TAX ALLOCATION METHODOLOGY FOR SLIMPACTTAX ALLOCATION METHODOLOGY FOR SLIMPACT

SLIMPACT/NRRA: INTENDED to create simple, uniform, fair and SLIMPACT/NRRA: INTENDED to create simple, uniform, fair and efficient reforms.efficient reforms.

The current tax allocation methodologies vary greatly state-by-state and The current tax allocation methodologies vary greatly state-by-state and use inconsistent complicated formulas which require significant data use inconsistent complicated formulas which require significant data collection and transmittal from insured to broker to tax collector.collection and transmittal from insured to broker to tax collector.

Under the current system (pre-NRRA) a large portion of premium on Under the current system (pre-NRRA) a large portion of premium on multistate risks goes untaxed.multistate risks goes untaxed.

For example, in New York in 2010, $2.44B of multistate of premium was For example, in New York in 2010, $2.44B of multistate of premium was reported, of which $1.03B was not taxed by New York. Much of the reported, of which $1.03B was not taxed by New York. Much of the $1.03B was untaxed by other states as well.$1.03B was untaxed by other states as well.

STATE MARKET SHARE ALLOCATION PROPOSALSTATE MARKET SHARE ALLOCATION PROPOSAL

Each participating state* taxes each multistate risk based upon the market share Each participating state* taxes each multistate risk based upon the market share (percentage) of multistate premium that state (as home state) bears to the country wide (percentage) of multistate premium that state (as home state) bears to the country wide aggregate of multistate surplus lines premium.aggregate of multistate surplus lines premium.

EXAMPLE: Assume New York’s 2010 multistate premium of $2.44B is 10% of the US EXAMPLE: Assume New York’s 2010 multistate premium of $2.44B is 10% of the US total countrywide multistate premium. The countrywide aggregate would therefore be total countrywide multistate premium. The countrywide aggregate would therefore be $24.4B. New York would be entitled to tax 10% of every multistate surplus lines risk at $24.4B. New York would be entitled to tax 10% of every multistate surplus lines risk at 3.6% for total tax receipts of $87.84MM. That would be in addition to 3.6% tax on the 3.6% for total tax receipts of $87.84MM. That would be in addition to 3.6% tax on the New York non multistate premium of $584.25MM or $21.033MM in additional taxes.New York non multistate premium of $584.25MM or $21.033MM in additional taxes.

** If all states do not participate initially, the participating states will tax every multistate If all states do not participate initially, the participating states will tax every multistate risk at its rate and percentage of market share and the home state of the insured will risk at its rate and percentage of market share and the home state of the insured will tax the market share percentage applicable to all non participating states.tax the market share percentage applicable to all non participating states.

As new states join, the premium pool subject to market share taxation grows and the As new states join, the premium pool subject to market share taxation grows and the amount which the home state taxes for non-participating states shrink.amount which the home state taxes for non-participating states shrink.

MARKET SHARE TAX ALLOCATION BENEFITSMARKET SHARE TAX ALLOCATION BENEFITS

Insureds no longer providing voluminous data to brokers unrelated to the acquisition Insureds no longer providing voluminous data to brokers unrelated to the acquisition of coverage.of coverage.

Brokers need only report the following data elements and are relieved of the unduly Brokers need only report the following data elements and are relieved of the unduly burdensome data collection, reporting and tax allocation procedures currently burdensome data collection, reporting and tax allocation procedures currently employed.employed.

• Broker /IDBroker /ID• Insured/IDInsured/ID• Insurer/IDInsurer/ID• Home State/InsuredHome State/Insured• Gross PremiumGross Premium• Policy inception DatePolicy inception Date

Insurers remain unburdened by the tax allocation process.Insurers remain unburdened by the tax allocation process.

For the states every dollar of premium is taxed but no dollar of premium is taxed For the states every dollar of premium is taxed but no dollar of premium is taxed twice. Each state taxes premium based on a fair nexus to the state.twice. Each state taxes premium based on a fair nexus to the state.

MARKET SHARE TAX ALLOCATION BENEFITSMARKET SHARE TAX ALLOCATION BENEFITS(continued…)(continued…)

This implementation meets the intent of NRRA/SLIMPACT goalsThis implementation meets the intent of NRRA/SLIMPACT goals

• SIMPLESIMPLE• UNIFORMUNIFORM• FAIRFAIR• EFFICIENTEFFICIENT

Because this approach is proportional, large surplus lines states will have an Because this approach is proportional, large surplus lines states will have an incentive to join.incentive to join.

DETERMINING STATE BY STATE MARKET SHAREDETERMINING STATE BY STATE MARKET SHARE

Several methods to make this determination can be employed.Several methods to make this determination can be employed.

If each state would begin to require surplus line brokers to identify each If each state would begin to require surplus line brokers to identify each transaction which is a multistate transaction, the gross premium on those transaction which is a multistate transaction, the gross premium on those transactions could be aggregated and reported.transactions could be aggregated and reported.

Another alternative in New York the top 20 excess line brokers and affiliated Another alternative in New York the top 20 excess line brokers and affiliated reported almost 90% of all premium related to multistate transactions. Those reported almost 90% of all premium related to multistate transactions. Those brokers could be asked to voluntarily assist in such calculations.brokers could be asked to voluntarily assist in such calculations.