Brokers see surplus of rules in excess and surplus market.

In the vernacular of insurance, excess and surplus lines are sometimes called the "unregulated" market. But to brokers and risk managers who structure coverage for complex commercial accounts, the label hardly seems accurate.

According to Michael D. Rice, chairman of Aon Risk Services, surplus lines insurance is subject to varying and often contradictory state rules governing such areas as producer licensing, due-diligence procedures, and premium tax payments. For larger enterprises that cross state lines, navigating this maze can prove daunting, Rice said.

Federal legislation introduced by Reps. Ginny Brown-Waite, R-Fla., and Dennis Moore, D-Kan., looks to simplify that process significantly. Dubbed the Nonadmitted and Reinsurance Reform Act, the bill, H.R. 5637, would grant sole regulatory authority over most aspects of surplus lines transactions to the home state of the insured.

In the short time since its introduction, the bill has been gaining momentum in the House, even as the Senate prepares to consider more radical changes to the insurance regulatory system in the form of S. 2509, the National Insurance Act, which proposes an optional federal charter system for life and property/casualty insurance.

The surplus lines market provides coverage for unique or hard-to-place risks through insurers that aren't licensed or admitted to do business in the insured's state of domicile. According to the National Association of Professional Surplus Lines Offices, $35 billion of premium is written by surplus lines carriers each year, representing more than 13% of the U.S. commercial insurance market.

Before turning to a surplus lines carrier, states typically require insureds or their brokers to demonstrate good faith efforts to place the risks in the traditional admitted market. Requirements vary widely from state to state on both the nature and number of "declinations" an insured must submit, Rice said.

The surplus lines bill currently before Congress would provide exemptions from state declination requirements for qualifying large municipalities, not-for-profit organizations, and commercial enterprises that request them. It also suggests creation of a national producer database to handle licensing of nonresident surplus lines brokers.

The separate House and Senate regulatory reform measures present a study in contrasts. Where the National Insurance Act proposes a comprehensive regulatory overhaul that has divided the industry, the House bill focuses on two limited segments of the insurance market and has enjoyed near-unanimous support.

One possible hurdle to quick passage will be the reaction of the National Association of Insurance Commissioners, which typically has rejected federal preemption of state authority, and was strongly opposed to an earlier draft bill.

But while communications between Congress and the commissioners grew heated during drafting of Capital Markets Subcommittee Chairman Richard Baker's proposal last year; the Louisiana Republican has reached out to the NAIC for input on H.R. 5637, according to Brett Palmer, managing director of government relations for the NAIC.

The bill's proposal to preempt extraterritorial requirements for reinsurance may meet with resistance from some states, Palmer said, but he praised Baker and the bill's other cosponsors for seeking the NAIC's guidance in structuring the bill.

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100 YEARS AGO in BEST REVIEW

San Francisco "Welchers"

The August 1906 issue of Best's Review continued reporting on the Great San Francisco Earthquake and Fire. The magazine reported hearing many complaints of insurance companies "welching" on their San Francisco losses and demanding reductions in claims payments ranging from 10% to 50%, citing the terms of "earthquake," "fallen building" or "dynamite" clauses. In response to this welching by insurance companies, the magazine said, "The stockholders, before a policyholder can lose anything, must themselves lose everything. ..." The issue also included an updated list of companies that had retired as a result of the San Francisco disaster.