This post is part of a series sponsored by AgentSync.
Surplus lines, also known as excess or excess lines, can be a tricky area of insurance, in part because the surplus lines business often comes with premium taxes that insurers and brokers must file separately with the state, not to mention stamp duties and other fees.
Federal legislation in 2011 aimed to streamline the premium tax filing process for surplus lines and has had some success, but at the end of the day, this remains a complex area for insurers, agents and brokers in this space.
What is the Surplus Line Premium Tax?
Essentially, surplus lines premium tax is a tax paid by surplus lines insurance companies or brokers to the state in which they sold surplus lines insurance.
Further explanation: The carrier pays the tax to the carrier State of Residence Insurance companies levy a tax based on the amount of premiums they receive each year. Insurance companies incorporate this tax into their overall cost, so policies in certain states include this amount in the premium payment. Because the payment is the responsibility of the insurance company, it is not usually disclosed to consumers. Also, for consumers, insurance on the licensed market is tax-free.
In the unauthorized, or surplus, insurance market, the taxes that states normally impose on authorized insurers do not apply, so states must impose those taxes in a more transparent manner and brokers and insurers must very clearly disclose them in the documents they provide to prospective insurers.
What is the stamp duty?
Stamp duties are one of several other taxes and fees that a state may impose. Some states require surplus lines brokers to include specific language in consumer documentation disclosing certain risks associated with surplus lines contracts. For example, surplus lines policies are not regulated by the state, the state does not guarantee the financial solvency of unauthorized insurers, or the state’s Guarantee Association If the carrier goes bankrupt, the insurance will not be paid.
These disclosure documents were once called “stamps” because they were printed on a physical stamp, but modern stamps are typically digital. However, some states still charge a stamping fee as a percentage of the premium (usually less than 1 percent) or a set amount per policy.
Submitting excess lines: Backocho 💃
Because states do not have rate setting authority or annual audit control over non-admitted insurance or insurers, there are other requirements that surplus insurers and brokers must meet. Some states require brokers to “Diligent Search RequirementsInsurance companies report data on the types of insurance they sell and premium taxes, or “report data on the types of insurance they sell and premium taxes.
Complicating things is not only that requirements vary from state to state; what It must be reported, but it must also be reported. Who The responsibility for reporting falls on either the broker or the carrier, and perhaps most frustrating, the reporting process varies from state to state. how Those data points need to be reported.
OPTins for surplus line applications
More than 20 states use the Online Premium Tax Portal (OPTins) supported by the National Association of Insurance Commissioners (NAIC), which is extremely convenient for insurance companies that need to submit data across state lines. But when did convenience become important in insurance?
State Portal
Most states have their own way of having insurers and brokers register surplus lines data. For most states, this typically means working through a proprietary portal maintained by the state itself or a state surplus lines association with which surplus lines brokers and insurers are required to maintain membership. There are also several private vendors that have rolled out portals and registration systems for states, allowing insurers and brokers a more predictable and standardized experience.
Unfortunately, some state-by-state filing methods are still paper-based, requiring carriers and brokers to download certain files and upload them into the system or mail in paper documents.
How often do I need to file surplus lines premium tax?
Monthly. Or quarterly. Or yearly. Or twice a year. Or for each surplus business, you may need to file within 60 days of the effective date. You’re smart enough. The answer depends on each state’s laws. Sorry.
Payment of surplus premium taxes and other charges
Some states make this tax exchange so fun that you can pay online and then fill out a form that you then have to submit via a separate portal or by email or mail.
Zero declaration requirements: 💃 Giro and Molinete 🕺
In a state that requires quarterly filing, if I pay a lot of premiums but have no premiums to report in one quarter, do I still have to report that quarter? In some states, there are reporting requirements. These are usually called zero returns, but recently some states have started to eliminate these types of reporting requirements.
Federal Surplus Line Premium Tax Regulation: A Positive Ocho 🕺
If there’s a bright spot when it comes to surplus lines premium taxes and filings, it’s that a 2011 federal law made life much simpler for insurers and brokers in the non-admitted market.
I know “thank goodness for federal regulation” isn’t a common refrain, but imagine this: Before 2011, when insurance was much more paper-based than it is today, states could require insurers and brokers to pay surplus insurance premium taxes and fees in every state they did business in. This meant that if someone insured property in multiple states, or if their surplus insurance broker was a nonresident and non-admitted insurer based in another state, each of those states could have a say in how they got their share of the profits.
By virtue of the Non-Admitted and Reinsurance Reform Act of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “NRRA”), We have this little gem:
(a) Exclusive competence of the home country
States other than the insured’s state of residence cannot require payment of premium tax on unauthorized insurance.
Salute: The Simplicity of Technology
Regulation of surplus and excess lines of insurance is an area of the insurance industry where there is a lot of opportunity for states to work together to streamline regulations and processes. While there is a gap between where we are today and where our dreams lie, there is one area where modern insurance infrastructure can reduce stress for surplus insurance brokers, insurers, and agents: surplus lines of insurance licensing.
AgentSync’s secret sauce makes managing your surplus line partners easy, whether they need a standalone license or your surplus line sale is attached to a property and casualty LOA. If you’re ready to upgrade your licenses into the 21st century, See how AgentSync can help you.
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Super excess gold
