In an effort to stay one-step ahead of related federal legislation, an interested parties group within the NAIC has begun drafting an interstate compact that will allow for the uniform regulation of excess/surplus line transactions.  Presently, Congress is considering legislation, the Nonadmitted and Reinsurance Reform Act (H.R. 1065) which, if passed, would establish national standards for state regulation of the surplus lines and reinsurance markets including a uniform system of surplus lines premium taxation.  The regulation of excess/surplus lines, particularly the method for collecting premium taxes on multi-state surplus lines risks, has become a major issue as the lack of coordination between states has caused millions of dollars to be wasted by brokers each year.

The current draft of the interested NAIC group’s proposed interstate compact would require each state to collect risk allocation information from the broker, and a compact-created clearinghouse would calculate how much money is owed to each state based on a uniform allocation formula, which would be reported to states and brokers.  This differs from H.R. 1065, which requires taxes be paid to the home state, and the home state would then be responsible for redistribution.  Additionally, the proposal would require states to participate in the NAIC or other national producer databases in order to collect licensing fees, while H.R. 1065 does not.

The hope and expectation is that the interstate compact will be viewed as either an alternative approach or template to be followed by the drafters of the federal surplus lines bill.  A final draft of the proposed interstate compact is expected to be ready by the NAIC’s September quarterly meeting.  If adopted by regulators, the next step would be for state legislatures to enact the compact into law.