Logic Be Damned
Once again the NAIC shows the
states’ self-interest supersedes their ability to work
together for uniform regulation.
In my 18 years as The Council’s lobbyist, 2010 was the
biggest legislative rollercoaster—from the highs of
enacting solid insurance provisions in the Dodd-Frank
regulatory overhaul to the lows of healthcare reform that gave
the lie to the notion that, if you like your health insurance,
you get to keep it.
Now the National Association of Insurance Commissioners is
in the process of dumbing down the best accomplishment of the
commercial insurance industry last year—specifically, the
surplus lines reforms designed to improve the multistate
Commissioners rapidly came to the conclusion that all they
care about is revenue, and they’ve created a proposed the
Nonadmitted Insurance Multistate Agreement that does little to
streamline the surplus lines regulatory regime and is sure to
perpetuate nightmarish regulatory disputes.
It’s likely that brokers and clients will continue to
be mired in countless conflicting state interpretations. This
is so disappointing. But given the history of the NAIC,
it’s not altogether surprising. What is surprising,
though, is the speed with which regulators abandoned the
pursuit of uniformity.
Every state has rules governing the placement of surplus
lines: eligibility standards for insurers, premium tax
allocations, “diligent search” requirements
regarding the admitted market that must be exhausted before a
broker can seek surplus lines coverage, and so on. When a
client is located in a single jurisdiction, it’s a pretty
clean system. But on a multistate transaction, which is
increasingly the norm, the system is deeply inefficient.
The NRRA provisions (“Nonadmitted and Reinsurance
Reform Act”) of the Dodd-Frank regulatory bill were
initiated and pursued by The Council for eight (l-o-n-g) years.
The premise was simple: The only rules that will apply to
multistate surplus lines placements are the rules of the home
state of the insured. Not only is that a streamlined approach,
it’s also logical. No matter where a client’s risks
may be located, it’s the single corporate treasury that
is in jeopardy of loss.
The NRRA, as eventually enacted, also contained ample
incentives for states to get together and form an interstate
compact to govern access to the surplus lines market and to
efficiently and appropriately share in revenue from premium
taxes. The reason the NAIC was helpful in passing the NRRA is
that the association viewed the act as the only opportunity to
create the political dynamic necessary to get the interstate
compact done, which has been a stated goal for decades.
The main obstacle to passing the surplus lines measure over
the years was the perception that there would be winners and
losers among the states, depending on whose treasury was where.
Our view has always been that, with a simple system, everybody
would be a winner because of fewer friction costs and an uptick
in compliance. But if states want to establish a formula for
sharing, the proposed “SLIMPACT” could do the
But, of course, states are all over the map. Some think they
deserve all the tax if the company is headquartered there. Some
think they’ll be winners, while others worry
they’ll be losers. With the effective date of July,
regulators rapidly developed myopia on taxes and walked away
from any substantive conversations about how to make the
allocations work or how to develop uniform regulatory criteria
governing surplus lines.
More disturbing is the NAIC’s development of a
multi-tiered definition of “home state.” The
Nonadmitted and Reinsurance Reform Act had a perfectly good and
simple definition. The states were worried that people would be
able to game the definition and jurisdiction shop. So they
developed a new definition to be adopted by all states who
adopt the Nonadmitted Insurance Multistate Agreement. And the
sates who don’t adopt it? They’ll use the
definition found in the The Nonadmitted and Reinsurance Reform
To its credit, the National Conference of Insurance
Legislators and the National Conference of State Legislators
both endorsed a more comprehensive “SLIMPACT-Lite”
to tackle the issues. Given relatively short legislative
sessions in most states, it’s hard to see how these bills
can be enacted, especially given the NAIC decision to punt on
the tough issues.
NAIC commissioners have said they will continue to pursue
uniformity over the long haul. Sorry, but we’ve heard
that line before. When the NARAB agent/broker licensure
provisions became law in 1999, states could go the path of
loose reciprocity or more desirable uniformity. They took the
path of least resistance, promising that they would get to
uniformity after avoiding NARAB. Eleven years later, licensure
problems are still a beast. No significant progress on
uniformity has occurred.
Fortunately, we are not defenseless. The conflict between
state legislators and regulators might mean nothing will get
done, which would not be the worst alternative (thus,
home-state rules and taxes only). The congressional authors of
the NRRA have already fired a warning shot. Also, the incoming
chairmen of the House Financial Services Committee and Senate
Banking Committee, respectively, Spencer Bachus of Alabama and
Tim Johnson of South Dakota, were big and open backers of NRRA.
Neither is a shrinking violet on the need for better insurance
regulation. After all the work that went into making the NRRA a
reality, congressional leaders are unlikely to shrug and walk
away from poor implementation of the law.
Wood is The Council’s senior vice president of