Nonadmitted Insurance Multi-State Agreement (NIMA) Governing Committee Amends State Agreement, Discusses Taxation of Foreign Risks; Incorporation Location Decision Postponed

 

The Nonadmitted Insurance Multi-State Agreement (“NIMA”) Governing Committee (“Committee”) met via teleconference yesterday, September 13, 2011, during which it voted to approve amendments to the NIMA State Agreement. 

The Committee delayed a vote that would authorize the incorporation of NIMA, Inc. and also held a discussion on the taxation of foreign risks.

Meeting materials, including the agenda and the NIMA agreement, are attached.

 

Discussion of NIMA Amendments

Bruce Culpepper of the Florida Office of Insurance Regulation reviewed changes made to the NIMA agreement that stemmed from discussion at the Committee’s most recent meeting.  Most of these changes, he explained, comprise the addition or changing of wording for stylistic purposes, whereas Sections 11, 12 and 13 under Part IV, “Collection and Allocation Procedure,” underwent more substantive changes. 

Section 11

Mr. Culpepper said that the State of Alaska submitted additional language for Section 11, which pertains to how the proposed NIMA Clearinghouse would process expenses and services for NIMA Participating States.  He said that the purpose of Section 11 was to assure Participating States that the Clearinghouse would be funded solely by transaction fees, and that one State would not be liable for work or services requested by another State.  “The more a single Participating State uses the Clearinghouse, that State will be liable for services and not another state,” he said.

Alaska Insurance Director Linda Hall said that if a Participating State elects to utilize the Clearinghouse for single-state risks, the same expense methodology will be utilized as applicable to multi-state risks.   

Section 12

The Committee agreed to change language in Section 12 beyond what was noted in the proposed draft amendments included in the meeting materials.

Section 12 provides that contracts among Participating States and the NIMA Clearinghouse include “terms prohibiting the Clearinghouse from lobbying, accepting gifts or donations from reporting entities, participating in political activity of any kind, or conflicts of interest…” 

Discussion amongst the states included a concern about donations from insurance companies that might not be reporting entities at the time of the donation, but might report in the future.

The Committee agreed to change the language to read “…donations from other than a state or governmental entity…”

Section 13

Mr. Culpepper said that, like Florida, some states tax premiums differently than others.  For example, not all surplus lines policies are taxed the same, and some policies are not taxed at all.  He expressed the need for amply broad language in NIMA in order for states to be able to notify the Clearinghouse how to tax certain lines. 

Mr. Culpepper said that Florida and Connecticut propose the addition of the following underlined phrase to Section 13:  “Each Participating State agrees to establish for each kind of insurance policy one tax rate, encompassing any applicable taxes, fees and assessments, that applies to Nonadmitted Insurance of that kind…”

He said that this would not provide a problem for the Clearinghouse, inasmuch as its computer system “should be user-friendly.”  Mr. Culpepper also said that he did not believe the addition of this language would negatively affect states that charge one tax.

Exhibit 1

Mr. Culpepper said that Alaska representatives had asked for additional information to be required under Exhibit 1, which is entitled “Information Required to be Submitted By the Broker or Insured via the Clearinghouse Web Portal.” 

Section E of Exhibit 1 pertains to policy data and asks for the submission of the policy number, policy effective date and expiration date, insured name and home state of the insured. 

With Alaska’s change, submission of an insured’s address and a description of the subject and location of the risk now also will be required.

 

Vote on NIMA Amendments

A motion was made and seconded to adopt the proposed NIMA amendments.  Eight states voted yes, with Hawaii abstaining and representatives from South Dakota, Puerto Rico and Utah not present on the call.

Mississippi Deputy Insurance Commissioner Mark Haire, who participated on behalf of Committee Chair Mike Chaney, stated that the necessary two-thirds of the states had voted to approve the amendments, and therefore, the motion carried. 

Deputy Commissioner Haire said that amendments to NIMA must be accepted in writing.  Therefore, instead of each member state re-executing NIMA, Mississippi would circulate certificates of acceptance for the states to complete and return to Chairman Chaney.

 

Addition of Part XIII, Section 48 to NIMA

The Committee then took up discussion on a proposed amendment submitted by the State of Louisiana pertaining to participation in the Clearinghouse by non-NIMA states.  The text of the proposed Section is, as follows:

“States or groups of states that are not Participating States may contract with the Clearinghouse subject to their acceptance of the business rules and practices of the Clearinghouse Plan of Operation and the allocation formulas and methods developed pursuant to this Agreement.”

Tom Travis of the Louisiana Department of Insurance said that, in the event that the Committee contemplates or enters into talks to “coordinate” with the Surplus Lines Insurance Multi-State Compliance Compact Commission (“SLIMPACT”), it would provide the Committee with the authority to allow states that are not yet NIMA members to use the NIMA Clearinghouse and participate in the NIMA allocation scheme.

Steve Parton from Florida echoed Mr. Travis’s comment, saying that this provides a “great opportunity” to not only demonstrate consensus among NIMA states, but to possibly include SLIMPACT members. 

A Connecticut representative questioned the need for NIMA to contain a provision dealing with “what the Clearinghouse can do.”  He said, “If we want to restrict or authorize the Clearinghouse to service another group of states, that should be in the contract between states and the Clearinghouse, but not in NIMA itself.”

Another participant on the call added, “We probably need something in our agreement that authorizes us to enter into a tax-share arrangement with a non-NIMA state, presumably the SLIMPACT states.”

The Connecticut representative replied that he was not sure whether some states would have the statutory authority to share information with non-NIMA states.

It was discussed that at least one NIMA state would likely have a statutory obstacle to coordinating with SLIMPACT on tax allocation.

Director Hall said that the NIMA language and the NAIC Surplus Lines Implementation Task Force (“Task Force”) Model Language referred to allocation with participating states.  “I don’t think we could allocate taxes to non-participating states,” she said. “In the more specific requirements . . . about the home state collecting taxes, we clearly use allocations to participating states and otherwise, we keep it and tax it at the home state’s rate.  I think that language is going to be fairly common for anyone who followed the Task Force Model.”

Deputy Commissioner Haire said, “I’m afraid [Mississippi] would have the same issues with our enabling legislation.”

An Ohio representative agreed that the current NIMA language does not likely allow for tax-sharing with non-NIMA states, but questioned whether the NIMA Clearinghouse could keep track of which states are in NIMA or SLIMPACT and execute the allocation among states based upon which agreement they belonged to.

Director Hall said, “Whether NIMA, SLIMPACT or an individual state, the more states we can get into the Clearinghouse and using the same allocation formula . . . that creates a win-win situation.”

Mr. Parton suggested tabling the discussion and further examining this issue, to which Deputy Commissioner Haire agreed.

 

Discussion of State for Incorporation of NIMA, Inc.

Deputy Commissioner Haire said that, since the Committee is negotiating with a Clearinghouse in Florida and, that since Florida is the likely site of the future Clearinghouse, it probably makes sense for NIMA, Inc. to be domiciled in Florida.

Mr. Culpepper said that incorporation documents have been drafted and that representatives of Florida are willing to handle the procedure in that state.

Deputy Commissioner Haire asked that a vote on the incorporation be held until the Committee’s next meeting.  He said that Mississippi representatives would like to develop a better understanding of what would be filed to create the corporation and also further information on related indemnification issues.

 

Discussion on Taxation of Foreign Risks

Director Hall said that her office has received calls from brokers about how the State of Alaska would tax portions of risk that were located in a foreign country.  She said that her tax auditor conducted a survey asking several states about this issue.

She said that the survey results included 11 states that do not tax foreign premiums both before and after the passage of the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”); four states that did not tax foreign premiums before the NRRA, but plan to now (three at the home state rate, one at the foreign rate); and three states that had not made a decision, but were leaning toward not taxing.

Director Hall said, “We don’t think we have any [statutory authority to tax foreign premiums].”  She said that she would like to know the reasoning behind taxation of foreign premiums and if statutory authority for that exists.

Mr. Travis said that Louisiana is in a similar situation with regard to authority to tax foreign premiums.  He also asked what other states do with regard to offshore risks.

Director Hall responded, “We don’t know things are there unless someone tells us.  We don’t have a specific plan for dealing with those right now.”

Deputy Commissioner Haire cited the definition of “home state” within the NRRA and in the NIMA, saying, “Where Mississippi is a home state and a portion of risk is allocated to a foreign nation, we don’t see where the NRRA provides authority to tax risk allocated to a foreign nation.”

Gennady Stolyarov of Nevada said that he agreed with the comments from Director Hall and Deputy Commissioner Haire, and said that, if a portion of a risk was located in the United States and was subject to the NRRA, and another portion located in France, for example, France might want to impose French premium taxes on the U.S. portion if the French portion were to be taxed by the U.S.

“I do think, in the allocation system that we create, it should be confined to premiums for exposures not located in foreign nations,” he said.

Mr. Stolyarov also said that the issue of offshore risks should be further evaluated.

Mr. Travis said, “I do not think the NRRA expanded our authority to tax non-U.S. risk.  It was designed to allocate that which is within the U.S.”  He also said that he did not believe it would not be a good foreign policy standpoint to tax foreign risks.

Deputy Commissioner Haire once again cited the definition of “home state,” saying, “This all revolves around risk residing in a state and does not contemplate risk allocated to a foreign country.  We need to strive for uniformity as much as possible.”

 

Next Steps

Deputy Commissioner Haire said that next steps for the Committee are to incorporate and adopt by-laws for NIMA, Inc.  He said that Florida and Louisiana have prepared proposed drafts and that Mississippi would work on blending those into a discussion draft for the next Committee meeting.

He also said that South Dakota Insurance Commissioner Merle Schreiber, Vice Chair of the Committee, is working on a Clearinghouse contract for the Committee to review. 

He recommended forming a special committee to work on a Clearinghouse Plan of Operation and invited Committee members to notify the Chair by Friday if they would like to participate.

 

With no further business at hand, the meeting was adjourned.

 

 

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