilitate such tax sharing. Thus, the bill answers one of the greatest concerns states have when it comes to regulating insurance: “Where's mine?”
Tax payments to state coffers aside, H.R. 5637 is just the sort of common-sense reform that the E&S industry needs–and deserves. As noted elsewhere in this issue, the E&S market has become a significant player in the insurance business, accounting for 15% of its P&C volume. Everyone should want it to operate as efficiently as possible, as long as necessary safeguards for insureds also are maintained. Another way H.R. 5637 would further that objective is by eliminating state-by-state regulation of surplus-lines transactions. Rather, such transactions for a given insured would be governed solely by the insured's home state. Assuming the surplus-lines broker on the account was licensed in that home state, it wouldn't have to be licensed elsewhere “to sell, solicit, or negotiate non-admitted insurance with respect to such insured.” One license is all it would take, regardless of the number of states in which the insured owns property or conducts business.
Still another way in which H.R. 5637 would streamline the procurement of nonadmitted insurance would be by eliminating individual states' “diligent search” requirements for large commercial buyers. Such requirements typically require an agent or broker to document that several admitted carriers declined to insure a client before placing it in the E&S market. That requirement would be dropped for a buyer that employs or retains a qualified risk manager and that also possesses at least two of the following characteristics: more than $20 million in net worth, more than $50 million in annual revenue, more than 500 full-time employees (or more than 1,000 employees in a larger group with which the buyer is affiliated), more than $100,000 in insurance premiums, more than $30 million in annual budgeted expenditures (for a nonprofit organization or public entity) or more than 50,000 residents (for a municipality).
Not surprisingly, the National Association of Professional Surplus Lines Offices and the American Association of Managing General Agents are squarely behind H.R. 5637. “We believe it is the right bill at the right time,” Richard Bouhan, NAPSLO's executive director and general counsel, said in a press release. “This legislation will bring much-needed relief to the complex and confusing surplus-lines regulatory process.”
“This is a common-sense solution that is urgently needed by (the) industry and consumers,” added Bernd G. Heinze, AAMGA's executive director, in a letter sent to all 70 members of the House Financial Services Committee.
Commercial insurance buyers, in the form of the Risk and Insurance Management Society, are on board. So are many retail agents and brokers. “We support this bipartisan legislation because we feel it will help alleviate the inefficiencies and expenses which ultimately affect policyholders, as well as independent insurance agents and brokers,” Charles E. Symington Jr., an Independent Insurance Agents & Brokers of America senior vice president, said in a press release.
What remains to be seen is how the states themselves will come down on H.R. 5637. The National Association of Insurance Commissioners has been wary of federal efforts to influence the regulation of insurance, which the McCarran-Ferguson Act delegates largely to the states. For example, the NAIC has not been thrilled with the proposed State Modernization and Regulatory Transparency (SMART) Act. It would increase uniformity and reciprocity of state insurance regulation in a number of areas–perhaps most controversially in preempting prior-approval laws governing the rates of most insurance products.
The surplus-lines portion of H.R. 5637 essentially is a condensed version of one of SMART's 17 sections, or “titles.” Its backers hope that it is sufficiently non-controversial to be enacted on its own. Will the NAIC see matters that way, or will it view H.R. 5637 as the proverbial camel's nose sliding under the tent and go looking for a club?
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