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Andrew G. Simpson, vice president of content for Wells Media Group Inc., recently grilled Surplus Lines Association of California Executive Director Benjamin McKay on an array of matters, including the market, new regulations and SLA’s role in the world.

As director of SLA McKay has a great deal of interaction with the state government. SLA serves as the surplus line advisory organization to the California Department of Insurance and helps monitor and direct surplus line brokers´ placements of insurance with eligible nonadmitted insurers.

McKay assumed the director post in July. He spent the last eight years with the Property Casualty Insurers Association of America as senior vice president for federal government relations following a career in both the private and public sector. His experience also includes a stint as a chief of staff to a member of Congress.

Q) You are representing and work with the surplus lines industry. This industry seems to be the most resilient of any that I know of. You don’t hear about too many companies going under. What’s the secret? Is it strictly the freedom of pricing or is there something else going on?

A) I think it’s a few things at play. Number one, good regulation. We’ve always said there is over-regulation, there is bad regulation, and there is good regulation, and the goal is always to strive for good regulation – regulation that protects the consumer but allows for enough freedom for the markets to function. What we find in the surplus lines market where you have a lot more freedom than in the admitted market is it really does work well. Now, there are consumer protections, and certainly those have changed with the Dodd-Frank Act passage.

Q) Nationally, if you look at the market, it appears that premiums are going up. The market is growing. The surplus lines market is regaining some of the premium lost over the past few years. Is that the case in California?

A) We are seeing that. Year to date, the premium filed at the California Stamping Office is about $4.2 billion, which is greater than all of last year, all of 2011. So we’ve already beat last year’s filed premium number. So…we’re definitely experiencing uptick in filed premium.

Q) The Nonadmitted in Reinsurance Reform Act went into effect a little over a year ago. Has California passed all the laws that they need to conform with that? What is affecting California out of that act?

A) As you know, the effects are many, but they are also unknown. All of the effects are unknown. We’ll continue to see effects from the Dodd-Frank Act. We often say Dodd-Frank Act and NRRA interchangeably. The NRRA was a bill that was absorbed into the Dodd-Frank Act and passed along with it, so they really can be used interchangeably, but the Dodd-Frank Act is obviously broader. But California — to your initial point – California has passed the requisite legislation, AB 2303 and Gov. Brown signed it into law…that conforms to California law to the NRRA. So California is compliant. Not all states are, but California is one of them that is.

Q) So how is California handling the tax issue for surplus lines and do you anticipate any changes in that?

A) Well, the NRRA allowed for what is called “home stating,” and what that means is that, if the principal place of the insured’s business is in a particular state, say California, then California can collect the tax on all of the premium. In the alternative, it provides for these different PACs, like SLIMPACT and NEMA, that states are allowed to join and then that would preempt all of the other, or lots of the other, rules that are in the NRRA. But it doesn’t look like those are moving forward. California, I think, at this point is going to stick with the home state principal. Most of the states are – frankly, the vast majority – are following the same principal, which is the place of business standard, the principal place of business standard.

Q) And what does that mean for a company that’s multi-state?

A) If you’re multi-state, you have to look at the insured, who you’re insuring, and you have to say, “Where is their principal place of business?” Frequently, that can be a complicated question. So if you’re a hotel chain and you have hotels in many states, which is your principal place of business? There are a lot of legal tests that we use to say, “Where’s the nerve center? Where are they operating from? Where are their headquarters? Where are they predominantly if you have 50 hotels in California and one in Nevada and one in Virginia?” Certainly, you can make a strong case that California is your principal place of business.

Q) And that’s the major test that determines the tax?

A) Yeah, the standard is principal place of business, but then, you can go through different tests to determine which is the actual principal place of business. Most brokers have these very elaborate decision trees that they go through, depending on the type of business. Where is the risk, is it a physical risk, is it a person/people risk, or building risk, that sort of thing. They go through the chart and come to a conclusion at the end that.

Q) Are there any other benefits or effects of Dodd-Frank that brokers should be aware of or anticipate?

A) Yeah. There’s a fair amount of uncertainty. The NRRA deals with interstate commerce, which is the jurisdiction of the federal government. What isn’t the jurisdiction of the federal government is contract law, tort law. We’re not sure where the liabilities lie for compliance, non-compliance, violations thereof, so there is a lot of uncertainty. The NRRA was incomplete in terms of who is liable if a company fails. Who is liable to the insured? Is it the broker? Is it the insurance company? We don’t know, and there’s no case law on it to tell us. What we’re going to have to do in the interim is try and figure that out, and states can take action individually. The courts can take action individually.

Q) Is there anything going on at the state level now in California that you’re keeping an eye on or you’re concerned about?

A) One of our statutory responsibilities is to make sure that we’re monitoring what’s going on in Sacramento to ensure that it will create a good marketplace, surplus lines marketplace, and healthy surplus lines marketplace. We do comment on legislation on how it will affect the marketplace. The legislature will come back in session on Dec. 4 for organization, but they really will just elect their leadership post-election. Then in January is where they’ll really start introducing legislation again.

Q) How do you think Gov. Brown’s administration has been handling insurance issues?

A) Well, I don’t have a long experience with what he’s been doing, but my brokers seem to think that he has a very practical approach, so, so far, so good.

Q) We’ve had some other forums where some of the industry have complained about Commissioner Jones, and his lack of access, and he’s not easy to work with. Do you find that the case?

A) I haven’t. In fact, I found the exact opposite to be the case. His staff has been incredibly responsive to us. Brokers contact us literally every day, me personally every day, with inquiries, everything from taxes to filings to licensure. We have an open door at the department, where they get back to us immediately on licensures. Sometimes there are computer glitches (like) “Hey, I thought I renewed my license over here and it’s not showing on the system, why not?” And we get that squared away, usually within a day. On the policy making side, you know, we’re talking to them literally almost every day at different parts of the department, so we’ve had a very different experience than what you’ve described.

Q) You’ve mentioned that everyone from consumers to surplus lines carriers to wholesalers to regulators have come together in this market. What role do you play in creating those markets that you say everyone in the industry wants?

A) One of our roles, I think, is to be negotiator, diplomat, bringing all those groups together to find the common ground. You know, (find out) what is the right balance to create and maintain this healthy marketplace. So I think that’s really our function, it’s to advise on laws, it’s to give the perspective of the broker, it’s to liaise with admitted and non-admitted companies, and it’s to always to be mindful of what’s going to be the impact on the consumer of any change that’s recommended or proffered.

Topics California Agencies Legislation Excess Surplus