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Surplus Lines, Reinsurance Legislation Reform Passes in the House

Posted on 10 Sep 2009

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The House passed legislation today to reform and streamline regulations for nonadmitted commercial surplus lines insurers and reinsurers.

The legislation, H.R. 2571, "the Nonadmitted and Reinsurance Reform Act of 2009," passed unanimously under expedited procedures on a voice vote.

The bill's primary sponsors were Rep. Dennis Moore, D-Kan., and Rep. Scott Garrett, R-N.J. The bill now moves to the Senate, where it was introduced on June 25 by Sen. Evan Bayh, D-Ind.; Sen. Mike Crapo, R-Idaho; Sen. Bill Nelson, D-Fla.; and Sen. Mel Martinez, R-Fla., who resigned effective today.

The legislation would subject the surplus lines transactions, which involve unusual and difficult risks to a single set of regulations—those of an insured’s home state or principal place of business—regardless of the location of the risk.

It would also establish a clear requirement that all surplus lines premium taxes be paid to each the home state. An interstate compact has been drafted that would facilitate the transfer of the premium taxes to the other states involved, as appropriate.

According to insurance industry officials, the practical effect of the legislation would be to provide incentives to states to create an interstate compact that would govern multistate surplus lines placements.

The National Association of Insurance Commissioners did not formally support the legislation, according to insurance industry lobbyists, because the state regulators object to the provisions dealing with reinsurance.

Under those provisions, primary responsibility for regulation of a reinsurance transaction is assigned to the insured’s home state and application of other state laws is prohibited. As a result, it bars state insurance regulators from interfering in reinsurance agreements of ceding insurers domiciled in other states.

According to several industry officials, the NAIC opposes the reinsurance provisions because it has drafted its own reinsurance regulatory proposals and is seeking support for them over those included in the measure the House has passed.

The reason is that the House legislation takes a home-state regulatory approach, while under the NAIC proposal the NAIC would approve states to regulate reinsurance transactions.

Also, under the House bill current state requirements that foreign reinsurers post 100 percent collateral for transactions would remain the same, Under the NAIC measure the collateral requirement would be reduced for some reinsurers judged more creditworthy. The State of Florida,has already reduced the 100 percent requirement for ceding reinsurers highly ranked by credit rating agencies.

Several property and casualty insurance industry trade groups voiced strong support for the legislation and urged the Senate to approve it.

These include the Council of Insurance Agents and Brokers, the National Association of Professional Surplus Lines Offices, Ltd., and the American Association of Managing General Agents.

The Risk and Insurance Management Society, which represents large commercial purchasers of insurance, also backed the bill.

David A. Sampson president and chief executive officer of the Property Casualty Insurers Association of America (PCI), called the legislation “an important step toward reforming and streamlining our current insurance regulatory system.”

"Adopting this reform legislation is a practical solution to longtime marketplace problems," said CIAB President Ken A. Crerar. "The result will be lower costs to insurance consumers and greater access to affordable products."

NAPSLO President John Wood added that the surplus lines organization is “very pleased to see the strong support the House members gave the bill, and we hope the Senate will follow suit."

"This is an important piece of regulatory reform that will help both consumers and the industry," he said.

But Steve Bartlett, president of the Financial Services Roundtable, which represents large multinational insurers, said in a letter to all members of the House that although “this measure is meaningful,” its passage will mean that the U.S. insurance industry “will receive only a narrow and incremental improvement to the efficiency of regulation.”

Instead, Mr. Bartlett said, Congress should “build on this progress toward uniformity, by moving quickly to pass comprehensive insurance reform for all lines of insurance as part of financial regulatory reform.”