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Dodd-Frank Financial Services Regulatory Reform: NAIC Initiatives

Non-admitted and Reinsurance Reform Act of 2010 (NRRA):

Surplus Lines

The NAIC Executive Committee charged a Surplus Lines Implementation Task Force at the Summer National Meeting in August 2010 with developing state-based solutions for addressing the surplus lines part of the Nonadmitted and Reinsurance Reform Act (NRRA).

NOTE: As a result of the restructuring of task forces in 2012, the Surplus Lines Implementation Task Force was disbanded and its charge transferred to the Surplus Lines (C) Task Force.

Most of the NRRA’s provisions will go into effect in July 2011, and states effectively have until June 2011 to become part of a nationwide solution. Regulators want to ensure states continue to receive premium taxes based on the risk or exposure located in a given state.

Early in its deliberations, the Task Force agreed that certain legislative changes need to be made for states to participate fully in a nationwide system for premium tax allocation and disbursement:

• States should adopt a uniform definition of “home state” consistent with the NRRA.
• States should amend their laws to provide for the authority to tax 100% of the gross premium of a surplus lines policy for which that state is the home state.
• States should change their laws to provide for the authority to allocate on a reciprocal basis a portion of the premium tax related to the percentage of the property or risk in those other states.
• States agree that a uniform method of reporting in conjunction with tax collection and allocation is necessary.

Insurance regulators have reached out to stamping offices, revenue departments and other state agencies affected by the NRRA and a proposed national system for premium tax allocation and collection.

After considering various approaches, the Task Force opted to develop an interstate agreement, presently known as the Nonadmitted Insurance Multi-State Agreement (NIMA) which states could enter into through enabling legislation and other statutory changes to allow full participation in the agreement. 

Among NIMA’s key features:

• A central clearinghouse for reporting, collecting and distributing surplus lines premium taxes would be established.
• The clearinghouse would generally be used for multi-state placements, but states would have the option of utilizing the clearinghouse for single-state placements.
• Surplus lines licensees and individuals independently procuring nonadmitted insurance would have access to a web-based software program for ease of filing and reporting.
• Uniform allocation formulas and reporting methods would be prescribed. 
• A role for stamping offices, in those states that have them, would be preserved. 
• States would be required to establish a “blended tax rate” encompassing applicable taxes and fees across lines of business, which has been considered crucial to streamlining the compliance obligations of the broker community. 

NIMA is not a broad regulatory compact and it does not go far as some regulators and industry may have preferred, but it does provide a means for preserving something close to the status quo where premium taxes are concerned. This was considered crucial to Task Force members, and there is a legitimate concern about the ability of all states to enter into a formal interstate compact in the short time frame allowed by the NRRA.

The Task Force recently established a subgroup to develop a plan of operation for the clearinghouse established through NIMA. This group is putting together the details of what regulators and other state officials need a clearinghouse to do for those states that join NIMA and that work will likely lead into development of a RFP (or something like it) so a system can be procured that will work for joining states. There is also a small group of lawyers working on a model contract to be entered into by the states and the clearinghouse.

The Task Force understands NIMA is one part of state implementation of a surplus lines regulatory reform. The Task Force believes NIMA allows states to address the pressing issue of preserving surplus lines premium tax revenue within the very short period of time provided by Congress. As for other areas of surplus lines regulatory reform, the work of the Task Force will be ongoing. 

While a handful of regulators have supported SLIMPACT, most regulators believe SLIMPACT and the revised SLIMPACT-Lite proposal go too far. Specifically:

• SLIMPACT would establish a central commission with the authority to promulgate rules that could preempt contrary state laws in ways not necessarily required by NRRA. For example, while the NRRA authorizes and incentivizes states to put in place a nationwide uniform system for tax allocation, states can agree to do this in ways that do not mandate ceding authority to a compact commission that could preempt state laws.
• Many regulators object to the governance structure of SLIMPACT. Under the most recent iteration, SLIMPACT would establish an Executive Committee and an Operations Committee. By SLIMPACT’s terms, the Operations Committee must be comprised of individuals with extensive experience and/or employment in the surplus lines business, including insurance industry professionals, law firms, regulators and surplus lines stamping offices. In fact, stamping offices must be appointed to the Operations Committee if a state on the committee utilizes such an office. While the Executive Committee oversees the Operations Committee, the Executive Committee must accept the determinations and recommendations of the Operations Committee unless good cause is shown otherwise.