The NAIC’s indecisive dance on
surplus lines again delays states from acting. Doing nothing
really does something—a lot of state regulators are
likely to be angry at the outcome.
Scott Sinder and John Fielding
The Dodd-Frank Wall Street Reform and Consumer Protection
Act, signed into law by President Obama last July, includes a
key provision that The Council and commercial insurance brokers
had been advocating for years: the reform of state regulation
of the surplus lines insurance market.
Dodd-Frank’s surplus lines provision, taken directly
from the Nonadmitted and Reinsurance Reform Act (NRRA), which
passed the House four times in recent years, addresses the full
spectrum of surplus lines regulation. It establishes uniform
standards for insurer eligibility; limits regulation of a
surplus lines transaction to the home state of the insured;
allows automatic export to the surplus lines market for
sophisticated commercial purchasers; and requires state
participation in a national producer licensing database.
Perhaps most importantly, the NRRA says that only a single
state—the home state of the insured— can require
the payment of surplus lines premium tax. The home state can
require risk allocation information from the broker in addition
to payment, but it’s up to the states to allocate (or
not) among themselves.
Most of the NRRA reform provisions go into effect July
21—one year after enactment of Dodd-Frank. Given the
timing, the states are under some pressure to act quickly to
make their laws and regulations conform to the new federal
standards. True to their nature, the states have not taken the
opportunity offered by NRRA to develop a single set of uniform
rules for surplus lines regulation. Instead, we have competing
approaches pushed by the state regulators through the National
Association of Insurance Commissioners (NAIC) and by the state
legislators through the National Conference of Insurance
The NAIC is pushing a narrow approach designed to address
only the tax collection and allocation issue. The regulators
adopted the “Nonadmitted Insurance Multi-State
Agreement” (NIMA) in December. NIMA would create a
central clearinghouse for reporting, collecting and
distributing surplus taxes, and prescribes uniform allocation
and reporting methods. State regulators have been supporting
legislation in their individual states to give them authority
to enter into NIMA and require them to share surplus lines
premium taxes only with other states who are signatories to the
In contrast, NCOIL, which is a group of state legislators
from across the country, is advocating for Slimpact—the
Surplus Lines Insurance Multistate Compliance Compact. Slimpact
takes a much more comprehensive approach than NIMA to
satisfying the reforms provided for in the Nonadmitted and
Reinsurance Reform Act. Slimpact addresses not only the tax
collection and allocation issues, but the other regulatory
issues addressed in NRRA, such as insurer eligibility, insured
“home state” determinations, commercial purchaser
exemptions, and so forth. It provides for the creation of a
governing commission made up of the compacting states that
will, essentially, have authority to make decisions in
connection with these surplus lines regulatory policy issues.
Importantly, a state that becomes a member of the compact will
only be authorized to allocate premium taxes with other
members. Slimpact can only be created if 10 or more states, or
states with at least 40% of all surplus lines premium coverage,
enter into the compact.
Only six states have enacted legislation that would allow
the state insurance regulator to enter into a NIMA-type
agreement, and only Kentucky and New Mexico have enacted
legislation adopting Slimpact. Legislation pending in about 30
other states would provide the state insurance regulator with
authority to either enter NIMA or join Slimpact—or both,
in some cases.
A few state legislatures are considering bills that would
tax 100% of surplus lines premiums and keep it all for their
state. New York and Washington have already adopted such a law.
At the most recent NAIC meeting in Austin, legislators and
regulators continued to disagree about the relative merits of
their respective approaches. Absent an agreement, however, the
default will be a no-allocation model in which taxes are paid
to the home state based solely on the home state’s tax
Compliance would be simple, straightforward and inexpensive
(at least by comparison). On the state side, simplicity also
should result in enormous cost savings. The potential benefit
of allocation—a “fairer" distribution of
proceeds—may be illusory, and the cost for attaining such
perceived equity is probably unwarranted.
In this instance, the moniker often applied to the
NAIC—“No Action Is Contemplated”—is
living up to its name.
Sinder, a partner at Steptoe & Johnson, is CIAB General
Fielding is of counsel at Steptoe & Johnson.