July | August 2017




Surplus Lines Compact Nears Enactment

By Steven Blevins, CSG Policy Intern
When the late King of Pop Michael Jackson wanted to insure his “This Is It!” concert tour, he looked to Lloyd’s of London, a commercial supplier of highly specialized insurance policies, for entertainment insurance not traditionally available from standard, admitted insurance companies.
Lloyd’s of London is part of the surplus lines insurance market, which provides coverage for complex and unique risks that may not be covered by a standard insurer in the marketplace. Surplus lines typically are used to cover nontraditional or unusual assets, complex or distressed industries, or when an excessive limit of coverage is necessary. 
This niche market allows for surplus line brokers to design policies that are specific to the needs of the insured while also being able to negotiate rate terms that standard insurance companies cannot traditionally offer.
But there’s a catch; states need to streamline surplus lines market regulation.
The Council of State Governments’ National Center for Interstate Compacts is assisting in that effort by helping to develop a compact known as SLIMPACT-Lite—the Surplus Lines Insurance Multi-state Compliance Compact.  Indiana, Kansas, Kentucky, New Mexico, North Dakota, Rhode Island and Vermont have signed on to the compact; it takes 10 to take effect and carry the force of law.
Kentucky Rep. Robert Damron, CSG’s Finance Committee Chair and SLIMPACT legislative sponsor in Kentucky, believes the compact will attract its 10th signature during the current legislative session. 
“The Dodd-Frank Act gave states a short period of time in which to act,” he said. “With seven states already members of the compact and legislation being actively considered in several others, there is a real chance that SLIMPACT will achieve the 10 necessary states required for activation in one legislative session,” he said. “That represents a tremendous accomplishment and is a testament to my colleagues around the states and the power and importance of interstate compacts.” 
Vermont and Rhode Island recently became the sixth and seventh states to pass legislation approving SLIMPACT-Lite.  Additionally, Tennessee Gov. Bill Haslam has the compact and it is ready for his signature, and one chamber of the Alabama legislature has approved the compact.
The compact was developed to ensure state compliance with Title V, Subtitle B, Part I of the Dodd-Frank Act, known as the Nonadmitted Insurance and Reinsurance Reform Act. The act contains language suggesting an interstate compact would be an appropriate vehicle to assist state efforts to comply with the mandate to adopt a set of nationwide uniform requirements and procedures that will provide for the collection and allocation of premium taxes for nonadmitted insurance.
Beginning July 21, 2011, the home state of an insured will be the only state with jurisdiction over surplus lines transactions, thus all premium tax from surplus lines insurance policies that cross multiple state borders will be paid only to the insured’s home state, according to the Nonadmitted Insurance and Reinsurance Reform Act.
Supported by the National Conference of Insurance Legislators, the National Conference of State Legislatures and CSG’s membership, SLIMPACT-Lite aims to provide exclusive single state/home state regulation for surplus lines insurance. The concern among many states after the passage of the Dodd-Frank Act and the Nonadmitted Insurance and Reinsurance Reform Act was the implementation of a suitable method to allocate surplus lines premium taxes. 
SLIMPACT-Lite answers this concern by authorizing a governing commission to establish such standards.  The compact instructs the governing commission to adopt uniform rules for taxation, foreign insurer eligibility and policyholder notices.  To facilitate the distribution of the premium taxes, the commission will create and oversee a clearinghouse that will be tasked with collecting premium taxes and gathering and analyzing data pertaining to risk within the surplus lines industry. 
Without such a compact, states will not be able to charge taxes on multi-state surplus lines transactions if it is not the home state of the insured, potentially resulting in a loss of significant premium tax revenue.

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