[House Report 109-649]
[From the U.S. Government Publishing Office]
109th Congress Rept. 109-649
HOUSE OF REPRESENTATIVES
2d Session Part 1
======================================================================
NONADMITTED AND REINSURANCE REFORM ACT OF 2006
_______
September 12, 2006.--Ordered to be printed
_______
Mr. Oxley, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 5637]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred the
bill (H.R. 5637) to streamline the regulation of nonadmitted
insurance and reinsurance, and for other purposes, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
Amendment........................................................ 1
Purpose and Summary.............................................. 6
Background and Need for Legislation.............................. 6
Hearings......................................................... 9
Committee Consideration.......................................... 9
Committee Votes.................................................. 9
Committee Oversight Findings..................................... 10
Performance Goals and Objectives................................. 10
New Budget Authority, Entitlement Authority, and Tax Expenditures 10
Committee Cost Estimate.......................................... 10
Congressional Budget Office Estimate............................. 10
Federal Mandates Statement....................................... 13
Advisory Committee Statement..................................... 13
Constitutional Authority Statement............................... 13
Applicability to Legislative Branch.............................. 13
Section-by-Section Analysis of the Legislation................... 13
AMENDMENT
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Nonadmitted and
Reinsurance Reform Act of 2006''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title and table of contents.
Sec. 2. Effective date.
TITLE I--NONADMITTED INSURANCE
Sec. 101. Reporting, payment, and allocation of premium taxes.
Sec. 102. Regulation of nonadmitted insurance by insured's home State.
Sec. 103. Participation in national producer database.
Sec. 104. Uniform standards for surplus lines eligibility.
Sec. 105. Streamlined application for commercial purchasers.
Sec. 106. GAO study of nonadmitted insurance market.
Sec. 107. Definitions.
TITLE II--REINSURANCE
Sec. 201. Regulation of credit for reinsurance and reinsurance
agreements.
Sec. 202. Regulation of reinsurer solvency.
Sec. 203. Definitions.
SEC. 2. EFFECTIVE DATE.
Except as otherwise specifically provided in this Act, this Act shall
take effect upon the expiration of the 12-month period beginning on the
date of the enactment of this Act.
TITLE I--NONADMITTED INSURANCE
SEC. 101. REPORTING, PAYMENT, AND ALLOCATION OF PREMIUM TAXES.
(a) Home State's Exclusive Authority.--No State other than the home
State of an insured may require any premium tax payment for nonadmitted
insurance.
(b) Allocation of Nonadmitted Premium Taxes.--
(1) In general.--The States may enter into a compact or
otherwise establish procedures to allocate among the States the
premium taxes paid to an insured's home State described in
subsection (a).
(2) Effective date.--Except as expressly otherwise provided
in such compact or other procedures, any such compact or other
procedures--
(A) if adopted on or before the expiration of the
330-day period that begins on the date of the enactment
of this Act, shall apply to any premium taxes that, on
or after such date of enactment, are required to be
paid to any State that is subject to such compact or
procedures; and
(B) if adopted after the expiration of such 330-day
period, shall apply to any premium taxes that, on or
after January 1 of the first calendar year that begins
after the expiration of such 330-day period, are
required to be paid to any State that is subject to
such compact or procedures.
(3) Report.--Upon the expiration of the 330-day period
referred to in paragraph (2), the NAIC may submit a report to
the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate identifying and describing any
compact or other procedures for allocation among the States of
premium taxes that have been adopted during such period by any
States.
(4) Nationwide system.--The Congress intends that each State
adopt a nationwide or uniform procedure, such as an interstate
compact, that provides for the reporting, payment, collection,
and allocation of premium taxes for nonadmitted insurance
consistent with this section.
(c) Allocation Based on Tax Allocation Report.--To facilitate the
payment of premium taxes among the States, an insured's home State may
require surplus lines brokers and insureds who have independently
procured insurance to annually file tax allocation reports with the
insured's home State detailing the portion of the nonadmitted insurance
policy premium or premiums attributable to properties, risks or
exposures located in each State. The filing of a nonadmitted insurance
tax allocation report and the payment of tax may be made by a person
authorized by the insured to act as its agent.
SEC. 102. REGULATION OF NONADMITTED INSURANCE BY INSURED'S HOME STATE.
(a) Home State Authority.--Except as otherwise provided in this
section, the placement of nonadmitted insurance shall be subject to the
statutory and regulatory requirements solely of the insured's home
State.
(b) Broker Licensing.--No State other than an insured's home State
may require a surplus lines broker to be licensed in order to sell,
solicit, or negotiate nonadmitted insurance with respect to such
insured.
(c) Enforcement Provision.--Any law, regulation, provision, or action
of any State that applies or purports to apply to nonadmitted insurance
sold to, solicited by, or negotiated with an insured whose home State
is another State shall be preempted with respect to such application.
(d) Workers' Compensation Exception.--This section may not be
construed to preempt any State law, rule, or regulation that restricts
the placement of workers' compensation insurance or excess insurance
for self-funded workers' compensation plans with a nonadmitted insurer.
SEC. 103. PARTICIPATION IN NATIONAL PRODUCER DATABASE.
After the expiration of the 2-year period beginning on the date of
the enactment of this Act, a State may not collect any fees relating to
licensing of an individual or entity as a surplus lines broker in the
State unless the State has in effect at such time laws or regulations
that provide for participation by the State in the national insurance
producer database of the NAIC, or any other equivalent uniform national
database, for the licensure of surplus lines brokers and the renewal of
such licenses.
SEC. 104. UNIFORM STANDARDS FOR SURPLUS LINES ELIGIBILITY.
A State may not--
(1) impose eligibility requirements on, or otherwise
establish eligibility criteria for, nonadmitted insurers
domiciled in a United States jurisdiction, except in
conformance with section 5A(2) and 5C(2)(a) of the Non-Admitted
Insurance Model Act; and
(2) prohibit a surplus lines broker from placing nonadmitted
insurance with, or procuring nonadmitted insurance from, a
nonadmitted insurer domiciled outside the United States that is
listed on the Quarterly Listing of Alien Insurers maintained by
the International Insurers Department of the NAIC.
SEC. 105. STREAMLINED APPLICATION FOR COMMERCIAL PURCHASERS.
A surplus lines broker seeking to procure or place nonadmitted
insurance in a State for an exempt commercial purchaser shall not be
required to satisfy any State requirement to make a due diligence
search to determine whether the full amount or type of insurance sought
by such exempt commercial purchaser can be obtained from admitted
insurers if--
(1) the broker procuring or placing the surplus lines
insurance has disclosed to the exempt commercial purchaser that
such insurance may or may not be available from the admitted
market that may provide greater protection with more regulatory
oversight; and
(2) the exempt commercial purchaser has subsequently
requested in writing the broker to procure or place such
insurance from a nonadmitted insurer.
SEC. 106. GAO STUDY OF NONADMITTED INSURANCE MARKET.
(a) In General.--The Comptroller General of the United States shall
conduct a study of the nonadmitted insurance market to determine the
effect of the enactment of this title on the size and market share of
the nonadmitted insurance market for providing coverage typically
provided by the admitted insurance market.
(b) Contents.--The study shall determine and analyze--
(1) the change in the size and market share of the
nonadmitted insurance market and in the number of insurance
companies and insurance holding companies providing such
business in the 18-month period that begins upon the effective
date of this Act;
(2) the extent to which insurance coverage typically provided
by the admitted insurance market has shifted to the nonadmitted
insurance market;
(3) the consequences of any change in the size and market
share of the nonadmitted insurance market, including
differences in the price and availability of coverage available
in both the admitted and nonadmitted insurance markets;
(4) the extent to which insurance companies and insurance
holding companies that provide both admitted and nonadmitted
insurance have experienced shifts in the volume of business
between admitted and nonadmitted insurance; and
(5) the extent to which there has been a change in the number
of individuals who have nonadmitted insurance policies, the
type of coverage provided under such policies, and whether such
coverage is available in the admitted insurance market.
(c) Consultation With NAIC.--In conducting the study under this
section, the Comptroller General shall consult with the NAIC.
(d) Report.--The Comptroller General shall complete the study under
this section and submit a report to the Committee on Financial Services
of the House of Representatives and the Committee on Banking, Housing,
and Urban Affairs of the Senate regarding the findings of the study not
later than 30 months after the effective date of this Act.
SEC. 107. DEFINITIONS.
For purposes of this title, the following definitions shall apply:
(1) Admitted insurer.--The term ``admitted insurer'' means,
with respect to a State, an insurer licensed to engage in the
business of insurance in such State.
(2) Exempt commercial purchaser.--The term ``exempt
commercial purchaser'' means any person purchasing commercial
insurance that meets the following requirements:
(A) The person employs or retains a qualified risk
manager to negotiate insurance coverage.
(B) The person has paid aggregate nationwide
commercial property and casualty insurance premiums in
excess of $100,000 in the immediately preceding 12
months.
(C) The person meets at least one of the following
criteria:
(i) The person possesses a net worth in
excess of $20,000,000.
(ii) The person generates annual revenues in
excess of $50,000,000.
(iii) The person employs more than 500 full
time or full time equivalent employees per
individual insured or is a member of affiliated
group employing more than 1,000 employees in
the aggregate.
(iv) The person is a not-for-profit
organization or public entity generating annual
budgeted expenditures of at least $30,000,000.
(v) The person is a municipality with a
population in excess of 50,000 persons.
(3) Home state.--The term ``home State'' means the State in
which an insured maintains its principal place of business or,
in the case of an individual, the individual's principal
residence.
(4) Independently procured insurance.--The term
``independently procured insurance'' means insurance procured
directly by an insured from a nonadmitted insurer.
(5) NAIC.--The term ``NAIC'' means the National Association
of Insurance Commissioners or any successor entity.
(6) Nonadmitted insurance.--The term ``nonadmitted
insurance'' means any property and casualty insurance permitted
to be placed directly or through a surplus lines broker with a
nonadmitted insurer eligible to accept such insurance.
(7) Non-admitted insurance model act.--The term ``Non-
Admitted Insurance Model Act'' means the provisions of the Non-
Admitted Insurance Model Act, as adopted by the NAIC on August
3, 1994, and amended on September 30, 1996, December 6, 1997,
October 2, 1999, and June 8, 2002.
(8) Nonadmitted insurer.--The term ``nonadmitted insurer''
means, with respect to a State, an insurer not licensed to
engage in the business of insurance in such State.
(9) Qualified risk manager.--The term ``qualified risk
manager'' means, with respect to a policyholder of commercial
insurance, a person who meets all of the following
requirements:
(A) The person is an employee of, or third party
consultant retained by, the commercial policyholder.
(B) The person provides skilled services in loss
prevention, loss reduction, or risk and insurance
coverage analysis, and purchase of insurance.
(C) The person possesses at least two of the
following credentials:
(i) An advanced degree in risk management
issued by an accredited college or university.
(ii) At least 5 years of experience in one or
more of the following areas of commercial
property insurance or commercial casualty
insurance:
(I) Risk financing.
(II) Claims administration.
(III) Loss prevention.
(IV) Risk and insurance coverage
analysis.
(iii) At least one of the following
designations:
(I) A designation as a Chartered
Property and Casualty Underwriter (in
this clause referred to as ``CPCU'')
issued by the American Institute for
CPCU/Insurance Institute of America.
(II) A designation as an Associate in
Risk Management (ARM) issued by
American Institute for CPCU/Insurance
Institute of America.
(III) A designation as a Certified
Risk Manager (CRM) issued by the
National Alliance for Insurance
Education & Research.
(IV) A designation as a RIMS Fellow
(RF) issued by the Global Risk
Management Institute.
(V) Any other designation,
certification, or license determined by
a State insurance commissioner or other
State insurance regulatory official or
entity to demonstrate minimum
competency in risk management.
(10) Premium tax.--The term ``premium tax'' means, with
respect to surplus lines or independently procured insurance
coverage, any tax, fee, assessment, or other charge imposed by
a State on an insured based on any payment made as
consideration for an insurance contract for such insurance,
including premium deposits, assessments, registration fees, and
any other compensation given in consideration for a contract of
insurance.
(11) Surplus lines broker.--The term ``surplus lines broker''
means an individual, firm, or corporation which is licensed in
a State to sell, solicit, or negotiate insurance on properties,
risks, or exposures located or to be performed in a State with
nonadmitted insurers.
(12) State.--The term ``State'' includes any State of the
United States, the District of Columbia, the Commonwealth of
Puerto Rico, Guam, the Northern Mariana Islands, the Virgin
Islands, and American Samoa.
TITLE II--REINSURANCE
SEC. 201. REGULATION OF CREDIT FOR REINSURANCE AND REINSURANCE
AGREEMENTS.
(a) Credit for Reinsurance.--If the State of domicile of a ceding
insurer is an NAIC-accredited State, or has financial solvency
requirements substantially similar to the requirements necessary for
NAIC accreditation, and recognizes credit for reinsurance for the
insurer's ceded risk, then no other State may deny such credit for
reinsurance.
(b) Additional Preemption of Extraterritorial Application of State
Law.--In addition to the application of subsection (a), all laws,
regulations, provisions, or other actions of a State other than those
of the State of domicile of the ceding insurer are preempted to the
extent that they--
(1) restrict or eliminate the rights of the ceding insurer or
the assuming insurer to resolve disputes pursuant to
contractual arbitration to the extent such contractual
provision is not inconsistent with the provisions of title 9,
United States Code;
(2) require that a certain State's law shall govern the
reinsurance contract, disputes arising from the reinsurance
contract, or requirements of the reinsurance contract;
(3) attempt to enforce a reinsurance contract on terms
different than those set forth in the reinsurance contract, to
the extent that the terms are not inconsistent with this title;
or
(4) otherwise apply the laws of the State to reinsurance
agreements of ceding insurers not domiciled in that State.
SEC. 202. REGULATION OF REINSURER SOLVENCY.
(a) Domiciliary State Regulation.--If the State of domicile of a
reinsurer is an NAIC-accredited State or has financial solvency
requirements substantially similar to the requirements necessary for
NAIC accreditation, such State shall be solely responsible for
regulating the financial solvency of the reinsurer.
(b) Nondomiciliary States.--
(1) Limitation on financial information requirements.--If the
State of domicile of a reinsurer is an NAIC-accredited State or
has financial solvency requirements substantially similar to
the requirements necessary for NAIC accreditation, no other
State may require the reinsurer to provide any additional
financial information other than the information the reinsurer
is required to file with its domiciliary State.
(2) Receipt of information.--No provision of this section
shall be construed as preventing or prohibiting a State that is
not the State of domicile of a reinsurer from receiving a copy
of any financial statement filed with its domiciliary State.
SEC. 203. DEFINITIONS.
For purposes of this title, the following definitions shall apply:
(1) Ceding insurer.--The term ``ceding insurer'' means an
insurer that purchases reinsurance.
(2) Domiciliary state.--The terms ``State of domicile'' and
``domiciliary State'' means, with respect to an insurer or
reinsurer, the State in which the insurer or reinsurer is
incorporated or entered through, and licensed.
(3) Reinsurance.--The term ``reinsurance'' means the
assumption by an insurer of all or part of a risk undertaken
originally by another insurer.
(4) Reinsurer.--
(A) In general.--The term ``reinsurer'' means an
insurer to the extent that the insurer--
(i) is principally engaged in the business of
reinsurance;
(ii) does not conduct significant amounts of
direct insurance as a percentage of its net
premiums; and
(iii) is not engaged in an ongoing basis in
the business of soliciting direct insurance.
(B) Determination.--A determination of whether an
insurer is a reinsurer shall be made under the laws of
the State of domicile in accordance with this
paragraph.
(5) State.--The term ``State'' includes any State of the
United States, the District of Columbia, the Commonwealth of
Puerto Rico, Guam, the Northern Mariana Islands, the Virgin
Islands, and American Samoa.
PURPOSE AND SUMMARY
H.R. 5637, the Nonadmitted and Reinsurance Reform Act of
2006, will reform and modernize two important sectors of the
commercial insurance marketplace, nonadmitted insurance (also
known as ``surplus lines'') and reinsurance. Specifically, H.R.
5637 creates a uniform system for nonadmitted insurance premium
tax payments based upon the home State of the policyholder,
encourages the States to develop a compact or other procedural
mechanism for uniform tax allocation, and establishes
regulatory deference for the home state of the insured. The
bill adopts uniform eligibility requirements for nonadmitted
insurers as developed and promulgated by the National
Association of Insurance Commissioners (NAIC) in the
Nonadmitted Insurance Model Act. H.R. 5637 will allow direct
access to the nonadmitted insurance markets for certain
sophisticated commercial purchasers, bypassing inefficient
state declination rules.
H.R. 5637 streamlines the regulation of reinsurance by
applying single State regulation for financial solvency and
credit for reinsurance. Credit for reinsurance determinations
will be controlled by the State of domicile of the ceding
insurer. Reinsurance solvency regulation will be controlled by
the State of domicile of the reinsurer provided such State is
NAIC-accredited or has financial solvency requirements
substantially similar to the requirements necessary for NAIC
accreditation. Non-domiciliary States are specifically
prohibited from applying their reinsurance laws in an extra-
territorial manner.
BACKGROUND AND NEED FOR LEGISLATION
The terrorist attacks of September 11, 2001 and the
catastrophic storms of 2004 and 2005 caused some insurers in
the standard market to withdraw or reduce their underwriting
coverage in many critical sectors of the insurance market.
Nonadmitted insurance and reinsurance provide significant
flexibility and additional capacity required by the
catastrophic and specialty markets to provide coverage for
risks that would not otherwise be insurable.
Nonadmitted Insurance: Nonadmitted insurance provides
coverage for unique or hard to place risks where coverage is
generally unavailable through the traditional insurance market.
The vast majority of nonadmitted insurance polices are sold to
sophisticated businesses and cover specialized risks, such as
extreme catastrophic coverage and terrorism. Nonadmitted
insurers are not required to file rates or policy forms with
State regulators, giving them flexibility to develop
specialized coverage and rates for each distinctive risk.
Nonadmitted insurance policyholders are not covered under State
guarantee funds, since the special nature of surplus lines
insurance oftentimes forces them to obtain coverage outside of
their home State.
States collect premium taxes for nonadmitted insurance
placements, but the tax allocation and remittance formulas and
procedures vary significantly from State to State and are often
in direct conflict. When a nonadmitted policy involves multi-
state risk, it can be extremely difficult to determine how much
tax is owed to each State and, as a result, multiple taxation
or noncompliance often results. On June 21, 2006, the
Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises held a hearing entitled ``Commercial
Insurance Modernization,'' (hereinafter the ``June 21, 2006
hearing''). At that hearing, witness testimony detailed the
problems associated with State premium tax collection
procedures. For example, some States use a ``single situs''
approach, which requires that 100 percent of the premium tax be
paid to the insured's State of domicile. This single situs
approach is in accordance with the United States Supreme
Court's ruling in State Bd. of Ins. v. Todd Shipyards Corp.,
370 U.S. 451 (1962), which ruled that a State is not entitled
to tax or regulate surplus lines transactions merely because a
surplus lines policy insures property or risk located in that
State. The Court held in Todd Shipyards that the imposition of
any such tax violates the due process clause of the Fourteenth
Amendment to the United States Constitution and also exceeds
the scope of the McCarran-Ferguson Act delegation of primary
insurance regulatory authority to the States.
Despite the Todd Shipyards decision, most States use
different conflicting allocation and apportionment formulas and
procedures based on the location of the risk in determining the
amount of premium tax owed. Thus, if a policy covers property
in both a single situs State and an apportionment State, double
taxation on the same portion of the same policy is unavoidable.
More than a dozen States do not have regulatory provisions
indicating the State's tax allocation method, leaving it up to
the insured and the insured's broker to determine how to comply
with the state law. Witnesses at the June 21, 2006 hearing
testified that the conflicting State formulas sometimes result
in impossible compliance and enormous burdens, administrative
costs, and paperwork for commercial consumers and their brokers
who bear the costs of navigating the tax labyrinth of state
rules. By codifying the single situs rule, the Committee
recognizes that an insured's purchase of non-compulsory surplus
lines coverage protects against the potential financial risk
posed to the insured, with that risk being located in, and
fully apportioned to, the State of the insured's principal
place of business.
Nonadmitted broker licensing requirements and renewal
schedules also vary from State to State. Brokers engaging in
nonadmitted insurance transactions that involve multi-State
risks currently must obtain a license in each State where
exposures are located. This means that a nonadmitted broker may
be required to maintain up to 50 licenses in order to handle a
single multi-State insurance policy. Witness testimony at the
June 21, 2006 hearing affirmed that duplicative licensing
requirements have caused administrative burdens and created
expenses that negatively impact policyholders. Nonadmitted
agents and brokers are subject to additional duplicative
regulatory requirements including multiple tax filings,
multiple diligent search requirements, and multiple regulatory
filings.
Eligibility requirements for nonadmitted insurers also vary
from State to State, oftentimes making it difficult to find
insurers that are eligible in all States in which a multi-State
policy is sought. In addition, access to the nonadmitted
marketplace is limited, with States requiring nonadmitted
brokers to ``diligently search'' the admitted markets for
coverage, even for insurance contracts for sophisticated
commercial purchasers whose coverage needs cannot be met in the
admitted market.
Reinsurance: Reinsurance is insurance for insurance
companies. Primary insurance companies (ceding insurers)
purchase coverage by ceding or transferring a portion of their
risk exposure to a reinsurer. Reinsurance effectively increases
an insurer's capacity to underwrite more coverage. Reinsurance
performs an essential role in the insurance marketplace by
limiting ceding insurers' liability exposure on large risks,
adding insurance capacity, and protecting against mega-
catastrophes.
State laws on credit for reinsurance determine the
conditions under which a ceding insurer domiciled in a State
can take credit for reinsurance either as an asset or as a
reduction of liabilities on their financial statements. As
such, credit for reinsurance laws contain a strong incentive
for compliance because there are few situations in which a
ceding insurer would be willing to pay out premiums to a
reinsurer without being able to reflect a subsequent increase
in assets or reduction in its liabilities. Some States refuse
to accept findings by ceding insurers' domiciliary States that
their reinsurance contracts qualify for credit for reinsurance,
causing the ceding insurers' balance sheets to vary from State
to State and limiting the value of the reinsurance. These State
restrictions then become competing and sometimes conflicting de
facto nationwide standards. These state practices are known as
``extra-territorial regulation'' since the non-domiciliary
state is attempting to regulate beyond its borders. For
example, at the June 21, 2006 hearing, witnesses testified
about examples of extra-territorial application of State law,
such as unilateral and extra-territorial State invalidation of
arbitration clauses, choice of law provisions, and imposition
of contract terms that are materially different than those
negotiated by the parties in reinsurance contracts. This extra-
territorial application of State law reduced catastrophic
capacity and limited the benefits of the reinsurance markets by
undercutting the contracting ability of parties.
Although the domiciliary State of a reinsurance company has
the primary responsibility for evaluating that company's
financial condition and solvency. Any State in which the
reinsurer is licensed may conduct its own evaluation. Financial
solvency and reporting requirements vary from State to State,
resulting in conflicting or duplicative financial statement
filing and financial solvency requirements on reinsurers. At
the hearing, witnesses testified that duplicative solvency
regulation has led to increased transaction costs for insurers
and ultimately consumers.
The Committee has held numerous hearings on the
modernization of insurance regulation, including a hearing
specifically on H.R. 5637 on June 21, 2006 to identify the
problems in the nonadmitted and reinsurance marketplace, the
potential consequences to consumers, and to analyze the
potential remedies included in the bill.
HEARINGS
The Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises held a hearing on June 21,
2006, on H.R. 5637, entitled ``Commercial Insurance
Modernization''. Witnesses included Tom Minkler of the
Independent Insurance Agents and Brokers of America, Scott
Sinder of the Council of Insurance Agents & Brokers, Bernd
Heinze of the American Association of Managing General Agents,
Janice Ochenkowski of theRisk and Insurance Management Society,
Franklin Nutter of the Reinsurance Association of America, David Gates
of the American Council of Life Insurers, and Richard Bouhan of the
National Association of Professional Surplus Lines Offices, Ltd. The
American Association of Independent Claims Professionals submitted
testimony for the record.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 26, 2006, and ordered reported H.R. 5637, Nonadmitted and
Reinsurance Reform Act of 2006, as amended, to the House by a
voice vote. Previously, the Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises met in open
session on July 19, 2006, to consider H.R. 5637. The
Subcommittee approved the measure for Full Committee
consideration after agreeing to an amendment in the nature of a
substitute offered by Mr. Baker, No. 1, making a number of
technical and substantive changes to the bill, by a voice vote.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. No
record votes were taken in conjunction with the consideration
of this legislation. A motion by Mr. Oxley to report the bill,
as amended, to the House with a favorable recommendation was
agreed to a by a voice vote. During the consideration of this
bill, the following amendments were considered:
An amendment in the nature of a substitute recommended by
the Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises, making various technical and substantive
changes, as amended, was AGREED TO by a voice vote.
The following amendment to the Subcommittee amendment was
considered:
An amendment by Mr. Oxley (No. 1), making technical
changes and requiring a GAO study, was AGREED TO by a voice
vote.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee held a hearing and made
findings that are reflected in this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
H.R. 5637, the Nonadmitted and Reinsurance Reform Act of
2006, simplifies, streamlines, and improves the regulation of
the nonadmitted insurance and the reinsurance marketplaces by
applying exclusive domiciliary State regulation and uniform
standards.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act.
COMMITTEE COST ESTIMATE
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATE
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
August 11, 2006.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 5637, the
Nonadmitted and Reinsurance Reform Act of 2006.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Sarah Puro.
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.
H.R. 5637--Nonadmitted and Reinsurance Reform Act of 2006
Summary: H.R. 5637 would create a uniform system for taxing
and regulating certain types of insurance products.
Specifically, the bill would establish national standards for
how states may regulate, collect, and allocate taxes for a type
of insurance that covers unique or atypical risks--known as
``surplus lines'' or ``nonadmitted insurance.'' The bill also
would establish national standards for how states regulate
reinsurance--often referred to as insurance for insurance
companies. In addition, the legislation would require a study
by the Government Accountability Office (GAO) of the admitted
and nonadmitted insurance market.
CBO estimates that enacting H.R. 5637 would increase
federal revenues by $5 million to $10 million a year over the
2008-2016 period because the bill would prohibit states from
collecting taxes on certain insurance products, and that change
would in turn reduce federal tax deductions of insurance
companies, resulting in higher taxable income for federal
purposes. (The bill would have no effect on 2007 revenues
because the bill would take effect 12 months after enactment.)
The bill would have no significant impact on federal spending
because enforcement of the insurance tax system would rest with
the states rather than with any federal agency.
By prohibiting states from taxing and regulating certain
insurance products issued by companies not based in those
states, H.R. 5637 would impose intergovernmental mandates as
definded in the Unfunded Mandates Reform Act (UMRA). Although
the aggregate costs to state governments of complying with
these mandates is uncertain, CBO estimates that they likely
would not exceed the threshold established in UMRA ($64 million
in 2006, adjusted annually for inflation). The bill contains no
new private-sector mandates as defined in UMRA.
Estimated impact on the Federal budget: CBO expects that
enacting H.R. 5637 would reduce payments of certain state taxes
by insurance companies. These lower payments would, in turn,
reduce deductions made by insurance companies for federal taxes
and raise taxable income for federal purposes. State
governments would likely adjust their finances as a result of
these lost revenues. They would likely achieve this through
some mix of reduced spending and higher taxes and fees--both
deductible and nondeductible. This response by state
governments would mute, but not eliminate, the revenue gain to
the federal government. CBO estimates that H.R. 5637 would
result in an increase in federal revenues of between $5 million
and $10 million per year starting in 2008.
H.R. 5637 would require GAO to conduct a study to determine
how implementing the provisions of this bill would affect both
the admitted and nonadmitted insurance market. Subject to the
availability of appropriated funds, the cost of this study
would be less than $500,000, CBO estimates.
Estimated impact on state, local, and tribal governments:
H.R. 5637 would create a uniform system for taxing and
regulating certain types of insurance products. Specifically,
the bill would establish national standards for how states may
regulate, collect, and allocate taxes for a type of insurance
that covers unique or atypical risks--known as surplus lines or
nonadmitted insurance. The bill also would establish national
standards for how states regulate reinsurance.
Under current law, states use a variety of laws to regulate
and tax these products. By preempting such laws and making the
state of domicile the only state with regulatory or taxing
power, H.R. 5637 contains intergovernmental mandates as defined
in UMRA. Those mandates would result in forgone revenues to the
more than 40 states that have a taxing regime different from
what would be allowed under the bill.
Specifically, provisions in the bill would:
Prohibit states from taxing and regulating
certain insurance products issued by companies not
based in the state;
Prohibit states from collecting fees from
certain brokers of insurance unless states participate
in a database of national insurance producers for the
licensing of surplus lines brokers and the renewal of
those licenses;
Preempt laws in at least 40 states regarding
how insurance policies with multistate risks are taxed
and how those taxes are distributed among states; and
Preempt laws in at least 14 states regarding
certain requirements for reinsurance.
Estimated direct costs of mandates to state and local governments
UMRA includes in its definition of the direct costs of a
mandate the amounts that state and local governments would be
prohibited from raising in revenues as a result of the mandate.
The direct mandate costs of H.R. 5637 would be forgone revenues
that state governments are currently collecting from taxes on
insurance premiums issued by certain out-of-state brokers but
would be precluded from collecting under the bill.
CBO estimates that enacting H.R. 5637 would result in state
revenue losses that likely would approach but not exceed the
threshold established in UMRA ($64 million in 2006, adjusted
annually for inflation). While there is some uncertainty
surrounding the amount of tax currently being collected by
states, the portion of the surplus lines market that would be
affected by the regulatory changes in the bill, and the extent
of flexibility that would be available to states after
enactment of the bill, CBO estimates that forgone revenues
would total less than $50 million, annually, beginning one year
after enactment. For the purposes of estimating the direct
costs of these mandates, CBO considered only the revenues from
taxes that industry estimates it is paying and only the
revenues that states, as a whole, would no longer be able to
collect as a result of the bill.
Other impacts on state and local governments
Over time, CBO expects that states would either join the
compact authorized by the bill or change their statutes to
reflect the requirements set forth in the bill. Such changes
would likely lead to less complexity in the regulation of
certain forms of insurance and would mitigate at least some of
the tax losses. Such changes, however, could take between three
and five years to carry out.
Estimated impact on the private sector: The bill contains
no new private-sector mandates as defined in UMRA.
Estimate prepared by: Impact on state, local, and tribal
governments: Sarah Puro. Federal revenues: Barbara Edwards.
Federal spending: Susan Willie. Impact on the private sector:
Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis; G. Thomas Woodward, Assistant
Director for Tax Analysis.
FEDERAL MANDATES STATEMENT
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
CONSTITUTIONAL AUTHORITY STATEMENT
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional Authority of Congress to enact this legislation
is provided by Article 1, section 8, clause 1 (relating to the
general welfare of the United States) and clause 3 (relating to
the power to regulate interstate commerce).
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title and table of contents
This section sets forth the title of this legislation--the
``Nonadmitted and Reinsurance Reform Act of 2006''.
Section 2. Effective date
This section provides that this legislation becomes
effective 12 months after date of enactment, except as
otherwise specifically provided.
Title I--Nonadmitted Insurance
Section 101. Reporting, payment, and allocation of premium taxes
This section gives the insured's (policyholder's) home
State exclusive regulatory and enforcement authority over the
collection and allocation of premium tax obligations related to
nonadmitted insurance (also known as ``surplus lines
insurance'') for that insured. This section authorizes and
strongly encourages the States to enter into a compact or
similar process to reallocate the nonadmitted tax premiums
collected by insureds' home States among each other in
accordance with an appropriate uniform formula. Congress
intends this compact or procedure to be adopted within 11
months of the enactment of this legislation and to apply to all
subsequently due nonadmitted premium taxes. If a compact or
procedure is adopted after the 11 months time period, then
Congress intends that the reallocation among participating
States apply to premium taxes that are due after the beginning
of the next calendar year. This section further establishes the
intent of Congress that the NAIC report to the appropriate
Congressional Committees identifying the adopted compact or
procedures to carry out this section. To facilitate the
reallocation of premium taxes, each State may require entities
within its domicile procuring nonadmitted insurance to file
annual tax allocation reports with that State detailing the
portions of premiums attributable to various properties, risks,
or exposures located in each state, as necessary to facilitate
any reallocation compact or procedures established by the
States.
Section 102. Regulation of nonadmitted insurance by insured's home
state
This section provides the home State of an insured with the
exclusive authority to regulate the placement of nonadmitted
insurance with the insured, including the licensure of any
surplus lines brokers involved in the placement (although the
definition of surplus lines broker in section 106 requires the
broker to be licensed in a State to qualify). This section does
not limit the ability of States to require that certain
business activities taking place within the State be insured
through the admitted market, such as State laws requiring
workers' compensation insurance to be placed through admitted
insurers.
Section 103. Participation in national producer database
This section indicates the intent of Congress that all
States participate in the NAIC's national insurance producer
database. After two years from the enactment of this
legislation, States that do not participate in a national
database for the licensure (and license renewal) of surplus
lines brokers may not collect any fees relating to the
licensing of surplus lines brokers.
Section 104. Uniform standards for surplus lines eligibility
This section streamlines eligibility requirements for
nonadmitted insurers. It creates a national eligibility
standard for U.S. nonadmitted insurers, preempting State
eligibility requirements applying to nonadmitted insurers (that
are licensed or authorized in another State) other than section
5A(2) and 5C(2)(A) of the NAIC's NonAdmitted Insurance Model
Act. A national standard and listing is created for alien
insurers (non-U.S. domestics), allowing States to prohibit a
surplus lines broker from placing nonadmitted insurance or
procuring nonadmitted insurance from a nonadmitted insurer that
is domiciled outside the United States only if the insurer is
not on the NAIC International Insurers Department's Quarterly
Listing of Alien Insurers.
Section 105. Streamlined application for commercial purchasers
This section provides sophisticated commercial entities
with streamlined access to the nonadmitted insurance market.
Many States require surplus lines brokers to complete various
degrees of due diligence search requirements and documentation
to determine if commercial insurance coverage is available in
the admitted marketplace before the risks can be covered by
nonadmitted insurance. Many States also have exemptions for
sophisticated entities to be able to directly access the
nonadmitted market. This section allows surplus lines brokers
to procure or place nonadmitted insurance for exempt commercial
purchasers and preempts State due diligence search requirements
if the broker has disclosed to the purchaser that the insurance
might be available from the admitted market and that the
admitted market may provide greater protection and regulatory
oversight and the purchaser then subsequently requests in
writing that the broker procure or place nonadmitted insurance.
Section 106. Definitions
This section defines various terms used in Title I,
including for the terms admitted insurer, exempt commercial
purchaser, home State, independently procured insurance, the
NAIC, nonadmitted insurance and the Nonadmitted Insurance Model
Act, nonadmitted insurer, qualified risk manager, premium tax,
surplus lines broker, and State.
Title II--Reinsurance
Section 201. Regulation of credit for reinsurance and reinsurance
agreements
This section establishes a uniform process for credit for
reinsurance determinations. If the State of domicile of the
ceding insurer is an NAIC-accredited State, or has financial
solvency requirements substantially similar to the requirements
necessary for NAIC accreditation, then that State determination
for credit for reinsurance is controlling and no other State
may deny the ceding insurer credit for reinsurance. This
section also specifically prohibits non-domiciliary States from
applying their own State laws in an extra-territorial manner
and preempts actions by States (other than the State of
domicile of the ceding insurer) that invalidate arbitration
clauses, ignore choice of law determinations, attempt to
enforce a reinsurance contract on terms different from those
set forth in the contract, or that otherwise apply to
reinsurance agreements of non-domiciliary ceding insurers.
Section 202. Regulation of reinsurer solvency
This section gives the State of domicile of the reinsurer
sole responsibility for regulating the financial solvency of a
reinsurer, as long as such State is accredited by the NAIC. A
State that is not officially accredited, but that has financial
solvency requirements substantially similar to the requirements
necessary for NAIC accreditation, is given the same
responsibility. This latter provision is intended to give
parallel responsibility to the State of New York, which is not
accredited by the NAIC, although it currently meets or exceeds
such key financial regulation standards required by the
accreditation program for appropriate examination authority,
minimum capital and surplus requirements, NAIC accounting
practices and procedures, and regulation and valuation of
investments. Non-domiciliary States may not require reinsurers
to provide any additional financial information other than the
information required to be filed by the State of domicile. Upon
request, a non-domiciliary State may receive a copy of any
financial statement filed by the reinsurer with its domiciliary
State.
Section 203. Definitions
This section defines various terms used in Title II,
including for the terms ceding insurer, domiciliary state,
reinsurance, reinsurer, and State.