Slow and Steady Won the Race for Surplus Lines Reform

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September 13, 2010 Monday 09:25 AM EST

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Slow and Steady Won the Race for Surplus Lines Reform

Jesse A Hamilton

WASHINGTON

In the excitement over the Federal Insurance Office, the rest of the Dodd-Frank Act's insurance section went mostly unsung. Yet, for nonadmitted insurers and reinsurers, those other legislative passages have a truly massive effect. So, how did the industry manage to quietly get the Nonadmitted and Reinsurance Reform Act inserted into this sweeping bill and see it almost unchanged through the divisive financial reform debate?

The answer: With steady pressure and time, like most Washington success stories.

The process of reforming the market for the highly specialized insurers didn't begin in the early days of 2009, when federal lawmakers sought to repair the U.S. economy. It really goes back a decade to the days of the Gramm-Leach-Bliley Act. The surplus lines reform idea was brought to congressional staffers by frustrated industry reps, concerned with contradictory and confusing state regulatory structures. Regulators and the industry had concluded that a state-by-state solution wasn't going to work, said Libby L. Baney, who had co-chaired the Surplus Lines and Reinsurance Coalition as Washington counsel for the National Association of Professional Surplus Lines Offices.

Robert Gordon was there at the start, as a staff counsel in the insurance-related committees. "I was the insurance guy, the guy who did all the non-health insurance for the House, on the Republican side," he said. Gordon drafted most of the legislative language for this and a number of other insurance changes.

The NRRA, as it was known, had actually become part of the much larger SMART Act, a 2006 bill that had been doomed by some of its more controversial provisions. So, the nonadmitted piece was hauled out of SMART, Gordon said, and it started its long courtship with Congress. The basic idea: For surplus lines, taxation, regulatory and licensing authority would become the exclusive authority of the home state of the insured, meaning that multistate policies would only have premiums taxed in a single state, and for reinsurers, regulatory authority would be limited to the state where the company is domiciled.

The end of the 2006 session saw the bill's first success, when it raced through committee and passed in the House. But that would become its familiar story. It was introduced in both the House and Senate in 2007. And again, it passed the House that year, though the Senate only got around to holding a hearing. House members re-introduced it in September of 2009, and it was approved. And again, it was introduced in the Senate but hadn't seen any action through most of the year.

By then, this was a very familiar, noncontroversial bill in lawmakers' eyes. In the rhythms of Congress, there are many of these types of bills hanging around year after year, waiting for their moments.

"The momentum behind the bill was very strong already," Gordon said. "You spend a couple of years putting language together, and you keep refining it. The good ideas stay around long enough until there's an opportunity to make it happen."

"There'd been very little opposition to it from 2006 on," said Steve Stephan, director of government relations for NAPSLO. "We started getting messages that it would be joined with other financial bills when they moved."

Rep. Barney Frank, the chairman of the Financial Services Committee, gave the NRRA its biggest break. Frank, one of the chief authors of what would eventually become the Dodd-Frank Act, slipped this insurance provision into the gigantic financial reform bill. It was, the thinking went, an easy, low-interest piece that wasn't going to draw fire from either side. And it was slightly positive in its Congressional Budget Office score, so it couldn't be criticized as a budget drag. Still, getting it that far "was really a testament to the united position of the industry on this," said Baney, an adviser with B&D Consulting. "It was a real united front."

Then it was matched in the Senate version introduced by Sen. Chris Dodd, chairman of the Banking, Housing and Urban Affairs Committee. At that point, the lobbying just became a matter of constant presence -- routinely flying industry execs to Washington -- and reminding lawmakers of the provision's importance. "It wasn't a big battle, because the Senate saw that this was a noncontroversial piece of legislation in an otherwise controversial bill," she said. "There wasn't a whole lot of risk in including it." And these reforms never became a high priority in the debate, Baney said, because any issues had largely been worked out in previous years. "As they say on the Hill, it was pretty much baked," she said.

Eventually, the bill became law. "We popped the champagne," Baney said. "That's for sure." But that wasn't the end of the work.

"The states now have to decide whether to just allow a single-state tax system to come into play or they're going to have to find a way to allocate the taxes," Stephan said. "Since it's almost certain to take legislation at the state level, they're going to have to move quickly." Some state commissioners are already predicting they won't have time to finish the new system before the law goes into effect next July. The relevant National Association of Insurance Commissioners committee has been meeting via phone regularly.

Meanwhile, the Government Acountability Office will conduct a 30-month study of the law's implementation.

Before the law was finally approved, Gordon was hired by the Property Casualty Insurers Association of America as its senior vice president of policy development and research, where he's still working on the issue. "It's always important to do good work, because 20 years down the road, some of the seeds of what you worked on ... can actually be implemented," he said.

However the NRRA works in practice, Gordon said it has already set precedents. It defines "sophisticated entities that will be a critical precedent for distinguishing between sophisticated and unsophisticated policyholders down the road," he said. Also, he pointed out "the bill furthered the precedent of referring to certain NAIC lists or models as part of the law," bolstering its quasi-governmental nature. And finally, he said, it "will be an example of how federal legislation can make the state regulatory system effective and more uniform," rather than falling back on pure federal regulation.

(Jesse A. Hamilton, Washington bureau manager: Jesse.Hamilton@ambest.com)

September 14, 2010

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