Florida Surplus Lines Service Office National Clearinghouse Committee Meeting Report: May 10, 2011

 

The Florida Surplus Lines Service Office (“FSLSO”) held a National Clearinghouse Committee (“Committee”) meeting on May 10, 2011 to discuss and review the potential financial and legal implications of providing multi-state tax Clearinghouse operational services pursuant to surplus lines-related reform provisions in the Nonadmitted and Reinsurance Reform Act of 2010. 

The meeting materials are attached.

FSLSO executive director Gary Pullen led the meeting, presenting a detailed list of the positive and negative impacts of providing such a service.  Eventually, the Committee will decide whether it should respond to a Request for Proposal that is expected to be issued sometime in June 2011.  The Committee’s preferred position is to only provide technology services, not administrative and operational services, Mr. Pullen noted.

The aforementioned list of pros and cons follows:

Advantages of providing Clearinghouse operational services:

• Maximize return on investment to Florida policyholders
• Protect State revenues by ensuring the use of a proven system to efficiently collect state premium taxes
• Assist in facilitating Florida agencies’ compliance with current information technology systems; already possess knowledge of business processes needed to effectively collect premium taxes
• Provide additional revenue source for FSLSO operations and reduce, or minimize service fees levied against Florida consumers
• Shared operational expenses would reduce FSLSO operational costs

Disadvantages of providing Clearinghouse operational services:

• Potential legal liability
• Insufficient revenue to justify costs (depending upon the level of participation)
• Diverts resources from FSLSO core duties and responsibilities, as well as staff and equipment
• Increases the likelihood of tax audits
• Concerns regarding the use of “public resources” by a for-profit subsidiary
• Concerns regarding possible “conflicts of interests” (for-profit versus not-for-profit activities)
• Uncertainty of “Life span” of the proposed clearinghouse (if participating states drop out)

Mr. Pullen further explained that operational services, if provided by the FSLSO, would be done for additional money, which could increase the return Florida policyholders receive on their investment in the FSLSO office.

Another benefit is that FSLSO is experienced, he said.

“We have got going on 13 years of on-the-ground experience reporting and paying these taxes.  We have a system that’s been tried and proven over time to be accurate, efficient and effective,” he explained.

Providing Clearinghouse operational services also would generate non-fee income that could be used to mitigate or offset services fees that would be levied, Mr. Pullen said.

However, there are also many negatives to the proposal, he added.  With the existence of numerous contracts from various participating states comes legal liability and the possibility of contract disputes. 

Another potential problem could be insufficient revenue to cover the cost of establishing a Clearinghouse.  This scenario could evolve if participation from states is limited, Mr. Pullen said. Other funding problems could arise if participating states drop out due to their own financial concerns.

“The lifespan of the Clearinghouse is uncertain,” Mr. Pullen said.  “States could make a decision that they want to go to single state taxation and keep all their money.  They drop out and you end up spending a lot of money.”

A possible alternative to providing operational services would be to provide technology only for the Clearinghouse, he said.  One possibility would be for the National Association of Insurance Commissioners (“NAIC”) to provide operational services and FSLSO provide technical support.  Many questions still need to be answered, he said.

“I think . . . our next step is to have a discussion with the NAIC relative to them partnering with us, with us focusing on the technology solution and they do the operational portion,” Mr. Pullen suggested.  “This thing is so fluid and not well-defined, there are multiple directions this could go.”

To date, it remains unclear how many states will receive authority from their legislatures to enter into Clearinghouse agreements, he added.  “We need to learn more about their (NAIC) interest capacity and ability and they need to learn more about our interest capacity and ability.”

After a brief discussion, the Committee voted to move forward with the process by contacting the NAIC to discuss the pros and cons of entering into a partnership to run the Clearinghouse, and splitting up the operational and technical duties.

With no further business before the Committee, the meeting was adjourned.

 

 

 

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