CIAB Urges Quick Action on Surplus Lines Reform

George (Shad) Steadman, chairman of The Council of Insurance Agents & Brokers, urged Congress today to take a major step toward modernizing the insurance regulatory system by adopting legislation to provide a uniform approach to regulating the commercial surplus lines market.

In testimony before the Senate Banking Committee during a broad hearing on insurance regulatory reform, Steadman told lawmakers that adopting surplus lines reform legislation would be a “practical solution to real marketplace problems” that could cure a fundamental flaw in state insurance regulation while Congress considers other regulatory changes.

Steadman, who is president and COO of Rutherfoord Inc., of Roanoke, Va., noted that there is rare consensus on the need to have a less complicated and conflicting regulatory approach to surplus lines reform. Presently, more than 25 percent of commercial insurance in the United States is placed in surplus lines market, which is also known as the non-admitted insurance marketplace.

“All of the major stakeholders are supportive of this legislation – large and small insurers and reinsurers, large and small intermediary firms, and the only organization whose explicit purpose is to represent commercial insurance consumers – the Risk Insurance Management Society,” Steadman said. “I should also note that despite our disagreements on broader federal reforms, the National Association of Insurance Commissioners has taken a progressive stance on the surplus lines title of this legislation.”

The Council is a strong supporter of an optional federal charter for the insurance industry as well as a federal Office of Insurance Information that has been proposed by the Bush administration’s Treasury Department and is currently gaining some traction in the House. However, Steadman said nothing in the surplus lines reform legislation should be seen as either advancing the optional federal charter movement or threatening it.

The OFC debate is likely to be long and complicated and most certainly will not be resolved in the near future, Steadman said. However, surplus lines reform has already passed the House by unanimous vote during this Congress as well as the previous Congress and could easily receive final legislative approval in the Senate before lawmakers adjourn for the year and end the 110^th

“Surplus lines regulatory reform will not detract at all from the debate over the OFC, nor is it a substitute for that legislation,” he said. “But in the meantime, it is an achievable reform of the state-based regulatory system; it is a somewhat uncontroversial reform that even the state insurance regulators support; and its resolution will save millions of dollars for brokers and consumers and, we believe, ultimately increase compliance with state premium tax requirements by resolving the conflicts that make compliance difficult, if not impossible, today.”

The Senate surplus lines legislation is sponsored by Florida Sens. Bill Nelson, a Democrat, and Mel Martinez, a Republican. It proposes to replace the current crazy quilt of state regulations with a uniform approach that makes the rules of the insureds’ home state apply in the case of multistate placements.

The current system works if there is only one state involved, since regulatory compliance involves only a single set of rules. However, if multiple states are involved, which is the norm in the surplus lines market, “full regulatory compliance is difficult if not impossible because the laws of every state in which an exposure being insured is located may technically apply to the transaction,” Steadman said. “Simply keeping track of all the requirements can be a Herculean task.”

For example, he said, it is nearly impossible to determine the correct allocation for surplus lines premium taxes because of the differences among the states with respect to tax rates, the tax exemptions, taxing authorities and timing of tax payments. In one state, surplus lines taxes are levied not by the state at all but by municipalities. He said to comply in that jurisdiction, one Council member firm actually uses electronic maps to determine the city and county in which a risk is located.

The rules are equally divergent when it comes to other issues such as declinations, insurer eligibility, regulatory filings and producer licensing.

“We believe this bill offers the committee a political and substantive trifecta – lowering costs to insurance consumers, providing greater access to affordable products and doing so with little to none of the political controversy that surrounds other federally preemptive insurance legislation,” Steadman told members of the banking panel. “We hope that you will seize this opportunity this year.”