Surplus Lines Insurance Multi-State Compliance Compact Commission Delays Formal Adoption of Rules Until 10-State Threshold Is Reached

Aug 4, 2011

 

The Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”) Commission (“Commission”) met via Webinar on July 29, 2011 to discuss proposed surplus lines tax allocation formulas  and review draft Commission bylaws and rulemaking-related markups that were unofficially approved during the Commission’s July 15, 2011 meeting.

Commission meetings are co-hosted by the Council of State Governments (“CSG”), the National Conference of State Legislators (“NCOIL”) and the National Conference of State Legislatures (“NCSL”).

 

Update on Commission Member Appointments

At the beginning of the meeting, Mike Humphreys of the CSG said that, while representatives from Alabama, Indiana, Kansas, Kentucky, New Mexico, Tennessee and Vermont had officially been appointed to the Commission as voting members, neither North Dakota nor Rhode Island have made such appointments at this time. 

 

Review of Commission Status and Authority

Because fewer than 10 states have joined SLIMPACT, Rick Masters of the CSG stated that the Commission continues to lack the authority under Article XIII of SLIMPACT to formally vote on and adopt rules.

 

Consideration of Draft Commission Bylaws

NCOIL Executive Director Susan Nolan then described changes that were made to the draft bylaws following the Commission’s July 15 meeting.  Kentucky Insurance Commissioner Sharon Clark made a motion to adopt the bylaws. 

However, Kevin Davis of the Kansas Department of Insurance stated that Kansas Insurance Commissioner Sandy Praeger would be uncomfortable with permanently adopting anything until the 10-state threshold is reached. 

Tennessee Insurance Commissioner Julie McPeak expressed concern that “early” adoption of bylaws might prevent a state that is “on the fence” about SLIMPACT from actually joining, and echoed Mr. Davis’s preference for waiting for a tenth member state.  She said that it would “send a better message” to wait to adopt bylaws until a tenth state has joined, as opposed to risking the outcome of a potentially divided Commission vote now.

Ms. Nolan also stated her discomfort with taking a vote and then asked if the current member states felt it might be appropriate to elect an Interim Commission Chair.

Mr. Masters advised that the motion to adopt the draft bylaws should be voted on before the Commission selects an Interim Chair.

In response to a suggestion by Cynthia Donovan of the Indiana Department of Insurance that the Commission vote on these as “interim” bylaws to be amended at such a time when ten states have compacted or contracted, Commissioner Clark amended her motion, followed by a second from Alabama.

After Mr. Masters reminded the Commission that neither North Dakota nor Rhode Island — the two states lacking official voting member appointments — would be able to vote, New Mexico Insurance Superintendent John Franchini suggested postponing a vote on the bylaws, at least until North Dakota and Rhode Island are official voting members.  “Being prudent and taking our time is not a bad thing,” he said.

Commissioner Clark posed the question of whether the Commission should continue convening if the majority of the states are uncomfortable with conducting business without a tenth participating state, which prompted Mr. Masters to explain that an authority exists for the Commission to organize to the extent that it can.  “Convening meetings and attempting to reach consensus makes sense,” he added.

Commissioner Clark withdrew her motion to approve the draft bylaws and it was agreed that the issue of an Interim Chair would be placed on the agenda for the Commission’s next meeting.

 

Review of Draft Rulemaking Rules

Ms. Nolan described changes that were made to draft rulemaking-related markups that were unofficially approved at the July 15 meeting.  No questions or comments pertaining to the changes were raised.

 

Further Discussion of Allocation Formula Proposals

Representatives from several states and interested parties spoke about surplus lines tax allocation formula proposals that had been reviewed at previous Commission meetings, as well as a proposal by New Mexico that would tie reporting into Schedule T, which is part of the annual financial statement required of surplus lines carriers by the National Association of Insurance Commissioners (“NAIC”). 

 

Regulator and Interested Party Comments

Comments from regulators and interested parties were then given.  Following is a summary of each:

 

Nicole Allen, Council of Insurance Agents and Brokers (“CIAB”)

Ms. Allen said that it is becoming difficult for CIAB members to comply with “all of the different things going on here.”  She said that the purpose at hand is to simplify the reporting and payment of surplus lines taxes, and urged the finding of a common, uniform system.

 

Dan Maher, Excess Line Association of New York (“ELANY”)

“Uniformity and simplicity are the goals of the Nonadmitted and Reinsurance Reform Act and why nine states have passed SLIMPACT,” Mr. Maher said, explaining that anxiety exists in the marketplace about the multiple systems in play, and that more states could be induced to join SLIMPACT by demonstrating its “transparent and fair” system.

According to Mr. Maher, brokers are seeking simplicity and efficiency.  A “market share” approach that eliminates broker data collection would be regarded positively, he said.  ELANY has suggested that states either begin to require surplus lines brokers to identify multi-state transactions, so that the gross premium on those transactions can be reported, or ask brokers to voluntarily provide this information.

Commenting on the New Mexico proposal, Mr. Maher said it would be problematic because alien insurers write a disproportionate share of risks and do not file Schedule T.  “Using data from insurers who are not liable for tax payments creates an issue,” he said.

He said that he would expect “pushback” from carriers on the use of Schedule T data as a fundamental base for allocation.

 

Cynthia Donovan, Indiana Department of Insurance

Ms. Donovan stated that the allocation methodology introduced by Indiana was developed by the NAIC Surplus Lines Implementation Task Force.  She conceded that, although the formula is complex, Indiana could support the Kentucky allocation proposal, which she described as “simplified” from the NAIC version.

 

Commissioner Sharon Clark, Kentucky Department of Insurance

In formulating Kentucky’s proposal, Commissioner Clark said, the goal was to achieve a streamlined method of surplus lines taxation, while complying with Kentucky’s regulatory responsibilities.  Feedback on the proposal has been positive, she added.

 

Steve Stephan, National Association of Professional Surplus Lines Offices (“NAPSLO”)

NAPSLO also has proposed a “market share” allocation model that would base the states’ tax sharing arrangement on the proportion of the overall surplus lines premium written in a particular state to the aggregate national surplus lines premium.  The rate would be calculated by aggregating the Schedule T data for all domestic, non‐admitted insurers by state for a given year and determining the weighted average national tax rate. 

Mr. Stephan said that the market share system is a “workable concept,” and that, while NAPSLO suggested the use of Schedule T because the data is already available, it would be flexible in regard to the data origins.  Although some states possess premium data from brokers, he said, he is uncertain of how many states would have the ability to aggregate it. 

He added that Kentucky’s proposal is a good compromise, because it would allocate tax in a way that is similar to what is presently done.  With regard to New Mexico’s proposal, Mr. Stephan expressed concern about requiring insurers to produce data and submit a more complicated Schedule T, when paying tax is the broker’s responsibility as the regulated party.  He said that, rather than requiring more data on Schedule T, it would be preferable to find a way to use data that is generated in the normal course of business.

 

Commissioner John Franchini and Alan Seeley, New Mexico Division of Insurance

Mr. Seeley said that New Mexico supports the simplicity of a “market share” approach based on distribution of premium among the states.  Speaking about his view on problems with Schedule T in its current form, he said that, while the majority of surplus lines premium in the United States is written by U.S. surplus lines carriers, there are no carrier reporting requirements for foreign insurers.  Schedule T currently combines multi-state policy premiums with single-state policy premiums and allows each surplus lines carrier to determine its own method of allocating premiums.  He also raised concern about whether regulators apply enough scrutiny as to the accuracy of submitted Schedule Ts.

He added that New Mexico’s proposal is similar to NAPSLO’s version with regard to a nationwide average premium tax rate, which he emphasized would simplify things for brokers. 

Commissioner Franchini said that the proposal to create Schedule T – Part 3 mirrors the Life and Health Interstate Compact, which uses Schedule T – Part 2.  The proposed Part 3 would create separate columns for premiums from single-state policies versus those from multi-state policies, and only the multi-state column would be used for market share tax allocation purposes.  Part 3 also would have to be compatible with the Nonadmitted Insurance Multi-State Agreement, the other NRRA tax allocation proposal adopted by various states. 

 

General Discussion on Proposals

The Commission then listened to questions and comments on the various tax allocation proposals.

Mr. Seeley asked whether it is possible to obtain data on the state-specific market share of premium written by non-U.S. carriers.  Mr. Maher said that, ideally, for every excess and surplus lines transaction, if states would ask whether it is a multi-state risk and then aggregate those premiums, the market share would be discernible after 12 months. 

Mr. Maher said that New Mexico’s Schedule T proposal suggests the same, but of carriers rather than brokers.  He also said that NAIC assistance is needed to alter Schedule T, and until such time when more states join SLIMPACT, or an agreement is formed between states, legislators and regulators, it might be a good idea to ask states to start collecting this type of data.  He expressed doubt, however, about the likelihood of states’ participation. 

When asked whether states with a tiered premium tax structure can join SLIMPACT, Mr. Maher responded that the point of SLIMPACT is for each state to charge one universal tax rate.  If a state with two tax rates contracts with the Clearinghouse, it would not be a breach of contract if that state moves to a one-rate system at the time the Clearinghouse begins functioning. 

Mr. Masters added that Article XIII of SLIMPACT allows for member states to have time to assimilate the eventual allocation methodology into existing state regulatory administration.  He said that once 10 states have joined SLIMPACT, the Clearinghouse will not begin its work until January 1 or July 1 following the first anniversary of the date on which the 10-state threshold was reached.

Ms. Donovan stated her understanding that the enactment of the NRRA required states to create a single blended rate for each state and that she, along with other regulators, thought it was their responsibility to do so.  She asked for clarification on this in the context of the national blended rate. 

According to Mr. Seeley, the potential for state-specific blended rates exists.  He said that states like New Mexico that charge surplus lines premium taxes, along with various fees, might consider raising their tax rates so that the same amount of surplus lines tax revenue is received. 

Mr. Seeley also said that NAPSLO is proposing that whatever the state-specific surplus lines tax rate ends up being, a weighted national average tax rate would be used to simplify matters for brokers.  “There are two different blends going on here,” he said. “One at the state level, one at the national level.”

Another participant added that a national blended rate is not required by SLIMPACT.

In regard to a question about how tax money would exit the Clearinghouse and be distributed to SLIMPACT states under the New Mexico plan, it was explained that once there is a certain amount of money in the Clearinghouse that needs to be distributed to SLIMPACT states, the first step would be to determine what the national market share is from Schedule T, or whatever the eventual methodology is.  Then, the ratio of a given SLIMPACT state’s tax rate to the national weighted average premium tax rate would be calculated. 

For example, if Alabama’s tax rate is 3.250 percent, it would be divided by the national average rate, which, in this example, is 3.675 percent.  Because Alabama’s rate is lower than 3.675 percent, the amount of money that Alabama would initially receive from the Clearinghouse would equal the Clearinghouse dollar amount multiplied by Alabama’s market share, multiplied by the ratio of Alabama’s premium tax rate to the national premium tax rate.  

This process would be executed for all participating states, following which, remaining undistributed Clearinghouse money would be distributed to home states for the various multi-state transactions that would have entered the Clearinghouse, because they were written on accounts headquartered in SLIMPACT states. 

“That is what I perceive to be NAPSLO’s idea,” Mr. Seeley said.

Ms. Donovan commented, “Some may believe market share is the appropriate way, but everyone implies that it’s so difficult for brokers to report on a state-by-state basis.”

Ms. Donovan said that a spreadsheet exists for all of the 50 states on which brokers can enter coverages and indicate what percentage of their business exists in which state(s).  When a blended tax rate exists for the states, the spreadsheet calculates it.  The broker could then make a report to the Clearinghouse.

It was agreed that this option would be discussed at the Commission’s next meeting.

A participant asked whether it would be feasible for SLIMPACT states to belong to another compact for the purpose of collecting taxes from non-SLIMPACT states.  Mr. Masters replied that a compact is an expression of what a particular state’s legislature has authorized the state to do.  Another agreement or compact could conflict with the methods ultimately adopted by the Commission. 

Ms. Nolan then asked for a brief description of the Kentucky proposal.

A Kentucky representative said that the main difference in their proposal from others is how casualty coverages are reported.  The representative said that a compromise would be to allow home state reporting, unless a policy is reported or rated on a state- or location-specific basis. 

A representative from the Sullivan Group said that both the Kentucky and market share proposals are considerate of brokers.  The Kentucky proposal reflects closely on what brokers are presently doing for allocation and would not require significant changes, he added, echoing Ms. Allen’s earlier comment that brokers are concerned about balancing participation in SLIMPACT and NIMA.

Commissioner Clark recollected that the Kentucky allocation formula recently was discussed and garnered positive feedback with regard to compatibility with other compacts. 

Ms. Nolan then asked whether it was the will of the group to focus on particular proposals.

In response to a participant’s comment that the ELANY market share idea is not completely in line with the New Mexico market share plan, Mr, Maher said that what New Mexico has proposed is not far from what ELANY is interested in doing.  However, ELANY does not think that Schedule T is the right method for acquiring the needed data. 

At Ms. Nolan’s suggestion, Mr. Maher agreed that ELANY would submit a more formal data collection proposal prior to the next Commission meeting.

Commissioner Clark said that the market share allocation formula would, in her opinion, require states to revise statutes to adopt the national average tax rate, which would likely have to occur during 2012 legislative sessions.

“It’s difficult to go in front of a committee and talk about a tax rate,” she said. “It is a huge hurdle to overcome if we go with the market share idea.”

She also said that the New Mexico proposal involving Schedule T would require SLIMPACT states, which are in the minority, to petition the NAIC to change the financial reporting forms that have been in use for many years.  She described this as a “difficult and lengthy task.”

Commissioner Clark also cited concern that the New Mexico plan would “unfairly benefit” those SLIMPACT states that have tax rates lower than the proposed national average.

In response, Mr. Seeley said that he does not believe state legislatures would have to change the tax rates, nor is that what New Mexico is proposing.  Rather, the amount of taxes collected under the proposal would be approximately in line with the tax rates of the states, he explained.  Because the money would exit the Clearinghouse under the national tax rate, with varied distributions according to each state’s tax rate compared to the national rate, the existing state-specific rates would stay in effect. 

“We are not proposing changes to the existing Schedule T or any other existing reporting forms,” Mr. Seeley said. “We are proposing that a new, additional form of Schedule T be required and only of surplus lines carriers.”

He said that because Kentucky, for example, has a “very high” tax rate, it would create a higher than otherwise national tax rate, which would bring more money into the Clearinghouse. 

Commissioner McPeak said, “I don’t know how I can allow a broker to pay only 3.675 percent into the Clearinghouse even if it all worked out in the end.  I don’t know how I can allow that without legislative authority.”

Mr. Seeley said that he is not qualified to answer legal questions.

With time running out, Ms. Nolan said that she would distribute information once the next Commission meeting is scheduled. 

The meeting was then adjourned.

 

The meeting agenda draft bylaws and draft rulemaking rules are attached.  To view additional meeting materials, click on the hyperlinks below:

 

Should you have any questions or comments please contact Colodny Fass.

 

 

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