Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT) Commission Reviews Bylaws, Discusses Allocation Formulas at Third Meeting

 

The Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”) Commission (“Commission”) held its third meeting via Webinar on July 7, 2011 to review updates to a slate of draft governance bylaws, along with a draft rule to establish procedures for the adoption, amendment and repeal of SLIMPACT Commission rules.  The Commission also initiated discussion on several allocation formula proposals for the distribution of premium taxes.

The revised draft bylaws and draft rules, modeled after those used by the Interstate Insurance Product Regulation Compact Commission, are attached.

Legislators and insurance regulators from Alabama, Indiana, Kentucky, New Mexico, North Dakota, Rhode Island and Vermont participated in the two-hour July 7 meeting, which was hosted by the National Conference of Insurance Legislators (“NCOIL”), together with the National Conference of State Legislatures and the Council of State Governments.

SLIMPACT became effective and binding upon its enactment by two states.  The number of participating states has now grown to nine.  SLIMPACT stipulates that when membership reaches 10 states, the Commission becomes effective for purposes of adopting Compact rules and creating a Clearinghouse.

The Commission’s goal is to have the SLIMPACT bylaws and rules ready for formal consideration and adoption at NCOIL’s upcoming summer meeting in Newport, Rhode Island at 2:00 p.m. on July 15, 2011.

NCOIL executive director Susan Nolan opened the Commission meeting with a brief review of several minor revisions to the draft rule and the draft bylaws.  After minimal discussion, it was agreed the updates would be incorporated into revised drafts to be discussed again on July 15.

Most of the meeting discussion focused on proposed allocation formulas and their anticipated effect on the collection of taxes.

Indiana Deputy Insurance Commissioner Cynthia Donovan spoke first, throwing her support behind a complicated allocation formula developed by the National Association of Insurance Commissioners’ Surplus Lines Task Force.

“We want to try to simplify the reporting process as much as we can, while still providing the regulators the information they might need,” Ms. Donovan said. “This allocation methodology that comes from the Surplus Lines Task Force was developed to address a lot of questions that arise.”

She acknowledged that the Surplus Lines Task Force methodology departs somewhat from the “as is” method of reporting surplus lines risks on the Schedule T, which is what is used for reporting under the current methodology and defines more specifically what is to be reported, she said.

Kentucky Insurance Commissioner Sharon Clark said she supports simplicity, but voiced concern over the market share allocation methodology.

“Our concern is that the market share methodology would be detrimental to the states that had smaller premium volume and many of those states are in the SLIMPACT compact-Kentucky included,” Ms. Clark stated.

Steve Stephan, Director of Government Relations for the National Association of Professional Surplus Lines Offices said that his organization had suggested using a composite rate for the states that was a weighted, blended rate of participating states’ tax rates.

“We are not necessarily committed to that idea.  If the states would rather use their own tax rate, then that would seem to be simpler, more efficient and clearer for everybody involved,” Mr. Stephan said. “The idea was that the blended rate would have had the states wind up with about the same revenue they currently have.”

Excess Lines Association of New York Executive Director Dan Maher joined the discussion, saying, “One of the differences with the market share approach is that every state gets a share of every multi-state risk, whether or not there is risk exposure in that state.  It’s really looking at the market from a different standpoint.”

He said the current tax allocation methodologies vary greatly from state to state, use complicated formulas and require significant data collection.

“Under the current system, a large portion of the premium on multi-state risks goes untaxed,” Mr. Maher pointed out.  Under a state market share allocation proposal, each participating state taxes each multi-state risk based upon the market share of multi-state premium that state bears to the countrywide aggregate of multi-state surplus lines premium.

“Insureds no longer have to provide voluminous data to brokers unrelated to the acquisition of coverage,” Mr. Maher added.  “For the states, every dollar of premium is taxed but no dollar of premium is taxed twice.  Each state taxes premium based on a fair nexus to the state.”

“A key question would be:  How is a state’s market share determined?”  he said.

Surplus lines brokers would need to identify each transaction that is a multi-state transaction and then pull the data, Mr. Maher said.  The system will ensure that every dollar of every premium gets taxed by someone, which doesn’t happen right now, he pointed out.

Joe Torti, Superintendant of Insurance for Rhode Island, said the issue still raises many questions.

Nicole Allen, interim Vice President of Marketing and Communications for the Council of Insurance Agents and Brokers, said she didn’t want to see more complexity introduced with any formula.

“I think what we would prefer to see is the home state rate be used for 100 percent of the taxes to be paid,” she said, also voicing concern about the issue of taxing non-U.S. risk.  Doing so, she added, could result in a professional liability situation.

“Whatever allocation formula you are looking at we ask you don’t include the non-U.S. portion of the premium when calculating taxes,” Ms. Allen stated.

After a question-and-answer session, the discussion concluded, with all participants agreeing that more information is needed before any decision can be reached.

Before adjourning, Mr. Torti asked what would happen if 10 states have not signed SLIMPACT by July 15, the date of the first official Commission meeting.  He was told that three jurisdictions are considering SLIMPACT and may act by then.  If 10 states have not joined SLIMPACT by that time, the Commission could not officially meet.

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

SLIMPACT was developed to implement provisions of the Nonadmitted and Reinsurance Reform Act of 2010.  The Commission was established to fulfill SLIMPACT objectives through joint cooperative action among the compacting and contracting states.

 

 

 

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