Surplus Lines (C) Task Force Minutes · SURPLUS LINES (C) TASK FORCE . Surplus Lines (C) Task Force Aug. 5, 2020, Virtual National Meeting Minutes . 2021 Proposed Charges (Attachment

© 2020 National Association of Insurance Commissioners 1

SURPLUS LINES (C) TASK FORCE Surplus Lines (C) Task Force Aug. 5, 2020, Virtual National Meeting Minutes 2021 Proposed Charges (Attachment One) Blanks Proposal and Comment Letters Regarding Home State Direct Premiums Written (Attachment Two)

Draft Pending Adoption


Draft: 8/21/20

Surplus Lines (C) Task Force Virtual Summer National Meeting

August 5, 2020 The Surplus Lines (C) Task Force met via conference call Aug. 5, 2020. The following Task Force members participated: James J. Donelon, Chair, and Stewart Guerin (LA); Larry D. Deiter, Vice Chair (SD); Lori K. Wing-Heier represented by David Phifer (AK); Alan McClain represented by William Lacy (AR); Ricardo Lara represented by Kim Hudson (CA); Michael Conway represented by Rolf Kaumann (CO); David Altmaier represented by Virginia Christy (FL); Dean L. Cameron represented by Eric Fletcher (ID); Robert H. Muriel represented by Marcy Savage (IL); Vicki Schmidt represented by Heather Droge (KS); Sharon P. Clark represented by DJ Wasson (KY); Kathleen A. Birrane represented by Todd Switzer (MD); Mike Causey represented by Fred Fuller (NC); Barbara D. Richardson and Gennady Stolyarov (NV); Glen Mulready represented by Eli Snowbarger (OK); Raymond G. Farmer represented by Ryan Basnett (SC); Mike Kreidler represented by Jeff Baughman (WA); Jeff Rude and Donna Stewart (WY). Also participating was: Robert Wake (ME). 1. Adopted its 2019 Fall National Meeting Minutes Mr. Fletcher made a motion, seconded by Mr. Baughman, to adopt the Task Force’s Dec. 7, 2019, minutes (see NAIC Proceedings – Fall 2019, Surplus Lines (C) Task Force). The motion passed unanimously. 2. Adopted the Report of the Surplus Lines (C) Working Group Mr. Guerin reported that since the 2019 Fall National Meeting, the Surplus Lines (C) Working Group met Dec. 18, 2019; March 10; and June 29 in regulator-to-regulator session, pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings. During these meetings, the Working Group heard a summary of eight applications for admission to the Quarterly Listing of Alien Insurers. All eight of the applying companies were discussed, and seven applicants were admitted to the listing. Mr. Guerin updated the Task Force that on May 6, NAIC staff sent out a COVID-19 survey to the quarterly listed insurers and syndicates. The survey addressed equity market impact, writings exposed to COVID-19 claims, and claims status. Mr. Guierin indicated that survey responses would be analyzed in conjunction with the annual renewal analysis that staff completes. Mr. Kaumann made a motion, seconded by Mr. Hudson, to adopt the report of the Working Group. The motion passed unanimously. 3. Adopted its 2021 Proposed Charges

Commissioner Donelon stated that the 2021 proposed charges (Attachment One) for the Task Force and Surplus Lines (C) Working Group contained non-substantive changes compared to the 2020 charges. Ms. Droge made a motion, seconded by Mr. Stolyarov, to adopt the Task Force’s 2021 proposed charges. The motion passed unanimously. 4. Discussed Model #870

Commissioner Donelon referenced a March 16 NAIC staff memorandum on the Nonadmitted Insurance Model Act (#870). He stated that Model #870 was last modified in 2002, and it has not been updated since the passage of the Nonadmitted and Reinsurance Reform Act (NRRA) in 2001. He asked for a discussion as to whether Model #870 should be reviewed and brought up to date with current standards. He instructed Andy Daleo (NAIC) to provide a summary of the memorandum and supporting materials. Mr. Daleo stated that NAIC staff completed a cursory review of Model #870 in March 2020 that led to the topic’s inclusion on the agenda. He stated that Model #870 came into existence as a result of the compilation of three previous NAIC surplus lines models that date back to 1983—the Unauthorized Insurers Model Act, the Model Surplus Lines Law, and the Model Nonadmitted Insurance ActHe indicated that Model #870 was adopted in the third quarter of 1994, and it has been adopted by 31 states.



Mr. Daleo stated that the most recent activity regarding Model #870 was on Oct. 11, 2011, following the implementation of the NRRA. He indicated that Model #870 was not modified; however, a Nonadmitted Insurance Reform Sample Bulletin (Bulletin) was released to state insurance departments following its adoption by the Executive (EX) Committee and Plenary, and it was subsequently distributed to state insurance departments. He summarized that the Bulletin outlined the nationwide regulatory changes that affected the placement of nonadmitted insurance, and it included the scope of the NRRA, the implementation of the “Home State” policy, licensure requirements for brokers, diligent search requirements, and eligibility requirements for nonadmitted insurers. Mr. Daleo commented that the Task Force should consider one of three options:

• Model Law Request – Direct staff to develop a model law request for consideration at the next national meeting. • Develop a Drafting Group – The drafting group would produce a summary document that outlines the significant

updates to modernize Model #870 and present a recommendation to the Task Force at a future national meeting. • No Action – Do not amend Model #870, and rely on the Bulletin for guidance.

Mr. Stolyarov supported pursuing Model #870 amendments, with a caveat to limit revisions only to update the sections affected by the NRRA. He stated that most states have revised their statutes to conform to the NRRA, so whatever revisions are made to Model #870 should be of a nature that is compatible with the actions that the states have already taken. Bob Woody (American Property Casualty Insurance Association—APCIA) stated that his members do not have any objections to updating Model #870 to conform with the standards included in the NRRA. However, he expressed reservations to a model law request before knowing the exact portions of Model #870 that would be changed. He said his members would be more comfortable with the option two to develop a drafting group. Keri Kish (Wholesale & Specialty Insurance Association—WSIA) stated that most states have accepted the NRRA in regulations. She said only two states have not accepted the NRRA, but they have issued declarations and bulletins and made comments that they recognize that the NRRA supersedes state laws. She offered her organization’s assistance in providing information as to what the states are currently doing from a regulatory perspective. Jeff Klein (McIntyre & Lemon PPLC) agreed that option two to develop a drafting group would best conform to the consensus of opinions previously expressed. He said an outline of the areas of Model #870 to be amended would be appropriate. Commissioner Donelon indicated that he also favored a drafting group. He asked Task Force members their preference on the three options. Mr. Hudson, Ms. Droge, Mr. Baughman and Mr. Kelly all voiced support for the development of a drafting group. Commissioner Donelon said that support constituted consensus, and he will discuss with Mr. Daleo and Director Deiter on how to proceed. 5. Discussed a Blanks Proposal Regarding Home State Direct Premiums Written

Commissioner Donelon reminded the Task Force that this proposal regarding the reporting of “Home State” direct premiums written was introduced at the 2019 Fall National Meeting, where discussion was halted due to time constraints. He stated that he would like to come to a consensus during this meeting on whether to refer the proposal (Attachment Two) to the Blanks (E) Working Group. He stated that if a referral is made to the Working Group, all technical details should be resolved by the Task Force, explaining that the Working Group will not discuss the technical issues. Commissioner Donelon summarized that the proposal was exposed for a 45-day public comment period ending Oct. 10, 2019. He stated that comment letters were received from three interested parties, which were discussed at the 2019 Fall National Meeting. Further, he stated that several states commented that this Blanks proposal would provide a means for an insurance department to arrive at an estimate of surplus lines premium taxes and allow the states to better reconcile taxes collected. Commissioner Donelon agreed that the proposal is not a perfect solution for the problem of reconciling surplus lines premiums taxes. He said it has been several years since Louisiana last conducted an audit of a surplus lines broker. However, audits performed pre- and post-NRRA discovered only a slight difference between what was reported by the broker compared to the audit. Director Deiter said South Dakota utilizes the Florida Surplus Lines Service Office to track its nonadmitted premiums, but he understands that this may not be a viable option for some states with limited resources.



Mr. Wake said Maine’s tax department sought his advice on this issue last year because it thought the proposed Schedule T section would benefit Maine‘s tax collection efforts. He commented that the big question relates to the degree of burden this would be for the companies. He said the industry analysis of surplus lines taxes prepared by WSIA showed a minimal variance between their best aggregate guess and the aggregate guess provided by current reporting. However, he stated that the important point was not in the aggregate variance but what was occurring in each state. Commissioner Donelon agreed, but he added that he did not see how the proposal would come close to solving the problem of creating a more efficient tax system for surplus lines. Mr. Stolyarov said he is concerned that the proposal may cause confusion in how it would address the distinction between surplus lines premium and independently procured nonadmitted insurance. He indicated that in Nevada, surplus lines premiums are reported to the Nevada Surplus Lines Association (NSLA), whereas independently procured premiums are reported to the Department of Taxation. He said he is concerned that the proposed reporting by insurers might combine the two types of nonadmitted insurance premiums. Mr. Wake stated that the industry had not persuaded him that there is not a problem, but industry had persuaded him that this proposal does not appear to be a solution worth pursuing. John Meetz (WSIA) summarized his organization’s analysis of surplus lines premium taxes. He offered that there will always be differences between premium reported by carriers and the taxable transaction revenue reported by brokers. He stated that those differences will be caused by the timing of reporting, additional fees collected as part of the transaction, non-taxable premiums that brokers have no incentive to report, and the effect of cancellations and mid-term endorsements. Based on these differences, he said the reporting by carriers of “Home State” surplus lines premiums would be burdensome to carriers, state insurance regulators, and brokers. Ms. Stewart suggested that if the Schedule T proposal was implemented, the Task Force would consider drafting a memorandum to the states noting the information that would be available in the new supplement and explaining some of the differences between “Home State” premium reporting by carriers and the surplus lines reporting by brokers. Mr. Woody added that a joint trades letter submitted by the APCIA, the National Association of Mutual Insurance Companies (NAMIC), and the Council of Insurance Agents & Brokers (CIAB) opposes the Blanks proposal. Commissioner Donelon stated that from the comments made, there does not appear to be consensus in favor of advancing the proposal. Mr. Hudson made a motion, seconded by Director Deiter, to table the proposal. The motion passed unanimously. Having no further business, the Surplus Lines (C) Task Force adjourned. W:\National Meetings\2020\Summer\TF\SURL\Draft Minutes Final.dotx

Attachment One Surplus Lines (E) Task Force

8/5/20

© 2020 National Association of Insurance Commissioners

Draft: 7/20/20 Adopted by the Property and Casualty Insurance (C) Committee—8/5/20 Adopted by the Surplus Lines (C) Task Force—

2021 Proposed Charges

SURPLUS LINES (C) TASK FORCE The mission of the Surplus Lines (C) Task Force is to monitor the surplus lines market and regulation, including the activity and financial condition of U.S. and alien surplus lines insurers by providing a forum for discussion of issues and to develop or amend relevant NAIC model laws, regulations and/or guidelines. Ongoing Support of NAIC Programs, Products or Services 1. The Surplus Lines (C) Task Force will:

A. Provide a forum for discussion of current and emerging surplus lines-related issues and topics of public policy and determine appropriate regulatory response and action.

B. Review and analyze quantitative and qualitative data on U.S. domestic and alien surplus lines industry results and trends.

C. Monitor federal legislation related to the surplus lines market and ensure all interested parties remain apprised. D. Develop or amend relevant NAIC model laws, regulations and/or guidelines. E. Oversee the activities of the Surplus Lines (C) Working Group.

2. The Surplus Lines (C) Working Group will:

A. Operate in regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings and operate in open session when discussing surplus lines topics and policy issues, such as amendments to the International Insurers Department (IID) Plan of Operation.

B. Maintain and draft new guidance within the IID Plan of Operation regarding standards for admittance and continued inclusion on the NAIC Quarterly Listing of Alien Insurers.

C. Review and consider appropriate decisions regarding applications for admittance to the NAIC Quarterly Listing of Alien Insurers.

D. Analyze renewal applications of alien surplus lines insurers on the NAIC Quarterly Listing of Alien Insurers and ensure solvency and compliance per the IID Plan of Operation guidelines for continued listing.

E. Provide a forum for surplus lines-related discussion among jurisdictions.

NAIC Support Staff: Andy Daleo/Robert Schump

© 2019 National Association of Insurance Commissioners Schedule_T_Part_3_Proposal.doc 1

NAIC BLANKS (E) WORKING GROUP

Blanks Agenda Item Submission Form

DATE: 7/12/2019

CONTACT PERSON: Andy Daleo/Bob Schump – NAIC staff

TELEPHONE: (816)783-8141/(816) 783-8437

EMAIL ADDRESS: [email protected]/[email protected]

ON BEHALF OF: Surplus Lines (C) Working Group

NAME: Stewart Guerin

TITLE: Chair of Surplus Lines (C) Working Group

AFFILIATION: Louisiana Department of Insurance

ADDRESS:

FOR NAIC USE ONLY Agenda Item # Year 2020 Changes to Existing Reporting [ ] New Reporting Requirement [ X ]

REVIEWED FOR ACCOUNTING PRACTICES AND PROCEDURES IMPACT

No Impact [ X ] Modifies Required Disclosure [ ]

DISPOSITION

[ ] Rejected For Public Comment [ ] Referred To Another NAIC Group [ ] Received For Public Comment [ ] Adopted Date [ ] Rejected Date [ ] Deferred Date [ ] Other (Specify)

BLANK(S) TO WHICH PROPOSAL APPLIES

[ X ] ANNUAL STATEMENT [ X ] INSTRUCTIONS [ X ] CROSSCHECKS [ ] QUARTERLY STATEMENT [ X ] BLANK

[ ] Life, Accident & Health/Fraternal [ ] Separate Accounts [ ] Title [ X ] Property/Casualty [ ] Protected Cell [ ] Other ______________________ [ ] Health [ ] Health (Life Supplement)

Anticipated Effective Date: 2020 Annual

IDENTIFICATION OF ITEM(S) TO CHANGE

Add a new Schedule T – Part 3 to the Property/Casualty blank for the purpose of collecting direct premiums written data allocated by “home State.”

REASON, JUSTIFICATION FOR AND/OR BENEFIT OF CHANGE**

The intent is to provide a basis for state regulators to reconcile broker reported surplus lines premium with company provided information to better ensure that states are receiving the proper amount of surplus lines premium taxes. 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 Section 527 of the Nonadmitted and Reinsurance Reform Act of 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Currently, the only resource available to the state for tax reconciliation is Schedule T – Exhibit of Premiums Written, which allocates premium by geographic concentration of risk. Collecting premium information within the annual blank for “Home State Direct Premiums Written” provides the state a starting point for surplus lines premium tax reconciliation. Throughout the year NAIC staff receives frequent inquiries regarding assistance with surplus lines premium tax reconciliation and cannot provide a resource to the state. This blanks proposal will provide significant value to the states/territories regarding surplus lines tax reconciliation.

NAIC STAFF COMMENTS

Comment on Effective Reporting Date:

Other Comments:

___________________________________________________________________________________________________ ** This section must be completed on all forms. Revised 7/18/2018


Attachment Two Surplus Lines (E) Task Force

8/5/20


ANNUAL STATEMENT INSTRUCTIONS – PROPERTY

SCHEDULE T – PART 3 EXHIBIT OF PREMIUMS WRITTEN

ALLOCATED BY HOME STATES AND TERRITORIES

This schedule is intended to report surplus lines premiums written to a state or territory of the insured that conforms to the definition of “home State” as provided in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Allocation of surplus lines premiums reported on this schedule should be based on the “home State” of the insured, regardless of jurisdiction where the risks are located

All U.S. surplus lines business must be allocated to the “home State” of the insured, regardless of license status or concentration of risk.

Column 1 – Active Status

Use the following codes to identify the reporting entity’s status for each state or territory in whichsurplus lines premium is to be reported in the schedule as of the end of the reporting period. Enter thecode that applies to the reporting entity’s status in the state or territory.

L – Licensed or Chartered (Licensed Insurance Carrier and Domiciled Risk Retention Groups referred to in some states as admitted.)

R – Registered (Non-domiciled Risk Retention Groups)

E – Eligible (Reporting Entities eligible or approved to write Surplus Lines in the state (other than their state of domicile – see DSLI). In some states referred to as nonadmitted.)

Q – Qualified (Qualified or Accredited Reinsurer)

D – DSLI (Domestic Surplus Lines Insurer (DSLI) – Reporting Entities authorized to write Surplus Lines in the state of domicile)

N – None of the above (Not allowed to write business in the state or none of the above codes apply)

Column 2 – Home State Direct Premiums Written

The following is provided to illustrate appropriate allocation bases for surplus lines of business:

All surplus lines policy premiums are to be allocated to the appropriate state that conforms to the“home State” definition as provided in Section 527 of the Nonadmitted and Reinsurance Reform Act within the Dodd-Frank Wall Street Reform and Consumer Protection Act:

Definition:

(6)HOME STATE.(A) IN GENERAL.—Except as provided in subparagraph (B), the term “home State”

means, with respect to an insured—(i) the State in which an insured maintains its principal place of business or, in the

case of an individual, the individual’s principal residence; or(ii) if 100 percent of the insured risk is located out the State referred to in clause (i),

the State to which the greatest percentage of the insured’s taxable premium forthat insurance contract is allocated.



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(B) AFFILIATED GROUPS.—If more than 1 insured from an affiliated group are namedinsureds on a single nonadmitted insurance contract, the term “home State” meansthe home State, as determined pursuant to subparagraph (A), of the member of theaffiliated group that has the largest percentage of premium attributed to it under suchinsurance contract.

Column 3 – Percentage of Total Home State Direct Premiums Written

Amount represents the percentage of the individual line items in Column 2 to the Total Home StateDirect Premiums Written amount presented in Column 2, Line 59.

Line 59 should equal 100%.

The allocation method established by the reporting entity in compliance with these instructions and the instructions of the domiciliary state should be consistently applied to all policies and reporting periods.

The data reported in Schedule T – Part 3 of the annual statement may or may not be used for the calculation of the amount of premium tax due to a state/jurisdiction. Individual states/jurisdictions may require a separate schedule to support premium tax calculations.

NOTE: Existing state laws and regulations need to be considered when applying these instructions.

Footnote (a):

Provide the total of each active status code in Column 1. The sum of all the counts of all active status codes should equal 57.



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ANNUAL STATEMENT BLANK – PROPERTY

SCHEDULE T – PART 3

EXHIBIT OF SURPLUS LINES PREMIUMS WRITTEN Allocated by Home States and Territories

1 2

Home State Direct Premiums

Written

3

Percentage of Total Home State Direct Premiums Written

States, Etc. Active Status (a)

1. Alabama ............................................................................................................... AL 2. Alaska ...................................................................................................................AK 3. Arizona ................................................................................................................. AZ 4. Arkansas ............................................................................................................... AR 5. California.............................................................................................................. CA 6. Colorado ............................................................................................................... CO 7. Connecticut .......................................................................................................... CT 8. Delaware .............................................................................................................. DE 9. Dist. Columbia ..................................................................................................... DC

10. Florida ................................................................................................................... FL 11. Georgia .................................................................................................................GA 12. Hawaii ................................................................................................................... HI 13. Idaho ...................................................................................................................... ID 14. Illinois.....................................................................................................................IL 15. Indiana ................................................................................................................... IN 16. Iowa ....................................................................................................................... IA 17. Kansas .................................................................................................................. KS 18. Kentucky ..............................................................................................................KY 19. Louisiana .............................................................................................................. LA 20. Maine ................................................................................................................... ME 21. Maryland ............................................................................................................. MD 22. Massachusetts ..................................................................................................... MA 23. Michigan .............................................................................................................. MI

24. Minnesota ............................................................................................................ MN 25. Mississippi ...........................................................................................................MS 26. Missouri............................................................................................................... MO 27. Montana............................................................................................................... MT 28. Nebraska ............................................................................................................... NE 29. Nevada ..................................................................................................................NV 30. New Hampshire ...................................................................................................NH 31. New Jersey ............................................................................................................ NJ 32. New Mexico ........................................................................................................ NM 33. New York .............................................................................................................NY 34. No. Carolina ......................................................................................................... NC 35. No. Dakota ...........................................................................................................ND 36. Ohio ......................................................................................................................OH 37. Oklahoma .............................................................................................................OK 38. Oregon .................................................................................................................. OR 39. Pennsylvania ........................................................................................................ PA

40. Rhode Island ......................................................................................................... RI 41. So. Carolina.......................................................................................................... SC 42. So. Dakota ............................................................................................................ SD 43. Tennessee ............................................................................................................. TN

44. Texas .................................................................................................................... TX 45. Utah ...................................................................................................................... UT 46. Vermont................................................................................................................ VT 47. Virginia.................................................................................................................VA 48. Washington .........................................................................................................WA 49. West Virginia ......................................................................................................WV 50. Wisconsin ............................................................................................................. WI 51. Wyoming .............................................................................................................WY 52. American Samoa.................................................................................................. AS 53. Guam ....................................................................................................................GU 54. Puerto Rico........................................................................................................... PR 55. U.S. Virgin Islands ............................................................................................... VI 56. Northern Mariana Islands....................................................................................MP

57. Canada ............................................................................................................... CAN 58. Aggregate other alien .......................................................................................... OT

................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................ ................................

XXX

............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ............................... ...............................

XXX

..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... .....................................

XXX 59. Totals XXX

(a) Active Status Counts:

L – Licensed or Chartered - Licensed insurance carrier or domiciled RRG.................................................................................................. ________________ R – Registered - Non-domiciled RRGs ........................................................................................................................................................... ________________ E – Eligible - Reporting entities eligible or approved to write surplus lines in the state (other than their state of domicile – See DSLI) ________________ Q – Qualified - Qualified or accredited reinsurer ............................................................................................................................................ ________________ D – Domestic Surplus Lines Insurer (DSLI) – Reporting entities authorized to write surplus lines in the state of domicile. ................... ________________ N – None of the above – Not allowed to write business in the state .............................................................................................................. ________________



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August 4, 2020

Commissioner Jim Donelon Commissioner Larry D. Deiter Chair, NAIC Surplus Lines (C) Task Force Vice Chair, NAIC Surplus Lines (C) Task Force

Sent in care of Andy Daleo, [email protected]

Dear Commissioners Donelon and Deiter,

Thank you for the opportunity to comment on the proposal to revise the manner by which surplus lines carriers report their annual premium in Schedule T. We would like to express our opposition for the proposal and our agreement with WSIA that the proposal will not achieve the goals of the task force for the reasons outlined in the WSIA letter dated March 12, 2020. We would like to reiterate the following points:

The differences between carrier Schedule T reporting and surplus lines broker tax filings are too numerous to facilitate an accurate reconciliation of specific surplus lines broker taxes, even after accounting for home state premium.

WSIA’s data analysis conclusively shows that national surplus lines tax revenues are virtually identical to expected revenues based upon carrier reporting.

The clarity provided by the Nonadmitted and Reinsurance Reform Act of 2010 has facilitated a tremendous increase in surplus lines tax compliance.

The nonadmitted and surplus lines industry stands ready to assist the NAIC and its members where issues of surplus lines tax compliance exist but for these reasons, we urge the committee to oppose the proposed changes to the Schedule T.

Sincerely,

Robert W. Woody Vice President & Counsel American Property Casualty Insurance Association (APCIA)

Tony Cotto Director, Auto and Underwriting Policy National Association of Mutual Insurance Companies (NAMIC)

LeeAnn Goheen NAIC/State Legislative & Regulatory Senior Advisor Council of Insurance Agents and Brokers



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The Honorable James J. Donelon Chair, Surplus Lines (C) Task Force National Association of Insurance Commissioners 1100 Walnut Street Kansas City, MO 64106 October 1, 2019

SUBJECT: Surplus Lines Task Force Proposal Regarding Schedule T Modification

Dear Commissioner Donelon:

On behalf of the Excess Line Association of New York (“ELANY”), a nonprofit industry advisory association charged with facilitating and encouraging compliance with the excess line law of New York, thank you for the opportunity to comment on the Surplus Lines Task Force’s proposal regarding home state direct premiums written. ELANY supports uniformity in regulation whenever possible and practical. ELANY supported passage of the NRRA and works diligently to educate excess and surplus line brokers regarding the NRRA’s requirements. After careful study we respectfully submit the Schedule T proposed modifications will produce duplicative, incomplete and inconsistent information, confuse insurers and prove to be too flawed to be useful for regulators. Due to the practical reasons discussed below, ELANY urges the Task Force to reject its adoption.

1. E&S brokers are licensees charged with the legal duty to determine the insured’s HomeState and pay taxes accordingly. E&S insurers have no such legal obligation.

2. Many E&S insurers do not currently collect this data. A significant volume of business iswritten through brokers with binding authorities which allows insurers to reduce costsand not duplicate broker data collection.

3. 25% of New York E&S risks are written by alien insurer markets. These insurers are notrequired to produce Schedule T. To the extent, state by state, data is reported by Alieninsurers at all, there is no requirement to segment it by Home State. As such the proposalwill place a burden on U.S. insurers that is not placed on alien insurers with whom theycompete. If adopted as proposed, 25% of the data sought will not be reported.

4. If the proposal is adopted, it is likely the insurers will obtain Home State informationfrom the brokers which will mirror the information reported by brokers, making the newreport of little value.

5. To the extent the proposal is intended to impose a duty on insurers to determine HomeState independently, discrepancies are likely to occur. What happens then? Will brokers



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be audited against data provided by insurers which had no legal duty to determine Home State in the first place?

6. When determining Home State for an affiliated group, the broker is charged to determinehome state by choosing the affiliate “to which the largest percentage of premium isattributable under the policy.” Is that determination based on “insured values” or perhaps“premiums based on rates charged by insured location” or some other criteria? If thebroker and insurer choose different criteria, data discrepancies will occur. Furthermore,the states have adopted non uniform approaches to the reporting and taxation ofpurchasing group business and other master policy type transactions. This will createfurther complexity and discrepancies.

7. Requiring E&S insurers to attest to the accuracy of a new Schedule T, the data for whichis not linked to statutory accounting nor financial analysis appears to go beyond the scopeof what the attestation is intended to accomplish.

8. One last concern interested parties are compelled to raise, respectfully, is whether theproposal is within the province of the NAIC to require. Industry representatives areconcerned about the direction of designing part of the Statutory Annual Statementprimarily for tax reconciliation purposes. The long accepted purpose of the StatutoryAnnual Statement is financial analysis and helping regulators understand the financialperformance, stability and solvency of an insurer. ELANY respectfully suggests that statetax revenue reconciliation is quite different from financial analysis and is inconsistentwith the general understanding state policymakers may have as to the Statutory AnnualStatement’s purpose. Is it the NAIC’s intent to make this exhibit an accreditationstandard?

In light of the above, ELANY maintains that the proposed exhibit will not accomplish its stated goal and will create confusion among the states and marketplace participants. We therefore urge the Task Force to reject the proposed exhibit and to instead permit the NRRA to function as intended with the duty to select and report Home State squarely on the broker. If there is anything else you would like from ELANY, we will be happy to offer additional information.

Sincerely,

Daniel F. MaherExecutive DirectorExcess Line Association of New YorkOne Exchange Plaza/55 Broadway, 29th Floor New York, NY 10006-3728 Direct Line: (646) 292-5555 [email protected] | www.elany.org



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March 12, 2020

Commissioner Jim Donelon Commissioner Al Redmer, Jr. Chair, NAIC Surplus Lines (C) Task Force Vice Chair, NAIC Surplus Lines (C) Task Force

Sent in care of Andy Daleo, [email protected]

Dear Commissioners Donelon and Redmer,

Thank you for the opportunity to follow-up with additional details from the Task Force’s December 7, 2019 discussion of the proposal to revise the manner by which surplus lines carriers report their annual premium in Schedule T. Based on that discussion, we further developed our commentary to include specific illustrations that we believe can be helpful as the Task Force continues to consider this proposal.

Since the Austin meeting, we have analyzed surplus lines tax revenue data from Business Insurance (collected annually through a survey of state regulators and stamping offices) with surplus lines premium data from the NAIC Insurance Department Resources Report. Based on our analysis and comparison of these data sources, we expanded the comments of our October 4, 2019 letter to highlight three more specific comments with examples and illustrations, which follow in the attached materials.

We reiterate that we understand the motivation for states to reconcile carrier and broker premium reports. However, as you will see in the attached materials, we find that, when comparing taxes collected and premium reported on a nationwide basis, the variances are small considering the known and valid differences between carrier reporting and broker tax requirements. We believe this analysis illustrates that surplus lines premium taxes are being appropriately remitted and collected across the nation. Therefore, before implementing an imperfect, potentially time-consuming and costly reconciliation process, we encourage the NAIC and the Task Force to consider conducting similar analysis as that outlined in the attached.

We look forward to discussing our analysis with the Task Force on the April 9 conference call. If you or other members have questions or need any additional information, we are happy to assist in any way.

Sincerely,

Brady R. Kelley Keri Kish John Meetz Executive Director Director of Government Relations Senior State Relations Manager



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Comment One: A comparison of surplus lines premium tax through the comparison of premium reported by surplus lines carriers on the NAIC Schedule T to the premium reported and taxes remitted by surplus lines brokers will not result in an accurate or conclusive reconciliation.

Examples: Exhibit I illustrates that comparing broker tax reports to carrier premium reports will often not reconcile based on a variety of factors that we outlined in our October 4, 2019 comment letter (Attachment A), the most common of which include:

Fees. Additional fees and costs beyond the carrier’s base premium are reported by the broker only and will not bereflected in the premium reported by a carrier. Some states require that surplus lines premium tax be paid on thesefees as well, such that the tax base for the broker will be different than the premium reported by the carrier. Brokerfee reporting is denoted by line 5 of Exhibit I.Non-taxable premium. Not all premium is taxable in some states. For example, it is not unusual for certain risks,such as inland marine, boiler & machinery, native lands and interstate commerce related railways, to be exemptfrom taxation. These are risks that carriers would report as premium but would not be reflected in broker tax filings,further distinguishing the carrier’s premium base from the broker’s tax base and skewing any reconciliation thereof.Non-taxable premium is denoted in line 3 of Exhibit I.Home state. It is the statutory responsibility of the surplus lines licensee to determine and report the home state ofthe insured, and a carrier may not always underwrite and report premium based on the same determination factors.Most carrier underwriting and reporting systems are designed based upon the physical location of the risk andunderwriting requirements in those particular physical locations or states, such that carrier reporting by home statewill require significant system and process changes. Such changes seem unwarranted when their purpose will notachieve the intended result for the reasons described herein. Brokers determine the home state of the insured formulti-state policies, which is denoted in line 1 of Exhibit I, whereas the carriers allocate and report premium basedon the location of the risk as denoted in lines 1 and 2.Return premium, midterm endorsements and cancellations. Policies can change throughout the year and theoriginal premium reported by a carrier may differ based on the broker reporting period for these factors. This is verycommon and another key reason why reconciliation will be ineffective. Return premium and the discrepancy inreporting timeframes between the broker and the carrier are denoted in lines 6 and 7 of Exhibit I.

In addition to those variables illustrated in Exhibit I, the following factors could also provide discrepancies between broker and carrier reporting:

Independent Procurement. Some states exempt taxation or have a different tax requirement or structure if aconsumer is allowed to procure policies without an insurance producer. These premiums are reported by carriersbut there would be no record of the transaction from a broker to cross reference. Again, these would skew anyreconciliation results.Reporting. States have different reporting and payment dates for surplus lines brokers, whereas all surplus linescarriers report their quarterly and annual premium at the same NAIC-required intervals.

Conclusion: Exhibit I illustrates known variances based on the difference in how surplus lines carriers report premium and how surplus lines brokers report and remit taxes. These differences are based on each parties’ regulatory responsibilities as well as underwriting standards and industry protocols. Even though both brokers and carriers each report premium, there are differences between the premium received and reported by the carrier in its Annual Statement and the premium (or tax basis) and related taxes collected and reported by the surplus lines broker. Carriers must establish premium based on the underwriting characteristics of the entire risk, which may be in many locations,

1



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and only a small portion may be in the insured’s home state. However, the broker must determine the home state of the insured (i.e., where the premium tax is to be paid). The basis upon which the broker must calculate and remit tax to the state is different from the premium reported by the carrier for the reasons illustrated in Exhibit I. Therefore, if carriers reported premium data based upon the “home state,” the carrier and broker reports would still not be an “apples to apples” comparison. Conducting a reconciliation based on two irreconcilable bases will result in significant administrative investments by regulators, carriers and brokers. As is illustrated in Exhibit II, such administrative investments are unwarranted when there is no apparent gap in tax revenues nationwide.

The known variances illustrated in Exhibit I are for one surplus lines insurance policy. Should a state try to reconcile the total difference between carrier and broker reported premium, the illustration would grow much more complex as you factor in the volume of surplus lines policies with such variances. Add to that the number of surplus lines brokers and surplus lines carriers doing business in each state, parties for which there is no one-to-one direct reporting within the Annual Statement, and the reconciliation grows more complex. Our concern is that regulators will not know if the reconciling variance is one policy, thousands of policies, one broker and carrier, or multiple brokers and carriers. In fact, we anticipate the known variances to apply to a high volume of policies and nearly all brokers and carriers, which makes the reconciliation process administratively unworkable.

While we understand the motivation for states to seek a reconciliation method, we are concerned that the proposal installs sweeping changes that will lead to a lengthy reconciliation process for a relatively small number of jurisdictions. States with surplus lines stamping offices that serve as intermediaries between surplus lines brokers and state tax collection entities have more certainty that all necessary surplus lines tax revenues are being collected. These states collectively represent 64% of all surplus lines premium written in the U.S. in 2018 according to the NAIC Insurance Department Resources Report.

Finally, we do not believe that changing the carrier’s Schedule T reporting basis will result in a starting point for states. Rather, the proposal will facilitate significant work and cost to reconcile valid differences in carrier and broker reporting. It facilitates an extensive and costly process, impacting all parties with no benefit or gain in the end.

2



8/5/20

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3



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Comment Two: Comparing carrier premium reporting within Schedule T to broker premium and tax reports will not result in substantial changes to surplus lines tax revenues for any of the states.

Example: Comparing surplus lines tax revenue data from Business Insurance (collected annually through a survey of state regulators and stamping offices) with NAIC Insurance Department Resource Report (IDRR) data (collected primarily from NAIC Schedule T filings) indicates miniscule variances in surplus lines taxes collected – variances which are expected as illustrated in Exhibit I. To illustrate this, WSIA has:

1. Estimated the tax revenue for each state based upon IDRR data from 2016 to 2018, based simply upon IDRRpremium as collected predominately from all carriers’ Schedule T reporting multiplied by the applicable surplus linestax rate in each state;

2. Calculated any variance between the tax estimated in item 1 above and the tax collected according to the BusinessInsurance survey; and

3. Calculated the 3-year average of the variances identified in item 2 above from 2016 to 2018.

From 2016 – 2018, the Business Insurance tax revenue lagged our estimated tax revenue by an average of 1.96%. However, Florida is the only state remaining to collect surplus lines taxes at rates based upon where the risk is located, rather than 100% at their 5% rate, which lowers Florida’s effective tax rate and has a fairly significant impact on the 3-year average given the size of the Florida surplus lines market. Excluding Florida illustrates actual tax revenue lagged expected revenue by only $3.7 million, or 0.22% when averaged for 2016-2018.

See Exhibit II for complete detail by state and by year.

Conclusion: Taxes collected nationwide are falling within 0.22% of WSIA’s estimate of surplus lines taxes by state. Because WSIA’s estimated revenue is based solely on carrier reported premium, the miniscule variances can be explained by the premium reporting and tax remittance responsibilities between surplus lines brokers and carriers described in Exhibit I (e.g., taxation of fees, risk and premium tax exemptions, differences in the timing of broker and carrier reporting, etc.). Implementing home state premium reporting for carriers will require them to obtain additional information from the broker, with a significant and costly compliance impact that will have no demonstrable benefit. By way of example, suppose a carrier writes 8,000 policies worth $250 million in premium in a state through 300 surplus lines producers. To reconcile these figures, the state adds up the premium reported by all 300 surplus lines producers, compares the result to the carrier’s Schedule T, and finds a discrepancy of $500,000. That difference could be comprised

3-Year Average2016 - 2018

Tax WSIA Estimated NAIC IDRR BI Tax Rate Variance % Variance Revenue Premium Collected

TOTALS (32,478,577)$ 1,689,797,891$ 43,035,404,358$ 1,657,319,314$ As % of BI Tax Collected -1.960%

TOTALS less Florida (3,695,548)$ As % of BI Tax Collected -0.223%

AVERAGE 3.569% (662,828)$ -1.972% 34,485,671$ 878,273,558$ 33,822,843$ MEDIAN 3.000% (155,369)$ -0.627% 14,904,089$ 397,046,347$ 13,748,598$ MAX 6.000% 9,661,818$ 30.061% 269,314,194$ 7,339,041,013$ 269,133,529$ MIN 1.000% (28,783,029)$ -22.077% 1,611,388$ 62,443,173$ 1,624,719$

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of hundreds of variances, which are not errors but known and valid differences between carrier reporting and broker tax requirements. It’s entirely possible that a lengthy reconciliation will find overpayment of premium tax requiring refunds and amended reductions to the overall tax revenue. Current data available, as summarized in Exhibit II, demonstrates that taxes are being accurately remitted for surplus lines premium. Therefore, before implementing an imperfect, potentially time-consuming and costly reconciliation process, we encourage the NAIC and the Surplus Lines Task Force to consider conducting similar analysis as that outlined in Exhibit II, to assess the reasonableness of surplus lines tax collections nationwide.

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3-Year Average2016 - 2018

Tax WSIA Estimated NAIC IDRR BI Tax Rate Variance % Variance Revenue Premium Collected

Alabama 6.00% (3,033,887)$ -7.71% 37,229,478$ 620,491,292$ 34,195,591$ Alaska 2.70% (662,915) -18.51% 3,519,912 130,367,127 2,856,997 Arizona 3.00% (584,185) -3.46% 16,454,987 548,499,582 15,870,802 Arkansas 4.00% 46,389 0.40% 9,989,898 249,747,441 10,036,287 California 3.00% (1,051,893) -0.51% 220,171,230 7,339,041,013 219,119,337 Colorado 3.00% 801,943 3.27% 23,948,098 798,269,933 24,750,041 Connecticut 4.00% (1,637,097) -7.00% 23,119,247 577,981,175 21,482,150 Delaware 3.00% (4,536) -0.29% 4,143,561 138,118,714 4,139,026 Dist. of Columbia 2.00% (264,647) -4.96% 5,662,154 283,107,716 5,397,507 Florida 5.00% (28,783,029) -10.79% 266,460,486 5,329,209,725 237,677,457 Georgia 4.00% 9,661,818 30.06% 38,183,300 954,582,495 47,845,118 Hawaii 4.68% (7,665) -0.04% 12,169,836 260,039,239 12,162,172 Idaho 1.50% 15,111 1.02% 1,620,617 108,041,132 1,635,728 Illinois 3.50% 3,688 0.01% 52,264,965 1,493,284,723 52,268,653 Indiana 2.50% (1,629,013) -8.24% 15,298,142 611,925,683 13,669,129 Iowa 1.00% 203,055 7.07% 2,823,203 282,320,338 3,026,258 Kansas 6.00% (25,075) -0.18% 13,773,674 229,561,226 13,748,598 Kentucky 3.00% (805,849) -10.90% 7,048,006 234,933,540 6,242,158 Louisiana 4.85% 1,488,839 2.16% 68,058,596 1,403,270,012 69,547,435 Maine 3.00% (155,369) -5.11% 3,040,756 101,358,532 2,885,387 Maryland 3.00% 195,526 1.61% 15,357,193 511,906,437 15,552,719 Massachusetts 4.00% (3,065,109) -7.51% 41,996,352 1,049,908,798 38,931,243 Michigan 2.00%Minnesota 3.00% 551,063 3.55% 14,904,089 496,802,953 15,455,151 Mississippi 4.00% 234,780 1.58% 15,881,854 397,046,347 16,116,633 Missouri 5.00% (1,185,279) -3.48% 33,517,236 670,344,717 32,331,957 Montana 2.75% (337,407) -10.98% 3,078,874 111,959,049 2,741,467 Nebraska 3.00% 94,428 2.04% 4,811,621 160,387,352 4,906,049 Nevada 3.50% (142,854) -1.20% 11,410,872 326,024,921 11,268,018 New Hampshire 3.00% 26,399 0.16% 3,431,359 114,378,631 3,457,758 New Jersey 5.00%New Mexico 3.00% (251,546) -6.49% 3,982,939 132,632,004 3,731,393 New York 3.60% 657,215 0.47% 143,232,904 3,978,691,765 143,890,118 North Carolina 5.00% (1,663,938) -4.64% 36,711,053 734,221,065 35,047,116 North Dakota 1.75% (26,051) -1.48% 1,889,748 107,985,576 1,863,697 Ohio 5.00% (467,266) -1.26% 40,164,050 803,281,009 39,696,785 Oklahoma 6.00% (1,669,132) -4.79% 34,313,732 571,895,527 32,644,599 Oregon 2.30% 196,972 2.56% 8,359,576 363,459,828 8,556,548 Pennsylvania 3.00% 527,871 1.45% 36,328,973 1,210,965,760 36,856,843 Rhode Island 4.00% (761,156) -12.26% 6,361,871 159,046,781 5,600,715 South Carolina 6.00% (279,007) -0.63% 40,563,094 676,051,575 40,284,088 South Dakota 2.50% 13,331 0.98% 1,611,388 64,455,521 1,624,719 Tennessee 5.00% 2,688,892 9.08% 30,506,854 610,137,080 33,195,746 Texas 4.85% (180,665) -0.06% 269,314,194 5,552,869,979 269,133,529 Utah 4.25% (594,546) -5.51% 11,651,476 274,152,373 11,056,930 Vermont 3.00% (459,004) -22.08% 2,099,503 69,983,433 1,640,499 Virginia 2.25% (499,874) -2.76% 17,275,881 767,816,940 16,776,007 Washington 2.00% 1,202,069 9.97% 17,211,952 860,597,603 18,414,021 West Virginia 4.55% (518,536) -9.54% 5,640,783 123,973,248 5,122,247 Wisconsin 3.00% (358,713) -2.85% 11,335,028 377,834,277 10,976,315 Wyoming 3.00% 17,279 1.15% 1,873,295 62,443,173 1,890,574 Totals (32,478,577)$ 1,689,797,891$ 43,035,404,358$ 1,657,319,314$

-1.96%

Florida (28,783,029) Totals Less Florida (3,695,548)$ As % of BI Tax Collected -0.223%

Exhibit II

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8/5/20

Comment Three: Surplus lines tax revenue is increasing at a higher rate than surplus lines premium growth.

Example: Since 2010, when the Nonadmitted and Reinsurance Reform Act (NRRA) was enacted, average annual tax revenue per state has increased by 7.67%. During this time period, five states (Delaware, Oregon, South Carolina, Tennessee and West Virginia) increased their tax rates and one state (Louisiana) lowered their rate. When these six states are removed from the data, there is no significant change to an annual increase in revenue per state, which reduces the total just slightly to 7.45%. According to NAIC Insurance Department Resource Reports data, surplus lines premium grew by only 6.57% annually during the same time period and only 6.46% when the same six states are removed.

See Exhibit III for complete detail by state.

Conclusion: Surplus lines tax collection has significantly improved as a result of the clarity brought about by the passage of the NRRA in 2010. The intent of the NRRA was to simplify the taxation and regulation of the surplus lines transaction. This change has led to significant improvements for the states and the industry clarifying the brokers’ ability to clearly assign a “home state” to each surplus lines transaction. Exhibit III helps us conclude the tax revenue is growing at a faster rate than premium, which further suggests the need for some level of analysis on an annual basis, for purposes of assessing the reasonableness of surplus lines tax collections nationwide, before implementing an imperfect and potentially time-consuming and costly reconciliation process given the known causes of the variances that will exist between surplus lines broker and carrier premium reporting.

Average Tax Tax Revenue Average PremiumRevenue Change Change Premium Change Change

Since 2010 Since 2010 Per Year Since 2010 Since 2010

Average 7.67% 88.34% 6.57% 61.35%

Average Less States withTax Changes Since 2020 7.45% 83.24% 6.46% 61.69%

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Average Tax Tax Revenue Average PremiumChange in Tax IDRR Provided Broker fees Tax Revenue Change Change Premium Change Change

Rate Since 2010 by NAIC? Taxable? Rate Since 2010 Since 2010 Per Year Since 2010 Since 2010Alabama 0% Alien Yes 6.00% 3.18% 46.10% 5.86% 55.78%Alaska 0% Yes No 2.70% 2.05% 18.55% 2.13% 16.56%Arizona 0% No Yes 3.00% 4.12% 56.28% 7.24% 73.43%Arkansas 0% Yes Yes 4.00% 2.70% 41.95% 2.86% 19.97%California 0% Yes Yes 3.00% 7.22% 116.33% 9.03% 98.81%Colorado 0% No Yes 3.00% 8.43% 99.60% 8.16% 85.58%Connecticut 0% Alien No 4.00% 8.06% 92.34% 6.37% 62.75%Delaware 1% No Yes 3.00% 20.87% 322.50% 23.57% 160.59%Dist. of Columbia 0% Yes Yes 2.00% 9.95% 96.64% 4.87% 37.03%Florida 0% No Yes 5.00% 4.13% 47.66% 3.06% 20.03%Georgia 0% Yes Yes 4.00% 6.59% 83.84% 10.38% 91.81%Hawaii 0% No No 4.68% 2.42% 22.58% 2.97% 23.74%Idaho 0% Yes Yes 1.50% 1.28% 75.30% 7.80% 77.61%Illinois 0% No No 3.50% 5.53% 66.22% 5.69% 54.39%Indiana 0% Yes Yes 2.50% 8.11% 57.15% 6.97% 55.13%Iowa 0% Yes Yes 1.00% 9.04% 120.76% 7.67% 78.59%Kansas 0% Yes Yes 6.00% 3.61% 62.65% 7.41% 66.49%Kentucky 0% Domestic Yes 3.00% 5.98% 67.02% 6.77% 63.34%Louisiana -0.15% Alien Yes 4.85% 1.36% 14.29% 1.79% 13.95%Maine 0% Yes Yes 3.00% 7.25% 73.59% 7.16% 72.44%Maryland 0% Yes No 3.00% 5.56% 72.66% 6.62% 64.61%Massachusetts 0% Alien No 4.00% 7.21% 91.23% 7.12% 72.40%Michigan 0% Yes No 2.00% -1.34%Minnesota 0% Yes Yes 3.00% 9.02% 82.39% 6.21% 59.41%Mississippi 0% Yes Yes 4.00% 1.63% 19.89% 3.42% 30.09%Missouri 0% Yes Yes 5.00% 4.96% 53.37% 5.12% 48.08%Montana 0% Yes No 2.75% 4.83% 43.37% 9.85% 110.89%Nebraska 0% Yes No 3.00% 3.92% 58.81% 6.95% 68.20%Nevada 0% No Yes 3.50% 6.13% 83.97% 8.60% 87.96%New Hampshire 0% Yes No 3.00% 13.24% 114.71% 7.44% 61.50%New Jersey 0% No No 5.00% 11.27%New Mexico 0% Yes Yes 3.00% 4.01% 61.98% 7.38% 72.33%New York 0% No Yes 3.60% 11.53% 117.25% 8.36% 88.52%North Carolina 0% Alien No 5.00% 6.16% 52.64% 5.23% 44.55%North Dakota 0% No Yes 1.75% 10.46% 113.10% 14.28% 150.60%Ohio 0% Alien No 5.00% 7.02% 68.55% 5.70% 54.69%Oklahoma 0% Yes Yes 6.00% 8.22% 79.47% 7.65% 74.69%Oregon 0.3% Yes Yes 2.30% 6.44% 94.60% 7.21% 72.36%Pennsylvania 0% Yes No 3.00% 4.87% 47.08% 5.33% 50.70%Rhode Island 0% Yes No 4.00% 62.49% 587.95% 6.12% 57.35%South Carolina 2% Yes Yes 6.00% 10.31% 112.72% 5.87% 55.83%South Dakota 0% No Yes 2.50% 10.42% 85.40% 8.36% 82.95%Tennessee 2.5% Yes Yes 5.00% 13.87% 171.99% 3.76% 33.22%Texas 0% No Yes 4.85% 6.87% 82.95% 5.25% 46.73%Utah 0% Yes Yes 4.25% 8.81% 109.74% 9.36% 102.59%Vermont 0% Yes No 3.00% 10.85% 94.89% 1.42% 10.38%Virginia 0% No Yes 2.25% 5.14% 51.92% 4.83% 40.95%Washington 0% Yes Yes 2.00% 6.94% 95.73% 8.89% 79.74%West Virginia 0.55% Alien Yes 4.55% 2.92% 33.22% 2.32% 17.43%Wisconsin 0% Yes* Yes 3.00% 4.41% 48.96% 5.29% 38.21%Wyoming 0% Yes Yes 3.00% 0.90% 16.77% 0.41% 1.17%State Stamping Offices

AVERAGE 3.569% 7.67% 88.340% 6.57% 61.35%MEDIAN 3.000%MAX 6.000%MIN 1.000%

Average Less States with Tax Changes Since 2010 7.45% 6.46%

Exhibit III

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4131 N. Mulberry Dr., Suite 200 | Kansas City, MO 64116 | 816.741.3910 | www.wsia.org

October 4, 2019

The Honorable James J. Donelon Chair, Surplus Lines (C) Task Force National Association of Insurance Commissioners 1100 Walnut Street Kansas City, MO 64106

Sent via email to: [email protected]

Re: Surplus Lines Premium Home State Blanks Proposal

Dear Commissioner Donelon:

On behalf of the Wholesale & Specialty Insurance Association (WSIA), we appreciate the opportunity to comment on the Task Force’s proposal to include “home state” reporting of surplus lines premium through Schedule T on domestic carriers’ Annual Statement filings. As the professional trade association representing the wholesale, specialty and surplus lines industry, WSIA is unique in that we represent both surplus lines brokers and surplus lines carriers. Although this proposal is directed at the reporting of premium by insurance carriers, it will impact both carriers and brokers such that we have worked with various representatives of both to conduct our analysis of the proposal and provide these comments.

Our members fully understand the motivation for this proposal is to help individual states reconcile surplus lines premium reported by surplus lines carriers to surplus lines taxes remitted by surplus lines brokers. They also understand and take seriously their surplus lines tax obligations; however, we are concerned that the proposed premium reporting changes will not yield the desired results. We are further concerned that 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.

Reconciliation of surplus lines premium tax through the comparison of premium reported by surplus lines carriers to the surplus lines taxes remitted by surplus lines brokers will not result in an accurate or appropriate outcome for the regulators. Some of the most significant reasons that this approach to reconciliation will not produce accurate results are:

Fees. Additional fees and costs beyond the carrier’s base premium are reported by the broker onlyand will not be reflected in the premium reported by a carrier. Some states require that surplus linespremium tax be paid on these fees as well, such that the tax base for the broker will be different thanthe premium reported by the carrier.

Non-taxable premium. Not all premium is taxable in some states. For example, it is not unusual forcertain risks, such as inland marine, boiler & machinery, native lands and interstate commerce relatedrailways, to be exempt from taxation. These are risks that carriers would report as premium but would

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not be reflected in broker tax filings, further distinguishing the carrier’s premium base from the broker’s tax base and skewing any reconciliation thereof.

Independent Procurement. Some states exempt taxation or have a different tax requirement orstructure if a consumer is allowed to procure policies without an insurance producer. These premiums are reported by carriers but there would be no record of the transaction from a broker to crossreference. Again, these would skew any reconciliation results.

Home state. It is the statutory responsibility of the surplus lines licensee to determine and report thehome state of the insured, and a carrier may not always underwrite and report premium based onthe same determination factors. Most carrier underwriting and reporting systems are designed basedupon the physical location of the risk and underwriting requirements in those particular physicallocations or states, such that carrier reporting by home state will require significant system andprocess changes. Such changes seem unwarranted when their purpose will not achieve the intendedresult for the reasons described herein.

Return premium, midterm endorsements and cancellations. Policies can change throughout the yearand the original premium reported by a carrier may differ based on the broker reporting period forthese factors. This is very common and another key reason why reconciliation will be ineffective.

Reporting. States have different reporting and payment dates for surplus lines brokers, whereas allsurplus lines carriers report their annual premium at the same time each year (March 1) for the priorcalendar year.

Based on these particular examples, we know that reconciliation is not a simple undertaking for any of the impacted parties (i.e., regulators, carriers or brokers). The above factors illustrate how difficult, if not impossible, it is to get an “apples to apples” accounting to effectively reconcile surplus lines premium taxes remitted by brokers to surplus lines premium reported by carriers. Attempts at reconciliation between broker and carrier data in the past on a state-by-state basis have rarely resulted in additional tax owed.

Finally, compliance with this proposal will have a significant impact on certain carriers. For some carriers, this change may be easier to implement because they generally write single state policies or monoline business. This could also be true for larger carriers writing personal lines or casualty risks where multistate policies are less common. However, this proposal gets much more complex and potentially costly, from a systems and administration perspective, when the surplus lines products are more complex and cover risks across many state lines. Regardless of the size of the carrier, all will be required to invest in technology changes to capture this information to comply with the proposal.

In closing, states should continue to rely on broker filings, with brokers remitting surplus lines taxes on 100% of the premium to the home state of the insured at the home state’s tax rate. While we understand that states desire an easy reconciliation, we are concerned that implementing this Schedule T proposal will not yield the desired results. Before the states decide to move forward with a reconciliation approach, we encourage a more detailed discussion with the carriers and brokers regarding any underlying state concerns. We further suggest discussing reconciliation efforts with representatives from the fifteen Stamping Offices because of their significant experience in this area, either in performing reconciliations or electing not to because of their experiences. We want to work with the states to better understand any concerns and/or help identify the right solution, and, for all of the above factors, we respectfully request that the Task Force table this proposal and further study it with the industry’s help.

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We appreciate the opportunity to work with our members and provide their perspective on this proposal. Please contact us with questions of if you need any additional information.

Sincerely,

Keri Kish Brady R. Kelley John Meetz Director of Government Relations Executive Director State Relations Manager 816.799.0855 816.799.0860 816.799.0863

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Documents

Surplus Lines (C) Task Force Minutes · SURPLUS LINES (C) TASK FORCE . Surplus Lines (C) Task Force Aug. 5, 2020, Virtual National Meeting Minutes . 2021 Proposed Charges (Attachment