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By CYRIL TUOHY, managing editor of Risk & Insurance®.

This year's annual national conference of the National Association of Professional Surplus Lines Offices Ltd. Oct. 10-13 in San Diego promises to be one for the record books. More than 3,200 members are expected to descend on the West Coast city.

Under the federal law, which was included in the Dodd-Frank financial reform legislation of 2010, states have been passing legislation to comply with the changes to the reporting, payment and allocation of premium taxes, as outlined in the Nonadmitted & Reinsurance Reform Act.

Surplus lines brokers will return to a single-state tax payment system that existed across the country until the 1990s, which means brokers will no longer have to comply with the tax provision of all states where portions of the risk reside. Brokers will make a single tax payment to the home state of the insured.

Backers of the legislation have termed it a "new era'' in the history of the surplus lines business, but state lawmakers face important public policy choices.

State lawmakers can opt for a tax allocation procedure through an interstate agreement, as intended by Congress, or they can choose instead to retain the tax paid to the home state of the insured.

Some states are beginning to pass laws to conform to the Nonadmitted & Reinsurance Reform Act. What kind of enabling laws states are passing and the nuances between laws passed in one state and another figure to be a big part of the discussion, which is expected to dominate the NAPSLO meeting in San Diego.

"Some states have done it and others have not, so it's a patchwork right now and the NAPSLO staff are working with other organizations as well through this entire process to try to get things ending up in the right place,'' said Robert T. Sargent, NAPSLO's president for the 2011-2012 term.

In August, New Jersey and Delaware, for example, enacted laws to authorize each of those states to collect 100 percent of the tax on the premium, and to allow each of those states to participate in tax-sharing agreements.

California and Missouri, however, which passed enabling legislation in July, do not address whether each of their respective states can join other states in sharing premium taxes.

The situation regarding states adopting enabling legislation is changing "fairly rapidly,'' said Sargent, hence the need for briefing updates on the part of NAPSLO staff, and the importance of networking among brokers, carriers and state insurance officials, when the industry gathers in San Diego.

In August, the Surplus Lines Multistate Compliance Compact Commission voted to approve the tax allocation method proposed by Kentucky insurance regulators. NAPSLO is supporting the Kentucky proposal.

"The Kentucky proposal presents a workable methodology that would be a vast improvement over other tax methodologies under discussion and we hope that other state groups will also adopt the proposal," said David Leonard, NAPSLO legislative co-chairman.

Kentucky's proposed tax allocation formula would allocate surplus lines taxes based on property risk exposures. Taxes based on most casualty risk exposures, however, would not be allocated, an approach similar to what is in use today.

"Adoption of Kentucky's proposal would basically continue the current allocation system rather than require brokers to implement a new system," said Hank Haldeman, NAPSLO legislative co-chairman. "It is a significant step toward implementing uniformity and simplicity in filing multistate taxes, which is sorely needed."

With the implementation processes surrounding the Nonadmitted Reinsurance & Reform Act "a big issue,'' there's no better place for the industry to pick the brains of the underwriters, brokers and regulators than face to face in San Diego, Sargent said.

THE KELLEY ERA

NAPSLO will also introduce its new Executive Director Brady R. Kelley, who officially began his NAPSLO duties on Sept. 12. He replaces Richard M. Bouhan, who retired after 30 years.

Kelley was most recently the chief financial and business strategy officer for the National Association of Insurance Commissioners, which represents the nation's state insurance regulators at the federal level.

Kelley joined the NAIC in 1998. He served as a senior accountant for Price Waterhouse after graduating with a bachelor's degree in accounting from the University of Missouri. He's a CPA.

This year's convention will serve as a way for members to welcome the new guard, as well as provide members with the opportunity to thank Bouhan for the "30 years of exemplary service he's put in for NAPSLO,'' Sargent said.

Bouhan's not quite done yet, though. He will remain with NAPSLO through June of 2012 working on the transition and on legislative and legal issues. He joined the association in 1981 as legislative director, and became its executive director in 1988.

In a press release Aug. 31 announcing Kelley's arrival, outgoing NAPSLO President Letha E. Heaton, vice president of marketing at Admiral Insurance Co. of Cherry Hill, N.J., said NAPSLO had settled on Kelley after an extensive search.

And with good reason. The position of executive director is a critical one, particularly with the growth of the surplus lines market over the past 10 years outstripping the broader property/casualty marketplace.

From 1990 through 2010, direct written premiums for surplus lines insurers almost quintupled to nearly $31.72 billion from $6.53 billion, David Blades, a former commercial insurance underwriter and now a senior financial analyst in the property/casualty ratings division at A.M. Best Co. of Oldwick, N.J., told Risk & Insurance®.

In comparison, direct-written premiums for the total property/casualty insurance market during the same period more than doubled to $481 billion from $230 billion, he said.

While the excess and surplus market continues to write the preponderance of professional liability coverage--including for medical providers--as it historically has, there are many more types of professionals now than 20 years ago.

The excess and surplus marketplace today covers risks in the healthcare, construction, higher education, and public entities sectors, even if the coverage is available in the traditional market. Excess and surplus lines carriers are also covering natural catastrophes, long-time market managers said.

With Kelley expected to be in charge of the day-to-day operations, NAPSLO will be able to build around a long-term industry veteran to help it develop tighter networking opportunities for its membership, said Sargent, who is also president of wholesaler Tennant Risk Services of West Hartford, Conn.

NAPSLO also needs to reach deeper into the ranks of the industry to attract younger members, and to offer more educational and internship programs for new members. "We will continue to keep NAPSLO a strong organization and provide significant value to its members,'' he said.

The Great Recession has tested the broader property/casualty industry, and the surplus lines segment has "done extremely well through this environment,'' Sargent said, even if the amount of excess and surplus premium has declined slightly since 2007.

In case NAPSLO members were wondering just what hit the industry over the past two or three years, author Michael Lewis, author of "The Big Short'' and "Liar's Poker,'' is scheduled to deliver the keynote address at the convention.

"It will be fascinating to get his perspective on where we are today,'' Sargent said.

Asked what he wanted to be remembered for at this time next year when he cedes the presidency to his successor, Sargent said, "It's not about me. NAPSLO is a fantastic organization. I'm just a short-term caretaker and we have a fantastic staff that does a good job.''

October 1, 2011

Copyright 2011© LRP Publications