STATE IMPLEMENTATION OF THE NRRA

1. STATE IMPLEMENTATION OF THE NRRA STEVE STEPHAN NAPSLO DIRECTOR OF GOVERNMENT RELATIONS, RICHARD BOUHAN NAPSLO EXECUTIVE DIRECTOR

2. NRRA Changes the Environment • NRRA effective 7-21-2011 • New rules for single-state compliance, single-state tax payment, single-state license • New rules for insured home state • New rules for affiliates, affiliated groups and control • New rules for Exempt Commercial Purchaser, Qualified Risk Manager • States may enter compact for tax allocation

3. NAPSLO Calls on States to Conform Codes to NRRA • August 2010, NAPSLO calls on states to amend their codes to conform to the NRRA • Oct. 2010 NAPSLO sends states written explanation of NRRA changes that could be incorporated in codes • Dec. 2010 NAIC rejects SLIMPACT proposal in favor of NIMA over vocal opposition of NAPSLO and other industry trade associations • Dec. 2010 NAIC rejects request from NCOIL to negotiate a tax allocation compact • Jan. 1 2011 many state legislatures open session and draft revisions to conform code to NRRA but differ on tax allocation treatment • States split over surplus lines tax allocation approach • Jan. 2011 NAPSLO issues broker protocol explaining the changes effective July 21, 2011

4. Four Approaches to Surplus Lines Tax Allocation • States authorize commissioner to enter into compact or agreement (supported by NAIC and opposed by industry) • States specifically authorized to enter NIMA • States introduce SLIMPACT in legislation (endorsed by NCOIL, NCSL and CSG) (supported by some industry groups) • States do not address tax allocation at this time • Sets off battle in the state legislatures between NIMA and SLIMPACT

5. Why NAPSLO Opposes NIMA • Burdensome reporting of allocation data – dozens of allocation methodologies – 8 different id numbers and 30 data elements per policy • Novel allocation of all casualty lines – even if data is unavailable – D&O, E&O, umbrella, excess • No commission to uniformly resolve the many issues that will arise • All commissioners would need to voluntarily act cooperatively – broker is at risk • No uniformity, no authority to set eligibility requirements • Legislation is not transparent

6. Scorecard • Bills authorizing Commissioner to enter into an agreement or compact: AK, AZ, CA, CT, HI, IA, KS, IL, MS, MT, NH, NY OK, UT, WY • Bills mentioning NIMA: WV • SLIMPACT bill states: AR, CT, IN, KS, KY, MD, NM, ND, RI, TN, TX VT, • States silent on allocation: ID, NE, OR, VA, WA • NAPSLO retains local lobbyists to oppose the NIMA clause

7. Is NIMA Consistent With NRRA? • NIMA is contract between non-home state and home state where home state agrees to collect the non-home state tax rates and assessment • NRRA preempts any “act” or “provision” of any state from collecting taxes unless it is the “home state” • NRRA: only home state can require tax payments – does that mean home state rate? • Some states start introducing bills to collect rates of other exposure states to circumvent NRRA • Congress could not have intended for a state to tax at other states rates because none of these laws existed at the time the NRRA passed • NRRA states may enter compact to share their taxes; NRRA did not indicate that states could collect other states taxes, fees and assessments for them • Congress would never have described the NRRA as a simplification if it intended for states to act as collectors for each other

8. Is NIMA Legislation an Illegal Delegation of Legislative Authority? • Is a delegation of the decision to enter into an interstate agreement to raise taxes, share tax revenue consistent with state law? • Interstate compact legal expert opinion – NIMA type legislation is illegal delegation of legislative authority • Decision to enter NIMA would be a tax increase in many states and tax increase is decision that must be made by legislature • NAIC recently developed another compact - IIPRC – and adopted it through comprehensive legislation • SLIMPACT would have been in the state codes

9. WHAT ARE WE HEARING FROM OUR LOBBYISTS • Would like to hear from NAPSLO members/other trades in the states • Would like to hear from policyholders who will experience tax increase under NIMA • DOI’s position that they will lose money if they do not join NIMA is hard to understand • States don’t always recognize they could be losers with NIMA • It has become NIMA vs. SLIMPACT

10. What Happens Next With Tax Allocation • Legislative sessions close spring/summer • Many states don’t yet have bills • NIMA – can the states create this by July 2011? • SLIMPACT – can the states create this by July 2011? • How will state know if it is winner or loser with NIMA? • NAPSLO lobbyists will oppose NIMA clause and will have some impact

11. Will Congress Extend The Effective Date Of The NRRA? • Some groups called on Congress to extend the effective date of the NRRA – Jan. 2011 • Tight deadline will be difficult for states to create tax allocation infrastructure and reporting systems by July 2011 • NRRA language dates to the SMART Act – 2004 - so Congress may be unwilling to extend deadline • It will be difficult to get Congress to revisit NRRA given the other issues in Washington

12. What Happens Next With The State Codes Conforming to NRRA? • If states fail to conform code to NRRA – federal law is still the law of the land • More than half of states have incorporated most elements of NRRA in code • NAIC also asked states to conform codes • NAPSLO issued broker protocol • Few problems with conforming codes at this point

13. Will NIMA create winners and losers among the states? • Small states believe they will gain money from large states • Coastal states believe they will gain from the allocation to catastrophe funds and assessments on casualty business • NIMA is a “tax only” compact – why would state join if it might become loser? • Will any state stay in compact if it is losing money to small states and coastal states? • Is this a fatal flaw?

14. How can broker know what to do between now and NRRA effective date? • It is not possible to know what states may do but it will be difficult to have clearinghouse functional by 6-16-2011 • NAPSLO web site has copy and statute of bills • NAPSLO webinar summer of 2011 • At least some states will go to a single state tax system because of deadline • On June 16, 2011 brokers determine home state and follow home state rules

15. SLIMPACT 2006 vs. 2011 • A different compact under NRRA (2011) than NCOIL adopted in 2006 • 2006 SLIMPACT (NCOIL) • Distribute taxes for brokers to states • Acts of behalf of brokers • Calculates tax due to states—uniform allocation formula • Distributes taxes to states • Pays tax for broker with certainty • Solved dysfunctional system of tax allocation and remittance of tax among state that brokers faced • States receive more tax • Courtesy filings, independent procurement, misallocation of premiums--all tax would be categorized and paid properly • 2011 SLIMPACT(NRRA) • Brokers problems solved—pay all tax to one state • Compact Is now agent of the states---Steps into shoes of the state to allocate taxes

16. Impact of NRRA on Compact • NRRA SLIMPACT and NIMA --- 2011 • State tax entire premium—not allocated share • “Zero sum” game • Not every state will gain revenue • Some states will not join a compact • No other compact exists except IFTA to distribute state tax money • Congress Legislated IFTA

17. NAPSLO Policy Implications • NAPSLO still supports SLIMPACT under NRRA • Each state must make decision to join compact—consider revenue implications and long term stability of compact and other benefits of the compact • Reason for joining compact may not be solely revenue related • SLIMPACT: 1) Consumer protections, 2) Stability and 3) Uniformity • NIMA: Tax compact only • If state choses to join compact---SLIMPACT is the one • NAPSLO will support SLIMPACT in states • But not be advocate for SLIMPACT • Does not have resources to be advocate