WASHINGTON—The inclusion of surplus lines reform in a massive financial services regulatory reform bill released last week was welcomed by insurers and risk managers, although some fear other measures in the bill could have unintended consequences for the insurance industry.

The draft of the Restoring American Financial Stability Act, unveiled last week by Senate Banking, Housing and Urban Affairs Committee Chairman Christopher Dodd, D-Conn., contains the Nonadmitted and Reinsurance Reform Act, the most recent version of which passed the House in September.

Among other things, the measure would make it easier for risk managers to access the surplus lines market and set a uniform system of allocating and remitting surplus lines premium taxes. The bill also would simplify reinsurance regulation by eliminating extraterritorial application of state reinsurance laws.

Also included in the Senate bill is a measure to establish an Office of National Insurance within the Treasury Department. The proposed office would act as an adviser to the Treasury Department on various insurance issues. While some insurer groups favor the creation of the office, others are concerned it might weaken the existing state-based regulatory system.

But insurance is only a small part of the 1,136-page bill. Among other things, the measure calls for establishing an Agency for Financial Stability that would monitor systemic risk and have the authority to break up large, complex financial institutions if they threaten the country's financial stability. The measure raised concerns among some observers that insurers would be dragged into a regulatory regime designed primarily for banks.

The inclusion of the surplus lines reform language, however, pleased risk managers and others.

The New York-based Risk & Insurance Management Society Inc. “is extremely pleased that the draft bill circulated by Chairman Dodd includes several of our legislative priorities,” said Nikolas Kapatos, chairman of RIMS' external affairs committee and senior vp and enterprise risk manager for Houston-based Sterling Bancshares Inc. “Chief among those would be a bill addressing the surplus lines insurance market.”

Inclusion of the measure within the larger reform bill increases the chances of surplus lines reform being passed into law, he said.

“The Senate Banking Committee's action is a giant step toward realizing the goal of a more efficient process for transacting surplus lines business for both consumers and insurance professionals,” Marshall Kath, president of the Kansas City, Mo.-based National Assn. of Professional Surplus Lines Offices Ltd. and chairman and chief executive officer of Dallas-based Colemont Brokerage Group Inc., said in a statement.

Although the larger bill likely will take months to work through, “we think the chairman has struck the right notes on insurance regulation,” said Joel Wood, senior vp at the Washington-based Council of Insurance Agents & Brokers.

Mr. Kapatos said RIMS also supports inclusion of the federal insurance office concept in the bill, which RIMS views as a precursor to an optional federal charter for commercial property/casualty insurers. In addition, RIMS supports a provision in the bill that would require certain financial institutions to create risk committees that must include at least one risk management expert.

While welcoming the surplus lines reform language, a representative of one insurer trade group raised questions about other parts of the measure.

“We do have concerns with several other areas of the legislation,” said Jimi Grande, senior vp in the National Assn. of Mutual Insurance Cos.' Washington office. “When it comes to systemic risk, we continue to believe that nearly every examination of financial crises concludes that insurance played no significant role in the crisis.”

In addition, NAMIC is concerned that the creation of an Office of National Insurance might lead to “duplicative regulatory requirements.”

“We understand that Sen. Dodd is not trying to create a new federal regulator for insurance,” he said. “However, in any legislation this sweeping, it's the unintended consequences that insurers must be concerned with.”

Measures to control systemic risk also run the risk of being “bank-centric,” said Stef Zielezienski, senior vp and general counsel at the American Insurance Assn. in Washington.

“We're working pretty hard to come up with some amendment to recognize that property/casualty insurers that are engaged in traditional insurance activities don't get regulated like banks,” he said.

In addition, insurers may have to cover some of the costs of any regulator-imposed breakup under the bill, which proposes that costs be spread across all financial institutions, even though insurers already pay into guaranty funds, he said.

But the discussion draft wasn't the end of the debate, noted another observer.

“We all know that bills always change when they move through the process,” said Ben McKay, senior vp in the Property Casualty Insurers Assn. of America's Washington office. “In an 1,100-page bill there's bound to be an unintended consequence, but it's the job of the process to ferret that out.”

Copyright © 2009 Crain Communications, Inc.