Florida Surplus Lines Service Office Board of Governors Reviews 2011 Business Plan, Discusses Clearinghouse Status

 

Questions arose about the scope and feasibility of operating the proposed Non-Admitted Insurance Multi-State Agreement (“NIMA”) Clearinghouse yesterday, November 29, 2011, when the Florida Surplus Lines Service Office (“FSLSO”) Board of Governors (“Board”) met to review a draft 2011 NIMA Clearinghouse Business Plan.

The FSLSO is under a tight deadline to ramp up Clearinghouse operations by January 1, 2012 to allow the collection and processing of First Quarter 2012 premium tax filings and payments, which would be due May 15, 2012 pursuant to NIMA’s current terms.  Contracts for Clearinghouse operations and software licensing are still being reviewed by the NIMA member states.

Once operational, the Clearinghouse will ultimately collect and distribute premium taxes pursuant to surplus lines reform provisions of the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”).

The proposed business plan currently being reviewed by the Board laid out the organizational structure for implementing the NIMA Clearinghouse, complete with listings of business assumptions, risks and descriptions of seven separate business areas.

 FSLSO Executive Director Gary Pullen had just started his presentation when Board member Dan O’Leary inquired as to whether Clearinghouse services would also be marketed to the Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”), which has been enacted by nine states to date.  SLIMPACT has not yet been enacted by the threshold of 10 states required to allow formal votes and the adoption of rules. 

“I think we need to amend the OIR (Florida Office of Insurance Regulation) plan of operation to include other states and to also market to the SLIMPACT group,” Mr. O’Leary stated.  Last month, he had voiced opposition to allocating money to hire additional employees to run the Clearinghouse and asked unsuccessfully for an emergency Board meeting to discuss the issue.

OIR Senior Attorney Bruce Culpepper said there might be territorial conflicts if the Clearinghouse were marketed to SLIMPACT.  He explained that wording in the agreement doesn’t address single states, but does refer to other compacts that are implementing NRRA compacts.

“After we – NIMA – develop the Clearinghouse, we would not appreciate the Service Office extending our Clearinghouse to another rival NRRA compact,” Mr. Culpepper stated.  He added, “If circumstances change and the Service Office feels it needs to evolve and authorize different services, by all means present that to the Office (OIR) and we will consider it.”

Mr. Pullen said a single state’s participation in a compact is predicated on it receiving authority from its respective Legislature.  It was also understood that SLIMPACT is still short on the number of member states it needs to become active.

A short time later, Board member R.C. Chaffin expressed concern about investing money in the Clearinghouse because it remains uncertain how many states will ultimately use it.  The Board in September allocated $750,000 to cover 2011 start-up costs associated with the NIMA Clearinghouse and approved nearly $2 million to cover 2012 Clearinghouse operations, including the hiring of five additional employees.

Mr. Chaffin pointed out that nine states have enacted SLIMPACT, and that it appeared that 30 to 31 states would not be entering any sort of compact.

“Does it make sense to keep doing this and putting all this money in if it’s not going to grow?” Mr. Chaffin asked.  “I guess that is where I am getting confused.  Why do we want to keep spending money just for the small group we have?

Mr. Pullen acknowledged Mr. Chaffin’s concerns, saying, “If at any point the Board reaches the conclusion that growth and participation and premium volume is unlikely, I would agree that would be a reason to not move forward with this particular initiative.”

He said financial projections for Clearinghouse operations might assuage some of Mr. Chaffin’s concerns.

Mr. Culpepper said NIMA member states are not content with its current 12-state and territory membership.

“From NIMA’s standpoint …NIMA wants to grow and involve all 50 states,” Mr. Culpepper added.  “We would love to develop the system, go out to other states, say our compact system works, ask them to join us and let us be profitable.”

Mr. O’Leary also suggested that the Clearinghouse manager should report directly to the Board, and that Clearinghouse operations eventually should be moved from the FSLSO’s purview.

As currently structured, the Clearinghouse manager would be more of an operational officer, as opposed to an executive director, Mr. Pullen explained.

“It’s not to say at some point if the Clearinghouse could stand on its own two feet it should not have its own executive director, and not to say at some point it shouldn’t stand outside the Service Office,” Mr. Pullen stated.

Highlights of the 2011 Clearinghouse Business Plan follow:

Overview

• The Clearinghouse will be primarily a service provider to state insurance regulators and tax authorities that are parties to NIMA.
• The Clearinghouse’s initial purpose is to facilitate the tax sharing arrangement contemplated by NIMA.
• The Surplus Lines Automation System Suite will be the technology platform for the Clearinghouse and the FSLSO will provide administrative services.

Assumptions

• The Clearinghouse will initially be a division or unit of the FSLSO. Clearinghouse staff will be FSLSO employees.
• The Clearinghouse will provide services to states participating in NIMA on a collective and individual basis.
• The Clearinghouse will offer a standardized pricing and licensing model for participating states.
• The Clearinghouse operations will be limited to matters related to taxation and not the regulation of surplus lines placements.
• The Clearinghouse will process all multi-state policies for the participating states, not just multi-state policies with two or more NIMA states.
• The Clearinghouse will create quarterly tax invoices based upon policy data reported by licensees and policyholders during the most recent calendar quarter.
• The Clearinghouse will operate under a five-year agreement with NIMA, Inc.

 Risks

• Competition – The threat of another viable technology solution or service provider. This risk is currently considered to be low.
• Client Identification – The NIMA states have incorporated and created a formal organizational structure to allow them to negotiate and execute a contract. This risk is considered to be low.
• Aggressive Scheduling – The challenge of an extremely short time-to-market remains one of the obstacles to our success. This risk remains high.
• Resource Constraints – Due to limited cash flow and the aggressive implementation timeline, there may be a shortage of qualified staff to execute this plan. This risk is high.
• Legal Liability – Potential legal liability could result from contractual provisions and disputes. This risk is moderate.
• Insufficient Revenue – Since there is no previous experience in operating a Clearinghouse, the revenue and expense projections are being compiled on a pro forma basis. This is believed to be a high risk.
• Tax Audit – Since the Clearinghouse operations could generate substantial unrelated business income for the FSLSO, the likelihood of an IRS tax audit is increased. This risk appears to be moderate.
• Tax Exempt Status — If the revenue generated by the Clearinghouse approaches or exceeds 50 percent of the total FSLSO revenue then its tax-exempt status could be called into question. This risk is low during the first three years, but increases over time to become moderate to high.
• “Life Span” of NIMA – Under the agreement, participating states are provided the ability to withdraw from NIMA with only 60 days notice. It is possible that states may decide to withdraw from or not enter into NIMA. This remains a high risk.
• Contract Negotiations – In order to meet the expected timeframe for beginning the Clearinghouse operations, it is necessary to incur expenses and make staffing decisions before execution of a contract. In the event contract negotiations are not successful, these costs may not be recovered. This is a low to moderate risk.

After the Board carefully reviewed the proposed business plan and discussed a spreadsheet containing projected financials, the meeting was adjourned.

 

 

 

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