By: Arleen Taveras – President & CEO, Insurance Licensing Services of America, Inc.
With this summer’s passing of the financial reform bill, including the Non-admitted and Reinsurance Reform Act (NRRA), regulators are now under the gun to come up with the how to meet the law’s when deadline (July 2011) for implementation of the mandates set forth in this legislation. This monumental undertaking has been put in the hands of the National Association of Insurance Commissioner’s (NAIC) Surplus Lines Implementation (EX) Task Force; a body that must create a clear, workable structure from the vague and certainly ambiguous blueprints set before them by the federal government. This task force is comprised of insurance commissioners from LA, AK, DE, FL, IL, IN, NV, NY, PA, SD, TX and VA and is chaired by the Honorable James J. Donelon, Louisiana Commissioner of Insurance.
Chief among the hurdles to be cleared is the adoption of a unified system for surplus lines tax premium collection and allocation including premiums on multi-state placements. Either from compacts or agreements, the task force must come up with an easy tool for brokers and state regulators to use for tax filings in the home state of the insured which will also allow the other participating states to capture their fair portion of the tax premiums through an automated allocation process. This feat can be likened to asking 51 individual chefs to bake a single cake to feed over 160,000 people. If that isn’t daunting enough, the 51 chefs must agree on the shape, size, and flavor of both cake and frosting. Oh, yes, and these chefs must also agree on the size of each slice as it is cut.
The task force has the unenviable task of creating this regulatory recipe and having it market ready before the opening sessions of the states legislatures at the beginning of the year. Failure to create a palatable product that will be adopted by the states could cost many states millions in tax revenue as they will lose their authority to collect their portion of the premiums on multi-state placements if they are not the home state. The home state of the insured, by default, will be the only state allowed to collect taxes on the policy. Also, home states that don’t opt in to the unified tax filing system – compact or agreement - could lose their rights to charge a fee for licensing surplus lines brokers.
Recently, the task force met to consider several proposals such as the SLIMPACT plan from Virginia and SLIMA plan from Florida. On October 26th, the decision was made to combine elements from both proposals and they came up with the Nonadmitted Insurance Multi-state Agreement (NIMA). Now the task force must refine this agreement as all the states, not to mention the other interested parties such as NAPSLO and the state stamping offices, weigh in with their concerns and desired input.
To add another wrinkle, the National Conference of Insurance Legislators (NCOIL), with a strong push from the industry, have put forth an updated version of SLIMPACT – originally mapped out in 2007 – and have dubbed it “SLIMPACT-Lite.” This agreement has the support of top industry groups such as, The American Association of Managing General Agents (AAMGA), the National Association of Surplus Lines Offices (NAPSLO), and The Council of Insurance Agents & Brokers (The Council), who recently sent an open letter to insurance regulators and legislators asking them to support NCOIL’s proposed option over NIMA as proposed by the NAIC. The letter points out several issues they feel are not adequately addressed in NIMA; issues they fear will result in even more confusion for both legislators and licensees. At this point, our compliance kitchen is getting very crowded.
NCOIL held its annual meeting in Austin, TX in mid November where this topic was discussed at length. NCOIL members were adamant in their lack of support for NIMA stating that it failed to live up to the mandates of the NRRA and asked members of the NAIC, including James Donelon, the chairman of Surplus Lines Implementation (EX) Task Force, to join in a joint task force that would include members of the NAIC and NCOIL where the pros and cons of NIMA and SLIMPACT-Lite could be discussed and a possible solution found between the two options.
As we enter the first weeks of December, NCOIL has thrown all its weight into supporting their SLIMPACT-Lite plans and have opted to take it directly to the states. The NAIC also voted to push forward with NIMA - in the shadow of mounting opposition from industry organizations - and stated that NIMA in its current form would move forward with the option to edit it later. This vote took place in spite of a last minute proposal from Delaware that attempted to blend the NIMA and SLIMPACT-Lite plans into one unified compact that appeared to offer a workable compromise. Motions for more time to review the new option were denied and the motion to move forward with NIMA was carried 9 to 0 with two task force member states abstaining. We now have two compact agreement options going to the states; if not a recipe for disaster, it has certainly increased the temperature in the kitchen.
Meanwhile, the nation’s surplus lines brokers sit idly by and wonder about the future of their business. The NRRA not only affects how and to whom they file their taxes on policies, but also their licensure and compliance which is still very much up in the air as everything is contingent upon the agreement and subsequent buy-in of each state. If a multi-state policy is written involving two or more states and each state has adopted a different compact, home state rules apply and things start getting messy and confusing again, especially for the broker.
Failure is simply not an option for states already suffering financially and working overtime to interpret and implement the necessary changes to comply with the Healthcare Reform Act that also passed into law earlier this year. The NAIC task force is scheduling weekly conference calls to share and report all correspondence and progress made on implementation of the NRRA. They certainly have their work cut out for them along with a deeply vested interest in the outcome.
If all that isn’t enough to ruin your appetite, the midterm elections are over and there’s been a major shift in the political tides. Republicans have gained enough seats to take control of the House and rumors of repeals, of all or parts of recent insurance and financial legislation, circulate and cause more confusion and angst. To top that, failure to find a workable solution that lives up to the intent behind the NRRA could result in further federal involvement as the FIO must report back to congress on the effectiveness of the NRRA mandates including implementation of the interstate compacts in 2013.
Once again, we are relegated to the cheap seats as we finish up the year much as we started it … uncertain, and hungry for something solid to build on.
Cake, anyone?
R: 12/9/2010
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