Florida Surplus Lines Service Office Board of Governors Meeting Report: July 25, 2012

Aug 1, 2012

 

The Florida Surplus Lines Service Office (“FSLSO”) Board of Governors met in St. Petersburg, Florida on July 25, 2012.

After Chairman David Holcombe called the meeting to order, the minutes of the FSLSO’s April 16, 2012 Audit Committee and Board of Governors’ meetings were adopted.

FSLSO Executive Director Gary Pullen provided an update on the Nonadmitted Insurance Multi-State Agreement (“NIMA”) National Clearinghouse (“Clearinghouse”), which is being operated by the FSLSO.  As part of his update, Mr. Pullen reviewed a Clearinghouse Analysis (“Analysis”) that was recently prepared by the FSLSO.  He indicated that Florida legislation implementing the Nonadmitted and Reinsurance Reform Act (“NRRA”) required that the Florida Office of Insurance Regulation (“OIR”) provide a report by January 1, 2011 to the Florida Legislature, which included the amounts of multi-state premium processed by the FSLSO.  Much of the recent criticism of NIMA is based upon information contained in that report; however, it was noted that the report was based upon preliminary data.

Mr. Pullen reminded that because Florida’s NRRA implementing legislation provided that when Florida was the home state of the insured, Florida would tax other states’ exposures on multi-state policies at those states’ rates, the FSLSO was required to revise its filing system to be able to accommodate the varying rates of all states, and submitting brokers were required to allocate premium and tax accordingly.  The FSLSO has now had the ability to perform further analysis based on a full year’s worth of those allocated filings, which were submitted from July 1, 2011 to June 30, 2012.

Mr. Pullen discussed the NRRA’s stated Congressional intent of nationwide uniformity, and indicated that part of that objective includes implementing uniformity in state filing requirements.  NIMA has had a positive effect in this regard by reducing the number of state requirements from 50 to 45, because those states that members of NIMA are using one set of rules for tax filing.  Arguments that each state should keep 100 percent of the taxes imposed when it is the home state do not advance the NRRA’s stated intent of uniformity, he said. 

In reviewing the figures set forth in the Analysis, Mr. Pullen indicated that, in the first quarter of the year analyzed (which was the third quarter of 2011), 4 percent of the total premium was attributed to multi-state premium.  That percentage rose in each of the subsequent quarters, to 14 percent, 22 percent, and 60 percent, respectively.  He explained that this data demonstrates there was a learning curve in how to allocate and report multi-state premium, and pointed out that the figures significantly change the earlier projections regarding estimated amounts of multi-state premium and corresponding tax.  The earlier projections were based upon an estimation that just 3.4 percent of premium was multi-state premium, whereas based on the updated data, it is actually 10 percent of total premium.  Of that amount, 54 percent of the premium was allocated to exposures in states other than Florida.

Mr. Pullen stated that, on a nationwide basis, total multi-state premium is estimated at $3.1 billion, generating approximately $136.5 million in taxes, calculated at a national weighted average tax rate of 4.4 percent.  If the 54 percent allocation rate demonstrated in Florida were applied, the amount of tax revenue to be allocated among the states would be approximately $74 million.  These figures demonstrate that it is financially viable to have a tax allocation system in place, and the successful establishment of the Clearinghouse further demonstrates the capability to implement nationwide uniformity, while still enabling the states’ varying tax rates and policies.

The Analysis reviewed by Mr. Pullen includes a discussion of the risks to the Clearinghouse project’s success.  Competition remains a moderate risk, inasmuch as there are some parties advocating to utilize the “OPT Ins” system of the National Association of Insurance Commissioners (“NAIC”).  The NAIC was involved in initial Clearinghouse discussions; however, the FSLSO successfully moved ahead with establishing it. 

The aggressive scheduling to launch the Clearinghouse operations has been a high risk that has been managed well so far, with the Clearinghouse becoming operational on time and on budget, Mr. Pullen explained.  There is more work to do, such as programming and finalizing banking relationships and procedures in order to meet the next stage in the process by October 1, 2012 – the date on which invoicing of reported taxes must be done.

Mr. Pullen next discussed the resource constraints on the Clearinghouse, particularly since the revenue that will be brought into the Clearinghouse will not “catch up” with the expenses incurred until later in the process.  The projections have improved regarding the amount that will be generated; however, the possibility of insufficient revenue is still a high risk.  NIMA permits states to utilize the Clearinghouse for the filing of single state policies as well.  Contracting with states for this service would be another source of revenue and there are currently two states interested in doing so (Wyoming and South Dakota).

Mr. Pullen indicated that the potential withdrawal of states from NIMA poses a high risk to the Clearinghouse viability or the “life span.”  NIMA provides for 60 days notice of withdrawal, however, the participating states agreed that notice would not be needed if a state withdrew prior to July 1, 2012.  Nevada withdrew on the Friday before the Clearinghouse went live (Sunday, July 1).  This action necessitated some last-minute programming changes.

The collection of Clearinghouse transaction fees was described by Mr. Pullen as a moderate risk, since it has not yet occurred and the participating states are responsible for enforcing the collection of fees.  NIMA does include language that provides remedies to the Clearinghouse in the event of delinquency.

The authority of the participating states was initially identified as a risk; however, because the states have subsequently passed legislation relating to the issue, or withdrew if they had concerns with it, the risk for the remaining participating states is now low.

The Analysis includes premium projections, which assume that 10 percent of total premium is multi-state premium and there is no growth from 2010 premium figures.  Based on these assumptions, and also including estimated single-state premium that may be processed, for the six quarters beginning July 1, 2012 and ending December 31, 2013, the Clearinghouse would generate approximately $2.7 million in service fee revenue.  If levels of premium increase beyond the 2010 amounts, additional revenue would result.  More detailed projections of Clearinghouse revenue and expenses were provided, which allocate anticipated revenue to correspond with the increasing percentage of multi-state filings made in each quarter for the year analyzed.  Based upon the estimated projections, the Clearinghouse revenue would exceed expenses by the third quarter of 2013.

Following the discussion of these figures, the process of taxation of multi-state policies was briefly reviewed.  Mr. Pullen indicated that each NIMA state has differing laws regarding how they tax premium allocated to other jurisdictions.  The Clearinghouse Tax Calculator applies the appropriate state’s tax rate and other nuances to the allocated premium that is filed.

A Surplus Lines Clearinghouse Report included within the Analysis reviews the implementation timeline and deliverables for each phase of the Clearinghouse project, as of July 16, 2012.  All Phase 1 deliverables were timely completed prior to the July 1 deadline.  Phase 2 and Phase 3 development and programming are underway and the deadlines for completion are October 1, 2012 and January 1, 2013, respectively.

Statistics related to the Clearinghouse have been changing on a daily basis and Mr. Pullen provided updated information as of July 24, 2012 to supplement the report.  The total number of registered reporting entities was 76 on July 16.  That number has increased to 106.  The number of Surplus Lines Information Portal (SLIP) users rose from 143 to 195.  There had been 12 policies and 15 transactions processed as of July 16, which has increased to 41 and 59, respectively.  The total amount of premium processed had been $398,030, which rose significantly to $3,018,000 as of July 24.  The total taxes, fees and assessments processed increased from $25,003 to $140,485.

Mr. Pullen concluded his update on the Clearinghouse by reviewing its annual budget.  A total budget of $861,270 was set for the year, and $286,724 has been incurred to date. 

Florida Insurance Consumer Advocate Robin Westcott raised the issue of lobbying that has taken place to advocate against NIMA and in favor of states’ retention of 100 percent of the taxes paid on multi-state polices when a state is the home state of the insured.  Ms. Westcott inquired as to whether the Clearinghouse has considered advocating at the national level to combat these efforts and advance the future of NIMA.  Mr. Pullen responded that he agrees support from professional resources with a governmental presence should be sought to provide access to those in the industry who could be helpful in this regard.  Mr. Pullen has had discussions with firms that could offer such services and he indicated he would like to work with the Executive Committee to further explore the prospects and commit resources to this effort.  Time is of the essence, as Mr. Pullen and Ms. Westcott agreed that it would be beneficial to have discussions on the topic at the upcoming NAIC Summer Meeting.  Ms. Westcott made a motion to permit Mr. Pullen to work with the Executive Committee on this endeavor, which was seconded by Ms. Palmer. 

In further discussion on the issue, Board Member Mike Franzese mentioned a report that the National Association of Professional Surplus Lines Offices had issued that morning, which indicated that the system whereby states retain 100 percent of the multi-state premium tax paid by their home state insureds is less complicated for brokers to process. 

Mr. Franzese indicated that efforts to advocate for NIMA and the tax allocation and sharing concept may need to be directed more broadly to reach those in the industry that are affected by the issue.  Board Member Skip Wolf stated that he would like to see a cap on the professional fees established in order to ensure that the fees are reasonable for taxpayers to incur.  Ms. Westcott revised the language of her motion consistent with the comments made by Mr. Franzese and Mr. Wolf, and it was unanimously passed by the Board. 

Mr. Pullen proceeded with the FSLSO Executive Director’s Report by reviewing the Executive Summary of the FSLSO Customer Survey (the “Summary”) that was recently performed.  The researcher who performed the survey said the response rate was very high and indicated that the results were very positive compared with most surveys that he conducted.  Mr. Pullen commented that both of those results reflect well on the FSLSO Staff. 

Next, Mr. Pullen reviewed the FSLSO Operational Assessment Report for the second quarter of 2012, which included data related to the FSLSO’s compliance, efficiency and productivity.  Certain negative figures in the Productivity Index reflect reconciliation issues related to a statutory change from monthly to quarterly billing of the service fee, and the implementation of quarterly filing for Independently Procured Coverage (“IPC”).

Mr. Pullen indicated that discussions are underway with firms that help establish pricing of software.  The FSLSO software is currently priced based upon a percentage of premium; however, as states consider using the Office’s software and services, this pricing model presents certain challenges.  States typically need to present pricing to their legislatures or follow other procedures in order to obtain approval to enter into agreements for services.  Since the corresponding fees and total amount of premium are not known at that point, other pricing models are being considered in an effort to further develop this market.  Mr. Pullen indicated that he will bring information to the Board for its consideration at the appropriate time in the discussions. 

A standardized contract based on NIMA, but to be entered into with NIMA participating states that choose to use the Clearinghouse for single-state policies, is in the process of being drafted.  Mr. Pullen will bring that document to the Board at the appropriate point as well. 

Mr. Pullen indicated that the FSLSO and Clearinghouse must register significant changes to software, logos and other intellectual property, which has been done.  In addition, Mr. Pullen mentioned that the FSLSO has developed a mobile application of its Tax Calculator that is available for downloading from the Apple iTunes and Android application stores.

The Florida Office of Insurance Regulation (“OIR”) has indicated that it will be performing an operational examination of the FSLSO.  A preliminary meeting will be held on July 31, with the examination to be performed shortly thereafter.  An examination of the FSLSO has only been conducted once before in the history of the organization and therefore, Mr. Pullen was not certain of the amount of the costs of the exam.  He indicated that it is statutorily required that the expenses be borne by the FSLSO, and this has not been budgeted.  He anticipated that the exam would be fairly targeted and would consider, among other factors, the statutory responsibilities of the Office compared to its internal procedures.  The FSLSO has historically followed its established internal audit procedures and Mr. Pullen therefore anticipates the examination should go smoothly.

Mr. Pullen concluded his discussion by providing a status update on certain operational objectives that had been previously identified, including expanding the available Web platforms for the Office’s website and developing a document management system to provide user reminders.

After a short break, FSLSO Chief Financial Officer Jim Godfrey provided a financial report of the FSLSO.  Reported premium increased in the second quarter of 2012, mostly attributable to commercial property filings.  When actual figures are compared with those budgeted, agent premium and revenues are about as expected, but IPC revenue is less than anticipated, which is believed to be attributable to home state filings being made by IPC filers, pursuant to the NRRA. 

A motion was made by Board Member Roy Fabry to accept the financial report that was submitted to the Board.  After a second was received, Mr. Franzese inquired about the current operating deficit and when consideration is given to raising fees.  Mr. Pullen indicated that the FSLSO budget is due to the OIR by November 1, and that the budget and Board meeting would take place in October 2012, which would be an appropriate time for further discussion on that issue.  The use of the “Investment Funds” category within the revenue section of the budget was discussed, and it was agreed that, because this line item was utilized to offset the deficit, it should not be categorized as revenue.  Instead, the operating deficit should be calculated and then these funds would be applied as deficit spending. 

Next, FSLSO Assistant Director of Agent and Insurer Services Tom Terfinko presented the Office’s Second Quarter 2012 Report and read certain highlights of it.  Responding to a request by the Board at the last meeting, Mr. Terfinko provided a report of all FSLSO insurance coverage currently in place.

Chair Holcombe indicated that the budget meeting will be held in the afternoon on October 23, 2012, and the Board meeting will be held the following morning.

The meeting was then adjourned at 2:55 p.m.

To view the meeting materials, click on the hyperlinks below:

 

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