I'm a “grab the bull by the horns” kind of guy. I don't like to sit back and wait for things to happen and I certainly don't shy away from new ideas or opportunities, especially if they're good ones. So it's been particularly frustrating to watch what has been happening with the state implementation of the Dodd-Frank provisions regarding surplus lines insurance—the Nonadmitted and Reinsurance Reform Act (Editor's note: For more on NRRA, turn to “NRRA Grows Up Fast” in this issue).
Unlike so much else in Dodd-Frank, these provisions were supported widely on both sides of the aisle, and Council members are deeply appreciative of the members of Congress who worked to get these important reforms enacted. Surplus lines insurance represents about a third of the commercial insurance marketplace, involving insurance risks that tend to be more sophisticated and are largely commercial.
Read Ken A. Crerar's previous Sounding Board article, “Future of Regulation is in States' Hands.”
The surplus lines provisions of Dodd-Frank made it clear that the only rules that would govern a multi-state placement of surplus lines products are the rules of the home state of the insured. This is simple and straightforward, and, again, all of the major stakeholders supported these provisions. For many years, states have tried and failed to harmonize their laws governing interstate surplus lines transactions, especially the issue of premium tax allocation. We believed that the enactment of the NRRA provisions in Dodd-Frank would have afforded the states to collectively devise an interstate compact to govern these transactions.
Instead, states have been all over the map during the past year. Some states have signed on to a compact that would govern all aspects of a surplus lines transaction. Some states have agreed only to a sharing formula for premium taxes, but the allocation procedure has yet to be constructed. Some states (especially some big states) want 100 percent of the premium taxes for insureds headquartered in their jurisdictions. Now that the NRRA implementation date has passed, it is a complete mess.
We're confident in the end that congressional intent will be upheld: a single standard for multi-state surplus lines transactions. However, we also think the states need to know that all eyes are on them and that, at least from our vantage point, things aren't looking very good right now.
Change is never easy. And we think the surplus lines situation is good evidence that there is justification for very limited federal reforms. It is very, very difficult for states to coordinate and streamline and harmonize in the absence of a broader political dynamic.
Grabbing any bull by the horns often results in a few cuts and bruises. But ushering out inconsistency and conflict in place of a single state regulatory system for surplus lines placements is of vital importance for our industry and will be incredibly beneficial for the market going forward. It's worth the fight.
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