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Insurance groups urge compromise on surplus lines tax dispute

US trade bodies have urged the two groups of states that have initiated separate schemes on sharing premium taxes for surplus lines policies to compromise.

The American Insurance Association, National Association of Professional Surplus Lines Offices (Naplso) and the Property Casualty Insurers Association of America (PCIA) are all urging the two groups to co-operate.

It has written to the 12 states that have signed up to the Non-Admitted Insurance Multi-State Agreement (NIMA), which is supported by the National Association of Insurance Commissioners (NAIC).

Though the NIMA states currently has the larger slice of the market on board, the trade bodies have urged them to agree to the so-called "Kentucky compromise" put forward by the Kentucky Department of Insurance.

This aims to bridge the gap between NIMA and its main rival system, the Surplus Lines Multistate Compliance Compact Commission (Slimpact), which is backed by the National Conference of Insurance Legislators (NCOIL).

"The NIMA allocation methodology is demonstrably unworkable for most of the industry, would unavoidably result in new costs and fees, and will complicate, rather than simplify, surplus lines premium tax reporting and allocation procedures," the groups said in the letter.

The two groups are divided over the allocation of tax on surplus lines policies that cover multi-states.

While the two groups are broadly similar in their aims of sharing premium taxes, the Kentucky proposal mirrors the manner in which insurers are currently instructed to allocate and report premiums.

Such consistency would "alleviate the need for costly retrospective audits and reconciliations," the trade bodies argue.

NIMA currently has 12 states signed up to its system of sharing premium taxes, which combined account for around 22 percent of the entire market (see table).

Surplus lines are non-standard risks not covered by "admitted" insurers in the regulated, general market. In 2010, $28bn of premium was written in surplus lines across the states.

The reforms are being driven by new powers resulting from the implementation of the Non-admitted and Reinsurance Reform Act (NRRA) - part of the post-financial crisis Dodd-Frank reforms.

At least 43 states have enacted some sort of NRRA-implementing legislation, though not all have entered into a tax sharing agreement.

Although the law is aimed at making premium tax collection more uniform, simple and efficient across states, critics have said that states have been more concerned with systems designed to share tax payments such as NIMA.

Before the NRRA powers came into force on 21 July, brokers placing multi-state risks were burdened with the onerous task of paying premium taxes across multiple jurisdictions with separate and often conflicting rules and regulations.

Under the new regime the "home" state has sole responsibility for regulating the broker and collecting tax payments. However, systems such as NIMA and Slimpact then allow the spoils to be divided among other states to an agreed formula.

"We believe the Kentucky compromise is the option best suited and most likely to bring the various parties and interests together and produce the much-needed uniformity intended by the NRRA," said David Leonard, co-chair of Napslo's legislative committee.

"We are most interested in working with states as we seek to realise the promise of uniformity while resolving the threat of unworkable allocation methods and competing tax sharing approaches."

Currently, nine states have signed up to Slimpact, but only Florida, a NIMA state, has pledged allegiance to one of the competing systems out of the four states that make up a large chunk of the national total (see graph).

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