Florida Surplus Lines Service Office National Clearinghouse Committee Report: July 21, 2011

Jul 21, 2011


The Florida Surplus Lines Service Office (“FSLSO”) held a National Clearinghouse Committee (“Committee”) meeting today, July 21, 2011, to decide what recommendations it will make to the FSLSO’s Board of Governors (“Board”) next week.  The recommendations concern continuing discussions with the National Association of Insurance Commissioners (“NAIC”) on the operation of the Nonadmitted Insurance Multi-State Agreement (“NIMA”) Clearinghouse (“Clearinghouse”).

The FSLSO Board meets on July 27, 2011 in Boca Raton for its quarterly business meeting.

The FSLSO and the NAIC have been discussing a potential partnership to perform certain Clearinghouse services, with the FSLSO handling technical support and the NAIC providing operational and administrative support.  However, the two entities have been at odds over many details.

After much discussion today, Committee members agreed to recommend that the Board permit the FSLSO to continue exploring the feasibility of providing Clearinghouse services and, if feasible, also allow for the creation of a wholly-owned subsidiary to be the contracting party to provide those services.

NIMA provides for the creation of a Clearinghouse, the purpose of which is to collect premium taxes and distribute them efficiently to participating states pursuant to the surplus lines reform provisions of the Nonadmitted and Reinsurance Reform Act (“NRRA”), part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

It was reported that, as of 10:00 a.m. today, Nebraska, Connecticut, Florida, Hawaii, Louisiana, Mississippi, Nevada, Puerto Rico, South Dakota, Utah and Wyoming have joined NIMA. 

After minutes from the June 14 and June 21 meetings were approved, FSLSO Executive Director Gary Pullen advised Committee members they had to make recommendations to the Board next week on two issues:

 First, the Committee must determine whether to continue researching the feasibility of the FSLSO providing Clearinghouse services.  Second, if the answer to the first question is yes, then the Committee must recommend the creation of a subsidiary to contract for the actual Clearinghouse services in order to protect the tax-exempt status of FSLSO and address liability issues, Mr. Pullen explained.

“It’s a result of federal tax laws,” Mr. Pullen stated.  “It’s an action that is necessary to ensure that we don’t do anything to jeopardize the tax-exempt status of the Service Office.”

The initial agreements should bring in sufficient funding, he said.

 “You are talking $600 million, and then if the Clearinghouse fee charged was the maximum three-tenths percent as permitted under Florida law, you are going to be generating somewhere between $1.8 to $2.1 million, assuming the premium is between $600 and $700 million,” Mr. Pullen stated.

Thus, there would be sufficient revenue generated to warrant the FSLSO providing Clearinghouse services, he explained.  An amendment to FSLSO’s Plan of Operation would be required to allow it to provide Clearinghouse services.

The Florida Office of Insurance Regulation (“OIR”) is finalizing a consent order that would subsequently result in that amendment, thereby ensuring the FSLSO has sufficient authority to conduct Clearinghouse services, Mr. Pullen stated.  A draft of the consent order was expected to be sent to FSLSO later today.

If the FSLSO provided Clearinghouse services, it would have to create a wholly-owned, for-profit subsidiary to contract for the provision of those services. 

A tax-exempt, non-profit entity that generates half or more of its income from revenue sources that are not directly related to its public purpose would jeopardize the FSLSO’s tax-exempt status, and the IRS would remove it, he said.  Creating a subsidiary also would protect the FSLSO from legal liability, he added.

Mr. Pullen said the FSLSO would be the single shareholder or owner of such subsidiary, making it a wholly-owned subsidiary of the FSLSO, which could then receive dividends from the subsidiary tax-free, he said.

Profits could not legally go to any entity other than the subsidiary itself or the FSLSO, he added.

“That is how ultimately this office and the policyholders that fund this office and that have invested in this office and its technology system would receive some return on the investment that they made,” Mr. Pullen noted.  “The other option is that any profit that is generated could be retained by the subsidiary for purposes of its operational costs.”

Financing the subsidiary could be done inexpensively through the issuance of low-cost shares, Mr. Pullen stated.  An example would be to issue 50,000 shares at a cost of 5 or 10 cents a share.  The FSLSO also could loan the subsidiary money, he said.

“It’s not the initial creation of capitalization of this entity that will require significant investments, funds or money,” he said.

Mr. Pullen referred to the situation as a sort of “chicken and egg” process because it’s still unclear how many vendors are interested in running Clearinghouse operations, or if it even makes sense for the FSLSO to get involved.

With no further business before the Committee, the meeting was adjourned.



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