Posted on 16 Jun 2010
While most of the U.S. financial sector frets over the sweeping provisions of the financial reform bill that may now be steaming toward passage in Congress, surplus lines insurers and brokers have eyes for one long-awaited section of legislative language that could make a huge change in their industry.
The financial reform bill includes language that those in the surplus business have been trying to get turned into law for years. It would put taxation, regulatory and licensing authority exclusively into the home state of the insured, meaning that multistate policies would only have premiums taxed in a single state. The section is the same in both the U.S. Senate and House versions of the bill, so if the legislation passes -- as Democratic leaders hope to get done later this month -- the surplus market will be dealing with a significant reform.
The legislation says "no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance." As for how the home states might disseminate those tax revenues to other involved states, the bill says they "may enter into a compact or otherwise establish procedures to allocate among the states the premium taxes paid to an insured's home state."
"For the broker, it's a huge improvement," said Steve Stephan, director of government relations for the National Association of Professional Surplus Lines Offices. It establishes "a much easier process," he said, because for each multistate policy, brokers would only have to deal with the single state and its one set of laws for taxation and for rules governing such things as placement. Those selling surplus policies see this legislation as a general streamlining of taxation difficulties that have required brokers to hire employees just to keep track of the different state systems and the details of risk allocation percentages for each state. "The Congress intends that each state adopt nationwide uniform requirements, forms, and procedures, such as an interstate compact, that provides for the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance," according to current language in the Restoring American Financial Stability Act of 2010, S 3217.
he reform legislation also says that in each transaction, brokers would only have to be licensed in the insured's home state. For a major 50-state policy, for instance, a broker would not need to be maintaining licensing in all 50 states.
Stephan said it was more than two decades ago that the nonadmitted system started moving toward more taxation confusion, adding this legislative proposal just moves back the calendar. "All these reforms are the way it was up to about the mid-'80s when things started changing in the tax situation," he said. States began re-writing their laws to require allocation of premium taxes based on a policy's share of risk within their borders. "It was easy to say in a law, but it was very difficult to do in practice."
"It got extremely complex and subject to a variety of inconsistent results," said Bernd G. Heinze, executive director of the American Association of Managing General Agents. "In this marketplace, we need to be consistent." It was also expensive. Heinze said the overhead for brokers and managing general agents to maintain staff for state-by-state compliance issues has been estimated at as much as $90 million a year.
The legislation also eases access to surplus lines by commercial purchasers, who won't face as many restrictions when seeking surplus coverage rather than purchasing coverage in the admitted market. And within two years, a state can no longer collect licensing fees from a surplus lines broker unless the state provides for participation in an NAIC national producer database (or similar entity) for the licensing and renewal of such brokers.
"This will remove some of the drag and the slowness of completing that insurance transaction," Heinze said, referring to the challenges of the increasingly complex 50-state system. "Insurance has become much more nationalized now," he said.
So, those who deal in surplus lines are watching the key U.S. lawmakers, hoping their newly established conference committee produces a unified reform bill that can pass both the House and Senate. "Most folks in the industry are pretty optimistic," Stephan said.