FSLSO News Release :: 12/01/2000

Changing the Surplus Lines Landscape: Gramm-Leach-Bliley

By Richard M. Bouhan
National Association of Professional Surplus Lines Offices

Introduction

The Gramm-Leach-Bliley Act or Public Law 106-102, enacted by Congress last November, has the potential of creating the biggest change in the surplus lines industry since the enactment of the first surplus lines law in the state of New York in 1890. This recently enacted federal legislation is a possible catalyst to a metamorphosis of the surplus lines industry from a business that is based almost exclusively on local transactions conducted by resident producers to an insurance marketplace in which nonresident brokers/agents may transact a substantial portion or even a majority of the business.

Currently, the vast majority of the states require that agents or brokers be a resident of the state or conduct business from the office in the state as a condition of obtaining and maintaining a surplus lines license. This "resident only" approach for licensing surplus lines producers stands in sharp contrast to licensing laws governing general agents and brokers in which virtually every state allows a nonresident to secure some type of nonresident license status.

The provisions of Gramm-Leach-Bliley Act pertaining to insurance producer licensing apply to virtually all insurance producers including surplus lines brokers and will provide surplus lines brokers with an expanded opportunity to secure surplus lines licenses in a number of states on a nonresident reciprocal basis. With nonresident licenses, surplus lines brokers could pay premium taxes directly to the states on the allocated portions of the premium and establish and conduct regional and national programs through the acquisition of nonresident licenses in multiple states.

NARAB

Under Gramm-Leach-Bliley, an entity entitled the National Association of Registered Agents and Brokers, known by the acronym NARAB, will automatically be established three years from the date of the enactment of the law (November 12, 1999) if a majority of U. S. jurisdictions (twenty-nine state, territories and the District of Columbia) do not enact uniform or reciprocal insurance producer licensing laws and regulations by that date.

If DARAB is created, eligibility for membership in the new organization would be open to any "state licensed insurance producer" meeting the minimum standards for membership. The membership criteria for NARAB would include "standards for integrity, personal qualifications, education, training and experience."

Preventing NARAB

The National Association of Insurance Commissioners (NAIC) opposes NARAB and believes that the best way to prevent NARAB's creation is for a majority of the states and territories to enact reciprocal insurance producer licensing laws within the next three years. The reason the NAIC chose the reciprocal approach, rather than the uniform approach, is that they believed enacting uniform producer licensing laws in a majority of the U.S. jurisdictions would likely take more time than the three years allowed under the Gramm-Leach-Bliley mandate.

In order to provide a vehicle that states can use to enact reciprocal licensing laws, the NAIC, on January 27, 2000, adopted a revised NAIC Producer Licensing Model Act. This amended model law applies to "surplus lines brokers" and allows for reciprocal licensing of surplus lines brokers.

The Gramm-Leach-Bliley Act will have a significant impact on the surplus lines market over the next three to five years. Because of the act, a minimum of twenty-nine states or jurisdictions, and possibly all fifty-eight U.S. jurisdictions, will have, within three years, some type of reciprocal or uniform law regarding nonresident licensing of surplus lines brokers.

If the requisite majority of states fail to enact reciprocal or uniform producer licensing legislation and the NARAB organization comes into effect, surplus lines brokers will be included under the NARAB umbrella and will be able to secure surplus lines licenses in every state.

Conclusion

Nonresident surplus lines licensing, as encouraged by Gramm-Leach-Bliley, will enhance the ability of surplus lines brokers to conduct multi-state transactions and provide nonadmitted products across state lines on a wholesale broker or managing general agent basis. Further, nonresident surplus lines broker licensing will assist in solving some of the complex and difficult tax remittance problems surplus lines brokers currently face on an almost daily basis.

However, the benefits that nonresident surplus lines broker licensing could also create additional concern and scrutiny among regulators leading to more oversight of the surplus lines market.

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Our apprecation to Richard M. Bouhan, President of NAPSLO for allowing us to provide a copy of his article that appeared in the Excess Surplus Lines Review supplement to the October, 2000 edition of the Florida Underwriter magazine.