NAPSLO Special Report and Legislative Update
The purpose of this report is to provide a special update to NAPSLO members as we reach the two-year anniversary of the Nonadmitted and Reinsurance Reform Act (NRRA). In enacting the NRRA, Congress took a great step toward modernizing surplus lines regulation and taxation, making regulation more consistent and efficient, with tremendous benefits for the surplus lines industry. In the two years since the NRRA’s passage, the NAPSLO Board, Legislative Committee and staff have been hard at work, with the help of stamping offices and state associations, advocating for the law’s proper implementation to state legislatures, insurance commissioners and insurance department staff, the NAIC and Members of Congress in an effort to fully realize the goals of the federal law.
Our #1 Priority – NRRA Implementation
The NRRA ushered in a national framework for the regulation and taxation of the surplus lines industry, representing a dramatic improvement from the multi-state tax, licensing and compliance issues that plagued the industry for decades. The NRRA’s establishment of home state authority has dramatically reduced the frequent conflict of law issues that once existed by ensuring one state, the home state of the insured, governs multi-state risks. Take for example a multi-state insurance policy with risks in 20 states pre-NRRA. This multi-state transaction was governed separately by 20 states with inconsistent rules for the filing of policy information, the allocation of multi-state premium and related taxes, and the eligibility of the underlying surplus lines insurance carrier, among others. Surplus lines brokers were required to submit separate tax filings and payments in each of the 20 states. The NRRA’s home state authority eliminates these multiple filings and separate regulatory requirements for multi-state insurance risks.
“Home state exclusive authority has been a significant benefit for AmWINS due to the large percentage of multi-state placements written by our various offices. Compliance with only one state’s statutes with regards to diligent effort, export list, tax forms, insurer eligibility and policy document disclosure has allowed us to further streamline our processes and simplified our communication of these requirements with our retailer clients.” – Kathy McVaney, Director of Regulatory Compliance, AmWINS Group Inc.
“Our compliance department’s “Four C’s” goal (is it Current? Correct? Consistent? Compliant?) is a constantly evolving target. The basic NRRA tenants of home state and its related definitions have streamlined the surplus lines process for many of our accounts, and its effects are felt across multiple departments. The larger, more complicated accounts are benefitting most from a simpler and thus quicker approach. With a majority of the states now taxing and retaining 100% of the tax as the home state our internal workflows are far less complicated and time consuming. From a big-picture perspective, our “Four C’s” goal has been made easier to attain.” – Jenny Lind, Compliance Coordinator, Westrope
• Tax Sharing
For the past two years, NAPSLO has focused its efforts on how states may implement any tax sharing approaches. The NRRA contemplated a uniform nationwide system of taxation for surplus lines transactions, but it is important to dispel the myth that interstate compacts or agreements for tax sharing are required by the NRRA. The NRRA does not require the states to share taxes and most states have decided to instead retain 100% of the tax when they are the home state. The overarching principle of the NRRA is simplification of a confusing and inefficient system – the home state approach does exactly that.
While NAPSLO’s recent legislative updates and communications have focused on the details of tax sharing, the status of NIMA and the effective date and reporting requirements of the NIMA Surplus Lines Clearinghouse, it is important to step back and review the national landscape and tremendous strides toward home state taxation. Today, nearly 75% of nationwide premium in 35 states will be taxed by states retaining 100% of the tax as the home state, representing states that have not adopted a compact or agreement for tax sharing purposes. States who entered in to the compact known as SLIMPACT, which is not yet operational, are currently collecting 100% of the tax increasing the home state approach to 44 states and more than 80% of nationwide premium. Those states implementing NIMA, which became effective July 1, 2012, represent 17% of nationwide premium. Since January 1st, six states (Alaska, Connecticut, Hawaii, Mississippi, Nebraska and Nevada) have withdrawn from NIMA leaving Florida, Louisiana, Puerto Rico, South Dakota, Utah and Wyoming as the only jurisdictions currently working to share surplus lines taxes.
Just two short years ago, pre-NRRA, a broker was apportioning premium, calculating taxes at multiple tax rates and making separate tax filings and payments in every jurisdiction involved in a multi-state insurance risk. It was a long time coming, but in retrospect, the home state reform has been quite successful in dramatically improving the process and reducing the cost of surplus lines tax compliance within the state based regulatory system. NAPSLO is pleased with this progress at the two-year mark and will continue its work toward 100% uniformity with home state taxation.
• Insurer Eligibility
Prior to the NRRA, there were unique laws, regulations and practices among the states for the authorization of surplus lines insurers. The NRRA changes that by defining clear and uniform national criteria for determining the eligibility of U.S. based companies to write surplus lines insurance. While a number of states have appropriately implemented the NRRA’s insurer eligibility provisions, our work continues in states whose requirements are inconsistent with the NRRA.
In early 2012, NAPSLO increased its focus on the states’ implementation of the NRRA’s two-prong criteria for insurer eligibility as required by the NRRA. Working with many of our fellow insurance trade associations, NAPSLO met with regulatory officials and submitted a letter to the NAIC regarding the need for the uniform implementation of the NRRA’s insurer eligibility standards nationwide. NAPSLO continues to urge the NAIC and its Surplus Lines Task Force to consider the concerns raised in our April coalition letter, and we have an opportunity to get started during the NAIC Summer National Meeting next month.
• Uniformity in Home State Regulation
In enacting the NRRA, Congress intended that each state adopt nationwide uniform requirements, forms, and procedures for the reporting, payment, collection and allocation of surplus lines premium taxes. There is still tremendous opportunity to improve the uniformity in forms, filing requirements, dates and procedures to create the more efficient and simplified regulation intended by the NRRA. Even beyond the uniformity achieved with the home state approach, the states have the opportunity to demonstrate their ability to modernize and work collaboratively to further reduce the complexity and cost of unique compliance rules and requirements across state lines. NAPSLO continues to promote and work to preserve the uniformity and efficiencies intended by the NRRA.
• Producer Database
The NRRA allows a state to collect fees relating to the licensing of an individual or entity as a surplus lines broker so long as the state participates in the national insurance producer database of the NAIC. In accordance with the NRRA, states had until July 21, 2012 to comply with this requirement. The NAIC’s affiliate, the National Insurance Producer Registry (NIPR), recently reported that all states and the District of Columbia are now participating in NIPR’s Producer Database. All but three states are processing online licensing and renewal applications for surplus lines brokers through NIPR, and two of the remaining states are actively testing their applications with plans to implement their online processing through NIPR soon. While this represents great progress toward the NRRA’s deadline, there is still opportunity for the states to unify their requirements (e.g., renewal timeframe) for the processing of surplus lines licenses.
• Two States To Go
This year, NAPSLO urged the seven states who took no action in 2011 to implement NRRA conforming legislation in 2012. Iowa, Colorado, Wisconsin, Illinois and South Carolina have answered the call and enacted legislation this year, which leaves the District of Columbia and Michigan as the only states yet to introduce NRRA legislation.
Other Legislative Updates
• Zero Reporting Requirements
As a condition of their license (resident and non-resident), surplus lines brokers are currently required to file a tax report with most states, even in cases where no policies were written in the state for the particular reporting period. The reports are typically required for each license, including individual licenses and entity licenses. The report showing that no policies were written is frequently referred to as a “zero report”. Zero reports cause unnecessary work for the surplus lines brokers, because each state requires a specific form with unique data elements and signature requirements, which create the risk of regulatory noncompliance.
In June, the NAPSLO Board of Directors approved a policy position that zero report requirements should be eliminated.
• Certificate of Insurance Requirements
The application of laws or regulations that require certificate of insurance forms to be approved by state insurance departments is inappropriate for the surplus lines market and for its broker/producers. While such requirements might be useful and beneficial for insurance producers that operate in the standard market with admitted insurers, they are unsuitable to the surplus lines market, which is characterized by non-standard and manuscript policy forms requiring that certificate of insurance forms have individual treatment before they can be issued with the proper wording. Freedom from regulation of rates and forms is what distinguishes the surplus lines market from the admitted market and is the essential regulatory feature that allows the surplus lines industry to serve the consumer and function as a market for hard to place risks.
In June, the NAPSLO Board of Directors approved a policy position that opposes provisions in laws or regulations that require surplus lines brokers or surplus lines companies to issue standard or state approved certificate of insurance forms.
• NARAB II
The NAPSLO’s Legislative Committee and Board of Directors recently agreed to support federal legislation to reform the National Association of Registered Agents and Brokers (NARAB). NARAB II, as the legislation is often referred to, will establish NARAB as a national agent/broker licensing entity to provide for one-stop insurance agent and broker licensing for agents operating outside of their home state, while preserving important state regulatory authority and consumer protections. It also supports providing a more competitive insurance market and improves state insurance regulation to the benefit of consumers.
A revised NARAB would operate as follows:
• Federal legislation would immediately establish NARAB as a private, non-profit entity managed by a board composed of state insurance regulators and marketplace representatives.
• State regulators would continue to supervise and discipline producers, and would continue to enforce state consumer protection laws.
• Membership in NARAB would be voluntary and would not affect the rights of a non-member producer under any state license.
• NARAB would establish membership criteria, which would include standards for personal qualifications, education, training and experience.
• NARAB member applicants would be required to undergo a national criminal background check within the last two years.
• Through NARAB, individual agent members would continue to pay the appropriate fees required by each state in which they operate and would renew their NARAB membership biennially.
• NARAB would not be part of, or report to, any federal agency and would not have any federal regulatory power.
The legislation includes changes worked out between legislators, regulators and the industry, and it has been endorsed by the American Association of Managing General Agents, American Bankers Insurance Association, American Insurance Association, Council of Insurance Agents and Brokers, Independent Insurance Agents and Brokers of America, Insured Retirement Institute, National Association of Insurance and Financial Advisors, National Association of Mutual Insurance Companies, NAPSLO and the Property Casualty Insurers Association of America. The NAIC has endorsed the latest version of the legislation.
• Federal Insurance Office
On December 16, 2011, NAPSLO submitted comments to the Federal Insurance Office. NAPSLO’s comments reiterated its strong support of the state based system of insurance regulation, and its belief that any federal policy regarding insurance regulation continue a course aimed at strengthening state insurance regulation and coordinating the efforts of federal agencies with state regulatory systems. As of the date of this report, the FIO report has not yet been released by the Department of Treasury.
NAPSLO’s continued legislative efforts will be driven by our goal to provide our industry the regulatory simplicity and uniformity it needs to reduce the unnecessary and duplicative costs of regulatory compliance best serve consumers. Check out the “NRRA Resources” link on the NAPSLO website for access to background information on the NRRA, NAPSLO guiding principles and position papers, NRRA compliance resources, and state by state summaries of approved/pending legislation, bulletins and guidance. Earlier legislative updates provided to NAPSLO members can also be found below.
I hope this report is helpful to you, and I encourage you to contact the NAPSLO office at (816) 741-3910 with questions or suggestions for how NAPSLO can further assist you and the membership.
Best Regards,
Brady R. Kelley
NAPSLO Executive Director
