Following comments by interested parties, including the American Property Casualty Insurance Association (APCIA) and the Excess Line Association of New York (ELANY), at the National Association of Insurance Commissioners (NAIC) Fall National Meeting in Austin, Texas, the Surplus Lines Task Force tabled its new Blanks proposal regarding home state direct premium written. As we noted previously, the original intent of the proposal was to require U.S. insurers that write surplus lines insurance to report premium on a home state basis, to provide state regulators a basis to reconcile broker reported surplus lines premium with company provided information and ensure that states are receiving the proper amount of surplus lines premium taxes. The reason this information was sought is that premium taxes on surplus lines premiums are based on the total policy premium and paid by surplus lines brokers solely to the “home state” of the insured, as defined in the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) of the Dodd-Frank Wall Street Reform and Consumer Protection Act . Currently, Schedule T – Exhibit of Premiums Written allocates premium by geographic concentration of risk and not by home state of the insured.
After the Summer National Meeting, the Task Force solicited and received comments from interested parties, including APCIA, ELANY and the Wholesale & Specialty Insurance Association (WSIA). Each party outlined issues of why the new Blanks proposal should be rejected.
APCIA noted that it would “not provide an effective means to determining the accuracy of information on the policies and premiums reported by the brokers as basis for surplus lines taxation” and “the U.S. insurance company would incur the cost and burden of collecting, accounting and reporting data to the NAIC for a purpose that is otherwise not necessary for the business nor legally required by the state” APCIA further highlighted that the “surplus lines licensee has the legal burden for properly adhering to the laws, rules and regulations of the home state of the insured” and “the tax liability does not exist for insurers writing surplus lines business as they are not licensed to transact business in the state.”
ELANY had similar concerns. It reiterated that “E&S brokers are licensees charged with the legal duty to determine the insured’s Home State and pay taxes accordingly [and] E&S insurers have no such legal obligation.” ELANY also highlighted the burden this would place on the insurers as “[m]any E&S insurers do not currently collect this data” and the proposal would “place a burden on U.S. insurers that is not placed on alien insurers.” In addition, there is no guarantee that the information would provide the needed result. ELANY noted that “to the extent the proposal is intended to impose a duty on insurers to determine Home State independently, discrepancies are likely to occur.”
WSIA also submitted a comment letter and had similar concerns as well that the “proposed premium reporting changes will not yield the desired results” and “an imperfect reconciliation process will require a significant investment of financial and human resources for all parties (i.e., carriers, brokers and regulators) and will result in no substantial change in surplus lines revenues for any of the states.”
While the interested parties acknowledged the intent behind the proposal, each highlighted the financial, systems and administrative impact the proposal would have on U.S. surplus lines insurers and indicated how the proposal, in the end, would not yield the intended reconciliation. The Task Force was urged to reject the proposal and to seek alternative solutions to achieve their goal. For the time being, the Task Force tabled the proposal until the 2020 Spring National Meeting scheduled for March in Phoenix, Arizona.
Locke Lord will continue to monitor this issue.