Senate Insurance & Commerce Committee
January 23, 2025
Senator Blake Johnson [00:00:00] Senator Hickey to go first with Senate Bill 70.
Senator Jimmy Hickey [00:00:13] Thank you, Mr. Chair. Members, I'm here to present Senate Bill 70. Jimmy Hickey with Arkansas Senate.
Senator Blake Johnson [00:00:20] Go ahead.
Senator Jimmy Hickey [00:00:20] All right. That's real complicated. Members, if you will, look at your bill that you have in front of you, lines 30 and 31. What this does is it extends so that if somebody's premiums are going to go up 25%, what we've had is, is that the insurance agent would have to be notified 30 days or extending that to 60 days. And then for the consumer, they only had to be notified for ten days. This is going to make it so they have to be notified within at least 30 days prior to that action. Of course, I think you all know the reason is insurance rates where they are, premiums have went up. So this will allow for a little more shopping time and make sure that maybe somebody can get their insurance before it's canceled.
Senator Blake Johnson [00:01:10] Are there any questions? Are there questions from members? Seeing none, is there anyone in the audience who wants to speak for or against the bill? Seeing none, you're welcome to close for your bill.
Senator Jimmy Hickey [00:01:25] I'm closed. Thank you, sir.
Senator Blake Johnson [00:01:26] Thank you, sir. And Motion by Senator Irvin. Second by Senator Penzo. Any discussion on the bill saying none, all in favor, say aye. All opposed like sign. Thank you, Senator. You passed your bill.
Senator Jimmy Hickey [00:01:44] Thank you. I appreciate you all.
Senator Blake Johnson [00:01:46] Thank you. Next, we'll go to Vice Chair, Senator Boyd. Senate Bill 47. There's an amendment we will pass around. I want members to have a chance to digest that. Senator, if you would explain your amendment.
Senator Justin Boyd [00:02:36] Yes, sir. So the amendment, and it'll be more clear once I start to explain the bill, but it was pointed out to me after I filed the bill that there were two places in Arkansas code where we had a definition of deposit account. And so I wanted to make sure we had consistency in the code. So this amendment makes sure that both places will say the same thing.
Senator Blake Johnson [00:03:11] Any questions from the members on the amendment? Senator Irvin.
Senator Missy Irvin [00:03:18] Thank you, Senator Boyd. So it looks to me that the amendment is basically a new bill. Is that correct? Or are you keeping-- I'm trying to follow it.
Senator Justin Boyd [00:03:30] So the title had to be updated because of the amendment. So that's the confusing part is the title had to change.
Senator Missy Irvin [00:03:39] But you're keeping section one of the current bill. You're keeping section one and keeping section two.
Senator Justin Boyd [00:03:52] Yes.
Senator Missy Irvin [00:03:53] So on page two, line 17, you're adding a section four.
Senator Justin Boyd [00:04:00] Yes. Adding section four. So that all places in Arkansas code would have the same definition of a deposit account.
Senator Missy Irvin [00:04:09] I gotcha. Okay. I just wanted to make sure I was tracking the amendment with the existing bill.
Senator Justin Boyd [00:04:15] Thank you.
Senator Missy Irvin [00:04:16] Thank you.
Senator Blake Johnson [00:04:18] Senator Murdock.
Senator Reginald Murdock [00:04:20] Thank you, Chair. Senator, can you just summarize in lay terms what you're trying to do with this bill?
Senator Justin Boyd [00:04:28] So right now I'm presenting the amendment. And so what I'm trying to do with the amendment is make sure that we're consistent throughout the code on what a deposit account is.
Senator Reginald Murdock [00:04:37] And that's correct. I'm sorry. I got ahead of myself.
Senator Blake Johnson [00:04:44] Motion on the amendment. And second by Senator Johnson. All in favor say aye. All oppose like sign. All right. Your bill as amended. Please present your bill as amended.
Senator Justin Boyd [00:04:57] Okay. So sorry. This microphone is a little different. If I struggle, let me just see if I can move it closer. That'll help. Okay. So let's start with what central bank digital currency is. And let's talk about what central bank digital currency is not. So what central bank digital currency is today, it's an idea. It doesn't exist. Okay. What it is not is it's not Bitcoin. It's not a cryptocurrency.
What it is, what the idea is, is the Central Bank of the United States, rather than issuing physical dollars, would issue digital currency. Okay. So that would fundamentally change, our bank has the capacity to, one, create a lot of privacy concerns for individuals because now the federal government knows where, when and how you're spending money or has that capacity. And then secondarily, we're no longer making physical deposits into our local banks. And that has the capacity to fundamentally change our banking system.
So what this bill does is it sets into place a speed bump should our federal government, should the central bank say we're going to begin replacing physical money with central bank digital currency. And it does this by defining what money is and what a deposit account is in the state of Arkansas with the uniform commercial code definitions. So Florida passed similar legislation. Other states have passed similar legislation. So we would not be the first. This is patterned after primarily Florida. So with that said, happy to try to answer questions.
Senator Blake Johnson [00:06:59] Senator Johnson.
Senator Mark Johnson [00:07:02] Thank you, Mr. Chairman. Senator Boyd, I just want to clarify a couple of things. When we say central bank, we're talking about the Federal Reserve.
Senator Justin Boyd [00:07:12] Yes, sir.
Senator Mark Johnson [00:07:13] Okay. There is a term I'm going to throw out and you tell me if I'm applying it correctly or not. That word is fiat currency. What the Fed does, and these green things I have in my pocket, those are fiat currency. There is an entity, the Federal Reserve, that tells us how much that's worth. Is that correct?
Senator Justin Boyd [00:07:35] That is my understanding.
Senator Mark Johnson [00:07:36] And one of the, I'll call it free market arguments, for digital currency cryptocurrency, and you mentioned some of them, Bitcoin probably being the best known is that it's not a fiat currency. It is absolutely determined by the laws of supply and demand.
What this thing you're going to talk about and define money, you're not going to-- I like the word speedbump. I like this, but unless I see something I really am worried about, I'm supporting your bill. But I want to just clarify that this would keep us recognizing an action like this by the Fed as being money for purposes of Arkansas law. Is that pretty well what it does?
Senator Justin Boyd [00:08:24] That's the point we're trying to get at because if the central bank issues digital currency, I have a lot of privacy concerns. I feel like it sets up the opportunity no matter what they say publicly for them to say, okay, well, now, hey, you're allotted $50 for gas in the month. Now you're at $50.01, we're cutting you off, right?
So I want to make sure we have a speed bump in place in the state of Arkansas to do what we can to protect our citizens if somehow we go down this road as a country of central bank digital currency, that we have something in place to help push back and say, let's think this through and make sure privacy concerns are addressed. Let's make sure control issues are addressed. Let's make sure the banking concerns that might exist because it could fundamentally change our banking system. So that's why I call it a speed bump, not an absolute roadblock.
Senator Mark Johnson [00:09:26] There would have been a time I thought this was unneeded and probably silly, but when I saw what happened in Canada when the truckers had their protest and Prime Minister Trudeau basically froze their money in the bank, and I realized that when the government can basically take your money, not a court order, not a due process thing, just say, well, you know, it's not yours anymore. You know, we're not gonna let you have it. I guess that was kind of a wake up call for me. So thank you for thinking of this. I'll support the bill. I've answered all my questions. Thank you, Mr. Chairman.
Senator Blake Johnson [00:10:03] Thank you, Senator. Senator Flowers.
Senator Stephanie Flowers [00:10:09] Thank you, Mr. Chair. Senator Boyd, do we presently use digital currency?
Senator Justin Boyd [00:10:19] Currently, we do not use central bank digital currency.
Senator Stephanie Flowers [00:10:22] No, digital currency.
Senator Justin Boyd [00:10:25] So like there are crypto-- there are things that I would refer to, and I'm not overly technical here, as digital currency. But what I'm talking about with this bill is not crypto currency, as you hear discussion on it. This is the central bank or the Federal Reserve. Rather than issuing hard physical dollars, they issue a digital currency. That's what I'm trying to put a speed bump up against.
Senator Stephanie Flowers [00:11:01] This whole concept of digital currency, crypto, all that, that's new and foreign to me. And I'm just trying to understand, since you say central bank digital currency, I want to know, is there such a thing now that is used. Digital currency, period.
Senator Justin Boyd [00:11:27] Someone might have a more technical definition. I would consider cryptocurrency a digital currency. But this bill doesn't affect that. This bill affects if the Central Bank of the United States creates its own digital currency and basically we're forced to that rather than a physical dollar or something else.
Senator Stephanie Flowers [00:11:53] Is a domestic bank generally a part of the Federal Reserve system?
Senator Justin Boyd [00:12:01] So what I would say is a domestic bank, if you're talking about the bank down the street, they bring in money, you go deposit your physical dollars there, they deposit it, they hold it, they have electronic accounts, and then they transfer money electronically based on deposits that have been made at the bank. If you have a central bank digital currency, you potentially no longer have those physical deposits.
Senator Stephanie Flowers [00:12:32] My question is, is this local bank or domestic bank a part of the Federal Reserve system?
Senator Justin Boyd [00:12:43] Yes.
Senator Stephanie Flowers [00:12:46] And so that being said, can federal legislation override what you are proposing to do here?
Senator Justin Boyd [00:12:57] So this is why I'm calling it a speed bump. There is the possibility that federal legislation could do that, but I would argue we have a 10th Amendment and we have states rights. And ultimately, the courts are the arbiters of, whether we like it or not, ultimately, the courts are the arbiters of what we can and can't do. So what I would say is this is a speed bump to help us send a signal, do what we can to say we have concerns about the concept of central bank digital currency.
Senator Stephanie Flowers [00:13:31] I understand that and if you allow me one more, Mr. Chair. Well, I'm just trying to understand what is the role of the Federal Reserve System in terms of laws or regulations regarding currency, whether you consider it digital or dollar bill or gold or whatever.
Senator Justin Boyd [00:13:54] So a report on their website is, is they're waiting for legislation from Congress. But my interpretation was that they didn't necessarily have to do that, but that's what they were waiting on.
Senator Stephanie Flowers [00:14:09] I don't know if you understood my question.
Senator Blake Johnson [00:14:14] Is anyone from the Bankers Association here today? Nobody. All right. Go ahead, Senator.
Senator Stephanie Flowers [00:14:27] You say somebody is waiting on some legislation. But there is a Federal Reserve system already in place. I just want to know, what is their role? What is their responsibility? Do they have a responsibility to define whether or not a local domestic bank can issue this?
Senator Justin Boyd [00:14:53] No. The local bank wouldn't be issuing this. It would be issued from the Federal Reserve. So rather than the Federal Reserve issuing a hard dollar, the Federal Reserve would issue digital currency. If they issue digital currency, that comes with tremendous privacy concerns.
Senator Stephanie Flowers [00:15:14] I'm tripped up by your added Section 44 on page two. It starts at line one and a digital monetary unit of account issued by the Federal Reserve System. So if local banks are a part of the system, I'm just trying to understand how does this all--
Senator Justin Boyd [00:15:45] It's complex, Senator. It is complex. I think we're all trying to grasp it.
Senator Stephanie Flowers [00:15:50] And I think we need to grasp it before we start putting in place some laws that may or may not be. I just want to know what I'm doing, what I'm voting on.
Senator Justin Boyd [00:16:04] So what I would say to you is the banking department is aware that this bill is filed. There's no one here from the banking industry that appears to be giving concerns. This has been done in other states. This isn't brand new to Arkansas. We're playing catch up with putting a speed bump in place. So that's why I'm comfortable moving forward with this.
Senator Blake Johnson [00:16:30] Thank you, Senator. So, Senator Boyd, banks transfer assets digitally. This does not interfere with that?
Senator Justin Boyd [00:16:45] That's the cultural part we're trying not to. I'm trying to put a speed bump in place so that we don't fundamentally change the banking industry, where we have some thoughtful input from the state of Arkansas before the federal government just makes a decision and says, we're going to do this whether you like it or not.
Senator Blake Johnson [00:17:02] Thank you, Senator. Is there any other questions? Senator Irvin and then Senator Flowers and then Senator Murdock.
Senator Missy Irvin [00:17:10] Thank you, Mr. Chair. So I was just curious as to, did somebody help you with this bill or bring the bill to you or, I guess, what's the origin of the bill? I'm just trying to understand the necessity of it. That's one question. Is there somebody that brought the bill to you that you're, or is this just something that you felt passionate about yourself or who did you work with on the legislation?
Senator Justin Boyd [00:17:42] So a constituent brought it to my attention that Florida had done it. Okay. So step number one. Then, there are a couple organizations out there that have model legislation that we look to to adopt model legislation.
Senator Missy Irvin [00:18:03] Do you mind saying who those are so we're aware?
Senator Justin Boyd [00:18:07] So ALEC is one of the entities that has model legislation.
Senator Missy Irvin [00:18:12] Okay. And then my second question is, I know I'm so excited and proud that we've got some people up in the federal delegation. And so it just came to my mind that our congressman, French Hill, is the chair of the Financial Services Committee. I'm just curious if you've had any discussion with him about this or kind of what you may, what may transpire under his leadership of that committee of financial services?
I would just think it would be a good resource for you to speak with him about these issues directly as it relates to all the different federal agencies and federal entities that you've listed here. Have you had those conversations or what your thoughts are about that?
Senator Justin Boyd [00:19:03] I mean, what I would say is we're the state of Arkansas and I appreciate that we have an Arkansan in those positions, but this conversation has been ongoing. He, to my knowledge, he's not reached out to any of us to have this conversation. I think what this does is it sends a signal to support him in pushing back on any nonsense about having central bank digital currency. That's what I see is this says the state of Arkansas doesn't want this. Or if we do want it, it needs to be very thoughtfully implemented to help protect against privacy concerns.
Senator Missy Irvin [00:19:40] I just offer it as a suggestion, as a resource.
Senator Justin Boyd [00:19:44] And I think it's great. I had not thought about that.
Senator Missy Irvin [00:19:47] I just thought maybe beneficial for you to reach out to him. Okay. Thank you.
Senator Blake Johnson [00:19:53] Senator Flowers.
Senator Stephanie Flowers [00:19:57] I'm still grappling with this idea of digital currency and I recall before the session speaking to somebody from Arkansas Bar that was proposing some legislation that would deal with, it may have been digital currency, it could have been crypto or something. I don't know. But you don't know that we use digital currency now in any way?
Senator Justin Boyd [00:20:32] Our banking system is based on hard dollars, not cryptocurrency.
Senator Stephanie Flowers [00:20:39] At all, at this time.
Senator Justin Boyd [00:20:42] Digital assets are transferred from bank to bank. Once you go make a physical deposit at the bank. But not digital currency. The United States has not gone down the road of a Federal Reserve system issuing digital currency. It's a policy discussion that they have that they're putting out.
Senator Stephanie Flowers [00:21:04] Okay. But if digital assets, you say, are deposited into bank accounts--
Senator Justin Boyd [00:21:11] Physical dollars are deposited, then they're put on a ledger is the way I understand it.
Senator Stephanie Flowers [00:21:17] Okay, so you didn't say digital currency.Where assets are deposited present.
Senator Justin Boyd [00:21:24] Right. That's correct. That's my understanding. I know of no place where we have central bank digital currency or central bank digital assets that you're going to the bank and depositing. You're going to the bank ultimately and depositing is a dollar, a physical dollar. That's what our current banking system is based on.
Senator Blake Johnson [00:21:45] Senator Flowers?
Senator Stephanie Flowers [00:21:46] Yes.
Senator Blake Johnson [00:21:49] The Federal Reserve does not recognize cryptocurrency as currency.
Senator Stephanie Flowers [00:21:55] Do they recognize digital currency?
Senator Blake Johnson [00:21:58] They have not adopted any digital currency as of today. But that is more or less a barter system created by private industry. And it's not considered as assets or currency by the Federal Reserve. This crypto that you hear about, it's not.
Senator Stephanie Flowers [00:22:24] Okay I'm not stuck on crypto. I'm just trying to figure out what is this digital currency. Is it something that credit cards--
Senator Blake Johnson [00:22:32] It's nothing right now.
Senator Stephanie Flowers [00:22:36] There is no thing?
Senator Blake Johnson [00:22:39] Nothing right now. And this is just saying Arkansans really don't want the crypto or the digital asset system. We want our monetary system based on the dollar and not the digital.
Senator Stephanie Flowers [00:23:03] If it doesn't exist, I mean, I don't understand why are we concerned about it.
Senator Justin Boyd [00:23:09] Because they have serious discussions about it existing.
Senator Blake Johnson [00:23:12] We do a lot of things like that.
Senator Stephanie Flowers [00:23:14] But, okay, I'll let this alone now. But I would like to have more information. And it seems to me like somebody from the banking--
Senator Blake Johnson [00:23:27] We will definitely get the Bankers Association and let them speak with you. And I wish there was some of them here today and I think they would have clarified it.
Senator Reginald Murdock [00:23:42] You guys just got my exact point. I mean, I think I know where the senator is going to protect, it's kind of consumer protection, to protect us from something that may be coming down the pike at some point. But as the senators are mentioning, it's not here yet. So there's a lot of mystery. So I, like you, wish that we had somebody from the banking industry here that could just talk a little more and just give us a little more information specifically about some of the questions that we have.
Senator Justin Boyd [00:24:11] So what I would say is the banking industry knows about this bill. I don't know why they're not here today, but I think if they were concerned about this bill, they would be here expressing their concerns. I think the fact that they're not here, knowing it was on the agenda, tells you what you need to know is they're not concerned about this. I'm not saying there endorsing--
Senator Reginald Murdock [00:24:31] Because it doesn't exist, probably.
Senator Justin Boyd [00:24:34] I have shared this with Lori Trogden. I have had a discussion with the people at the bank department. They know this is here.
Senator Reginald Murdock [00:24:45] That digital currency don't exist yet.
Senator Justin Boyd [00:24:47] Right. Well, that this legislation exists. So I really feel like if they were concerned that this was going to create a cog in the wheel on Arkansas that they would be here expressing their concerns. So that's what I'm trying to say is there's this discussion, we only meet every other year, it's probably not going to happen in the next four years. But I've been wrong before and I want to make sure that this state has the opportunity to send a signal that, I'm not calling it a roadblock. I think what this is is a speed bump to help make sure if the conversation accelerates, that we have a bump in the road to slow it down to make sure there's thoughtful implementation.
Senator Blake Johnson [00:25:35] Senator Johnson.
Senator Mark Johnson [00:25:38] Thank you, Mr. Chairman. Senator Boyd, would it be safe to say sort of in response to Senator Flowers' questions that cryptocurrency, which is a digital currency that is not government promulgated, I use the term fiat currency. Either way, it's basically, if you want to play in this game, you can.
And we give debits and credits of something that we all agree to, but it's not official as far as the government or any government is concerned versus taking that to the next level and having the Federal Reserve come up with their own version of that, which would not be voluntary. It would be in some ways mandatory of all citizens that earn and put money, in air quotes, money.
So your bill is to preempt the mandatory use of something that a separate group of people are using the equivalent thing voluntarily right now, and that's their right as free citizens. But this potentially, and I guess until we see the shape of something coming out of Congress or the Federal Reserve would only be speculative, but your bill would potentially at least temporarily stop that implementation in Arkansas for, as we say, all debts, public and private, and would perhaps cause a relook at anything that would come down the pike from the Fed or any other. And I know the Fed is private. It's not the government. But I guess it's a chartered corporation or something from the government.
But am I saying this right? Is that we, you and I anyway, don't want the government to force people to use this medium of exchange. For the time being, we'll just keep the medium of exchange that we're using right now. Is that a fair description of kind of what we're doing?
Senator Justin Boyd [00:27:55] Yes, sir. Because this gives all kinds of privacy concerns about how I want to spend my money, where I want to spend my money, how much of it I want to spend on something. Plus, the other issue, as I studied it, it has real concerns for fundamentally changing our banking system in the United States. So, yes, sir.
Senator Mark Johnson [00:28:16] So it protects us from a further concentration of power in one limited entity?
Senator Justin Boyd [00:28:24] Yes.
Senator Mark Johnson [00:28:25] Okay. Thank you, Senator. Thank you, Mr. Chair.
Senator Blake Johnson [00:28:27] Thank you, Senator Johnson. Senator Irvin.
Senator Missy Irvin [00:28:31] Thank you. I think it's important to state that the Arkansas Bankers Association and the banking department should be here in this committee. Whether they don't have an issue with the bill or not, we, as members of the Senate, need information and they need to be in this committee to answer our questions. And it's not about whether they're for or against your bill or anything like that. It's about letting us get the information that we need from them.
Because to your point, this could fundamentally change our banking system. What you just said, and they need to be in this room to answer these questions, because if these changes do fundamentally change our banking system, I want to know how. I want to know from the industry experts how that is. And I'm not an industry expert in the banking association. I mean, none of us are. So I think it's really important that people need to be here.
That is their job, to be here to answer these questions, so that you're not having to answer. But we need to be able to ask those people from the industry those questions. And so I don't think it has anything to do with what their opinion of the bill is. It's just really about us getting the information I think that we need. I think I just wanted to state that.
And then second, my question is-- and, again, I don't know if you could even answer this question or not, because I think it's the industry that needs to answer this question, is what I what I worry about-- because this isn't a thing yet, I guess, right? It's not a thing at the federal level, a potential, hypothetical, potential thing. But with that comes consequences of what happens at the federal level that if something happens at the federal level and we're in opposition or this language is opposition, is that potentially going to cause this huge disruption in the banking system for citizens?
I don't know the answers to those questions because I don't know what type of fundamental changes it could potentially be if they did something like this. And so what I don't want to do is pass something that gets us into a special session or whatever that we have to then come back and address. So for me, it's just really about getting that information about, to your point, Senator Boyd, what could fundamentally change our banking system. And I need to know what that is from the banking industry, to be frank. So it has nothing to do with you or this bill. I just need to have that information as a member of this committee. So you can absolutely respond if you--
Senator Justin Boyd [00:31:34] I mean, I have an answer. I mean, obviously, I've been thinking about this almost two years. Like this came to me right after our session ended. So I have been working on this. I've had a lot of time to get comfortable with this. What I would say is if that were of great concern, Florida wouldn't have done it. Tennessee wouldn't have done it. Whatever list of other states that have passed this wouldn't have done it. I don't think we're going to be in that kind of situation because we're not going to be on the boat alone. There are other states.
So I understand you're being uncomfortable. Mr. Chair, what I would say is, at this point in time, I can count, and I would ask if it's all right if I pull this bill down today, I invite someone from the banking industry to be here-- whether they're willing to show up and answer questions, I don't know the answer to that. I just know they know about it because I've had conversations and no one has expressed any concern outside of this committee about this bill. No one from the public has called me. Nobody from the banking industry has called and said, what are you trying to do? But I also respect that you maybe haven't had as much time to get comfortable with it.
Senator Missy Irvin [00:32:49] So you may also want to try to just engross the amendment. I mean, that's just a suggestion, whether you want to do that or not. But that's just a suggestion. You may want to engross the amendment. That way it's cleaner.
Senator Justin Boyd [00:33:03] Mr. Chair, if I wanted to engross the amendment, do I need to do something in committee?
Senator Blake Johnson [00:33:08] We have adopted the amendment. All you have to do is bring it to the floor, get it engrossed, and we'll have it back here in its full form.
Senator Justin Boyd [00:33:16] So I'm sorry to have wasted a bunch of your time today. When nobody in the public is having any issues with it, when the banking industry doesn't, I guess maybe because it's the first-- it's the second bill before the committee, whatever it is. But I will reach out, with your permission, I will see if they will come to try to address concerns and we'll go from there. Thank you, Committee, for your time today.
Senator Blake Johnson [00:33:45] Staff will help. We've already engrossed the amendment-- we've already adopted the amendment. So all he's got to do is get it to the floor and get in and get it engrossed. So we'll readdress that next week and have the Bankers Association here, so. Yes, ma'am.
Senator Missy Irvin [00:34:04] And maybe somebody from the Department of Commerce.
Senator Blake Johnson [00:34:09] We'll get everybody here that has a concern, with Commerce and the Bankers Association. I think she's traveling right now. And whenever I talked to her yesterday, she didn't voice any concerns with this bill. But it's better for everybody. We're early in the session and we can get this thing engrossed and have it in its full form. I always like that better anyway. You know, you're not dealing with an amendment. Yes, ma'am.
Senator Stephanie Flowers [00:34:47] I also point out on page one of the amendment, page one delete says leads, not lines. So the Bureau might want to check their spelling. They ought to have that on the word processor that they use.
Senator Blake Johnson [00:35:07] Thank you so much. Next Senate Bill 76. I'll hand the chair over to Senator Boyd.
Senator Justin Boyd [00:35:42] Thank you, Senator Johnson, please proceed with Senate Bill 76.
Senator Blake Johnson [00:35:48] Thank you, members. Thank you, Chair. Senate Bill 76 is dealing with surplus lines. The bill does not change existing public policy. Since 2015, the Arkansas Insurance Department has interpreted state law to exempt surplus line brokers from the 20% fee cap. Recognizing that the exemption is critical to provide insurance availability to Arkansas residents and the process for procuring surplus line policy is different than the standard admitted policies.
Costs associated with standard policy are backed into the premium and approved by the Department of Insurance, whereas the cost associated with distributing surplus lines policy are not included in the base rate provided by the surplus lines insurer. For that reason, surplus lines brokers frequently charge fees in order for profitability, find insurance solutions for hard to place risk after their decline by the standard market. If surplus line brokers cannot profitably place policies with surplus lines insurers, Arkansas businesses will have fewer insurance options or none at all.
It's worth noting that 44 states have no restrictions on surplus lines broker fees, including every state surrounding Arkansas. Other states that do provide restrictions on fees, no states include commissions and restrictions on the fee. So this bill is putting in a code what has been in rule by the Arkansas Department of Insurance since 2015. And it will help give reassurance to those surplus lines that it's in code rather than in rule and to help citizens of Arkansas in places that they might have trouble getting insurance by the standard lands. That's what the bill does. I have former insurance commissioner Alan Kerr here and he can help with with this and also I think the surplus lines, there should be industry brokers here also.
Senator Justin Boyd [00:38:35] All right. Any questions? Senator Murdock?
Senator Reginald Murdock [00:38:38] Yes. Thank you, Chair. My concern will be rates as we talk about these surplus lines and making sure that these rates are not something that's going to be a huge burden. I understand the nullification is here. And you say this has been going on as a practice since 2015 by rule. And now we're just putting a rule into statute. If you will, those rates associated, how have they been regulated previously? And maybe, Alan.
Senator Blake Johnson [00:39:13] You'll have.
Alan Kerr [00:39:22] Good morning, committee. Former Insurance Commissioner Alan Kerr. To answer your question, Senator, the rate structure will not change. It does not. Actually, this helps the rates by brokers being able to place those fees separately from the base premium. They are required by law to show them on the policy, show them to the public what the fees are, what the commissions are. And by doing that, they don't have to roll them into the rates and increase rates.
Senator Reginald Murdock [00:40:07] Give me an example of a surplus line broker.
Alan Kerr [00:40:10] Surplus lines would be someone who can't get a policy. None of the preferred markets will rate a particular type of risk. Let's say a contractor or someone like that who's had a couple of claims or something, and that risk is a little too high for the admitted market. So they have to go to a higher risk market. It's considered a high risk type of insurance market.
Senator Reginald Murdock [00:40:39] So you probably know where I'm going with my concern. It'll deal with predatory lenders. So, are we protecting our consumers from that same type situation here? Because you're saying it's for basically people who can't get the normal market, who are at high risk. So here's a market surplus lines market. But sometimes that can be outrageous. Is there caps here in place?
Because I think we currently have legislation that prevents predatory lending in Arkansas from-- what do you you call those lenders, title loans? You know, traditional banking. So this is for people that can't get a traditional line of insurance. And so how are we watching to make sure that doesn't be outrageous as it is in some other states?
Alan Kerr [00:41:38] Well, first off, it's a consumer friendly bill in that the market is going to be able to manage that. You have a competitive market in the surplus lines industry as well as the standard industry. People shop for rates. And if there's a gigantic fee on a particular risk, whereas another provider will not have that for you on there, obviously, that's where the market's going to go. So, I mean, it's a market bearing, a consumer bearing situation where they would shop that because all those fees aren't hidden there. They're presented to the insured. The fees, the commissions, all that. Whereas if you buy a policy from State Farm, you never see that. It's all rolled into the rate. And on the surplus lines market, it's different where it all it has to be spelled out.
Senator Justin Boyd [00:42:47] Senator Irvin.
Senator Missy Irvin [00:42:49] Thank you. I think Senator Murdock asked one of my questions. Appreciate you being here, Mr. Kerr. When you talk about the, on the bill on page two, the fee under subdivision of this section shall be reasonable in relation to the cost of underwriting, issuing and processing the policy or contract, can you define reasonable and what that means?
Alan Kerr [00:43:15] Well, reasonable would-- the fee is dictated by the cost of the underwriting. In other words, if you've got an apartment building that you need insurance on and I as the broker have to hire an inspector to go out and inspect that building, there's a cost involved in that. So the costs have to be reasonable. I can't just be an arbitrary number.
Senator Missy Irvin [00:43:43] Okay. Okay. So it has to go back to an actual action item.
Alan Kerr [00:43:48] Yes, ma'am.
Senator Missy Irvin [00:43:48] Okay. And then these are approved then by the insurance commissioner of the insurance department or would these be kind of considered the same as we do with other types of fees? In other words, is there anything that the insurance department or insurance commissioner reviews with these or anything like that?
Alan Kerr [00:44:10] Each policy's going to be a little different because each underwriting situation is going to be different. So it would be impractical for the insurance commissioner to approve each and every situation. That being said, in there, he does have the purview to decide what's reasonable.
Senator Missy Irvin [00:44:27] Okay. All right. Thank you.
Senator Justin Boyd [00:44:30] Senator Flowers.
Senator Stephanie Flowers [00:44:33] A couple of things. I wanted to mention that surplus lines broker, the president or somebody is here. I just wanted him identified or her identified. And the name of that person is what?
Alan Kerr [00:44:53] This is John Adams.
Senator Blake Johnson [00:44:55] Go ahead and come to the table.
Alan Kerr [00:44:57] Mr. Adams. He is the president of the Surplus Lines Association for Arkansas.
Senator Stephanie Flowers [00:45:04] Okay. And then my question is concerning on page two, lines two through four. It appears to be an exception made when a licensed property or casualty agent or broker refers a risk to a surplus line and broker licensed under this section 23-65-308 of the code. And it goes on. And I understood that part of the code to say somebody licensed in Arkansas as a surplus line broker. Am I right in that? Did I read that statute correctly? I had it pulled up. And so, the end question is, are they not subject to the cap of 20%?
Alan Kerr [00:46:04] Yes, ma'am. The agents are subject to the cap. Okay. The agent doesn't do anything but secure the customer. In other words, they're the customer that refers them to the surplus lines' broker. Surplus lines brokers do not talk to the public at all. They deal only with agents. And to keep the agents from tacking on too much of an additional fee, which some of them tend to do sometimes, they put a cap on the agent's side of 20% of whatever that premium is. So commissions, taxes and everything could not be more than 20%.
Senator Stephanie Flowers [00:46:48] I'm just trying to square, what does this mean? What does it mean?
Alan Kerr [00:47:00] It means that that cap does not apply to the broker, but applies to the agent.
Senator Stephanie Flowers [00:47:11] The cap does not apply to the broker, but rather the agent.
Alan Kerr [00:47:16] Yes, ma'am. The agent doesn't bear the--
Senator Stephanie Flowers [00:47:20] But it the agent or broker refers a risk, so the surplus lines broker that's licensed under this other statute, then it says this subdivision that has the cap or C1 or is it C1(b)(i), which is the 20% cap does not apply. I'm trying to visualize this.
Alan Kerr [00:47:51] You've got two entities involved. You've got a broker and an agent. Actually, there's three. There's a company that the broker represents, and then there's the broker and then the agent. The broker is kind of the middleman. Okay. But in a surplus line situation, the broker is responsible for all of the cost of writing that policy, the underwriting, the inspections, all of that upfront cost, and it is sometimes quite a bit.
Senator Stephanie Flowers [00:48:25] And so then are you saying that that surplus lines broker who's been referred, I guess, a customer, they can charge in excess of the 20% if it's warranted and if it's reasonable.
Alan Kerr [00:48:46] Correct. See the broker has to pay the agent the commission, and he has to do all that cost. And the commission, everything, is on the broker side.
Senator Stephanie Flowers [00:48:58] Well, if the broker is having to pay the agent, I mean, it just seems like this is kind of inverting the whole process. I mean, it seems like some more costs are being added on that wouldn't ordinarily be allowed.
Alan Kerr [00:49:26] No, those costs are always going to be there. Okay. We just--
Senator Stephanie Flowers [00:49:31] But you just said--
Alan Kerr [00:49:33] This is the way to keep that premium down so that it's not rolled into the premium.
Senator Stephanie Flowers [00:49:37] But it's not capped at 20%.
Alan Kerr [00:49:39] Not on the broker side. No, ma'am. It was never meant to do that.
Senator Stephanie Flowers [00:49:44] That broker gets to tap in and pay for any fee for referral?
Alan Kerr [00:49:54] Introduce yourself.
John Adams [00:49:56] My name is John Adams. So the mechanism works like this. The agent brings you something he can't place with the standard market. The way the rule is written, we're capped at 20%. We pay him a 12% commission. Say it's a $500 policy. We'll do $1,000 so it's simple. We would have $200 available to pay. The inspection fee would be $150. The API or the systems to look at the risk, whereas protection class, how far the fire hydrant is, all those things, that's going to be another $75. So when you get to the end of it, we would spend $400 for a $200 commission. And therefore we would have to raise the premium to cover all those costs. So instead of it being $1,000 premium, it would go to $3,000 or $4000 premium to pull those costs back in.
Senator Stephanie Flowers [00:51:04] The customer, are they allowed to pay those costs up front and not have them tucked into the premium if they can?
Alan Kerr [00:51:14] Well, so the way it is, you schedule the premium, you schedule the fee, you disclose that on an invoice that goes to the agent and to the insured. So they know about it all upfront. So there's no hidden things there. They know what their costs are going to be. They have reviewed it before they take that. So it just allows us not to raise the premium prices. We just, instead of we'll add $200 instead of $2,000, so it is actually a benefit to the consumer to do it this way.
Senator Justin Boyd [00:51:53] Senator Mark Johnson.
Senator Mark Johnson [00:51:55] Thank you, Mr. Chair. Mr. Kerr, could I throw out a theoretical and tell me if this is tracking on what we're talking about? Let's say I own a 10,000 square foot building and I want to get it insured. But I've had some ding on my credit or some kind of thing that might cause me to be forced into the surplus lines market. It's just a big steel building. So I want to get it insured. Well, the inspector or whoever doing this work to advise the company and you go out, say, okay, what is he storing in this building? Well, it's rebar. Okay, that's fine. It's not a big deal.
So, but let's say instead I'm storing fireworks, which might raise the risk significantly. There's a cost to determine those things. And you mentioned things like distance from a fire hydrant and things which are an underwriting consideration. So I guess what you're saying is since there is a cost to make those determinations, this 20% cap is waived because there is a hard cost involved of underwriting this. The alternative being I couldn't get insurance on this, Correct?
Alan Kerr [00:53:24] Correct.
Senator Mark Johnson [00:53:25] Is that what we're trying to do here? And is that a one time cost or at least a defined one? It's clear you all made it clear. It's transparent that the consumer knows what he's paying for. But is that the purpose of this to allow them to have-- I'm going to call it an extenuating circumstance of why they should be a little bit more than what the general policy price would be? Am I seeing that the right way?
Alan Kerr [00:53:51] Yes, sir. Yeah, you're pretty much spot on there.
Senator Mark Johnson [00:53:54] Okay. All right. And I understand it now. And thank you. Thank you, Mr. Chair.
Senator Blake Johnson [00:53:59] And also the current insurance commissioner is here and his deputy who deals with this on a current regular basis is here also, if the members would like to bring him to the table.
Senator Justin Boyd [00:54:13] Okay. Senator Murdock.
Senator Reginald Murdock [00:54:15] Okay. A quick question. So along the lines of Senator Johnson's example and also along the lines of Senator Flowers' question of them being able to possibly pay their upfront to not make it a part of the policy. What I want to talk about, as it renews, do these one time, this inspection, these things that happened at the origination of this, they don't have to continue to pay that when the policy renews because it's already determined if it's fireworks and it's hazardous has been determined. Inspector has come out. So we ain't going to keep paying that $200 or whatever that number is for the inspector each time.
John Adams [00:55:02] It's a complicated answer to that because it depends on what we're insuring and whether we have to inspect it again the next year. So if it's a warehouse that we're talking about and he stores various items, we will have to re inspect that next year to make sure he hasn't changed, he didn't go from rebar to dynamite.
Senator Reginald Murdock [00:55:21] So if everything remains the same.
John Adams [00:55:23] Yes. But we have to verify that it remains the same for the insurance company. And sometimes we do it every other year. Sometimes we do it every year. Sometimes we do it every third year, depending on what the risk is.
Senator Reginald Murdock [00:55:37] So just to be clear, if there is an original policy and a surplus line situation is determined by inspectors and those others that need to investigate that it's going to cost an additional $300-- I'm just using $300 as a number-- that's how we generate what that original number is for their cost. And a year later if it's an annual policy and nothing has changed, because even in my homeowner's or other insurances, there is questions that's asked of me, you know, if I had a pool or if I do certain things, then things do change, but that's generally a statement and a statement that's ratified through--
Alan Kerr [00:56:32] Verification and filling out that form.
Senator Reginald Murdock [00:56:35] Yes. That's not a cost. I can go get a-- person that's with that person has signed. I can get it notarized. So that happens many times to verify that things have not changed. What I'm scared of here is that there is a continued cost that never goes away. It really was a one time cost for you, but you continue to charge it to the consumer. Make me know that's not the case.
John Adams [00:57:05] Well, the way the model works is as soon as-- so three year loss run is the standard for the industry. When that gentleman has three years loss free, he's going to take it back to the standard market, away from us. So we serve that area where it's high risk and when it drops down in risk level, if he's no longer storing anything like fireworks and he's just doing rebar, I'm probably not going to write that. That will move back to the standard market.
Senator Reginald Murdock [00:57:38] That's a different question. I'm just saying.
John Adams [00:57:40] So what happens is the agent, every year, his agent is his advocate. And he'll come to us and say, Hey, our losses are good. We're moving that back to the standard market. So that's the agent's role in that. He'll either bring it to us-- we may not have it more than a year. What I'm trying to say, we don't keep this for 20 years. We'll keep it for a year or two years and then it'll go back to the standard market.
Senator Reginald Murdock [00:58:05] Okay, well, let me use the word if then. So if you keep it, if, am I going to be charged again for a one time fee that you incurred that I paid for initially? Upon renewal, I signed the verification that nothing has changed, will I have to pay that again?
Alan Kerr [00:58:26] It may be a reduced fee, but there will be some kind of fee on there. He still has to pay commission to the agent. He still has to pay the cost of putting it in their system and so forth. So it won't be a full blown inspection fee, but there'll be a fee of some kind. Instead of a $300 fee, it may be a $100 fee.
Senator Reginald Murdock [00:58:50] Yeah. You understand. I just want to make sense. And we don't have redundancy where it's not necessary.There's not an unnecessary collection.
John Adams [00:59:03] Let me see if I can clarify that for you. With a standard market policy, these costs are inside the premium. So you don't see them. In a surplus lines policy, the system to track the data, to report the data to the insurance company, that all is something we bear the cost of. Those fees cover the risk meter that we have to do to show them the crime score, the distance for the protection class. So those are ongoing things we have to produce every year for that insurance company. So it's not it goes away. Some of them do. And so the fees fluctuate depending on what our costs are going to be on that year.
Senator Reginald Murdock [00:59:45] So are you suggesting, make sure I'm clear with you, that in underwriting for the regular market that those one time costs, I'm calling them one time costs, that are built into the premium, you're saying even for the standard market, it stays is what you're suggesting. I want to make sure you're saying that.
John Adams [01:00:08] Yeah. So they have those fees built into their premium. And so you just don't see them because they do it all in one lump sum. So there are rules where they want us to have more transparency when it comes to a higher risk market. So we have to schedule.
Alan Kerr [01:00:24] Plus within the standard market, there's not that broker in the middle. Like your State farm agent is an agent of the company. There's not a broker in between. What they deal with is Lloyd's of London. They give them a premium period and a premium amount, and it's up to them to do all the required underwriting that Lloyd's of London sends them to do that.
Senator Reginald Murdock [01:00:55] So I'll say something kind of jokingly, but it crosses the insurance world. We hear terms of these third party people, brokers, PBMs, people that, yeah, yeah. Okay, you know.
Alan Kerr [01:01:10] Well let's not put that industry in the PBM category, Senator. Yeah they're not quite that bad.
Senator Justin Boyd [01:01:22] I reflect Senator Murdock's concern about the use of broker in an insurance discussion. Senator Flowers, you had a question?
Senator Stephanie Flowers [01:01:33] Yes. So a person seeking insurance through a surplus line, can one just go to a surplus line broker?
Alan Kerr [01:01:53] No, ma'am.
Senator Stephanie Flowers [01:01:53] You have to have an agent?
Alan Kerr [01:01:54] You have to have an agent. Right. Right. They're not allowed to talk to the public. They just deal with agents.
Senator Stephanie Flowers [01:02:01] Okay. Thank you.
Senator Justin Boyd [01:02:04] Okay. Any further questions? Seeing none, we only had one person signed up to speak on the bill. Mr. Adams. He's already spoken. Is there anything else you need to say or did you just--
John Adams [01:02:17] Just wanted to reiterate, this has been the process for the last ten years. I would just put it in the code and we appreciate a good vote.
Senator Justin Boyd [01:02:26] Okay. So, Senator Johnson, are you closed for your bill or do you want to say something?
Senator Blake Johnson [01:02:31] Appreciate all the discussion and consideration for the customers here. But this gives the consumers an ability to be insured that they might not otherwise be insured. And hopefully by putting this in the code, it will attract more surplus lines to the state of Arkansas being solidified in code rather than just in rule and make that market more competitive for the consumer. So I would appreciate a good vote and make a motion to adopt or accept.
Senator Justin Boyd [01:03:08] I've got a motion. We have a second. All in favor say aye. Any opposed same sign. Hearing none, senator, your bill passes.
Senator Blake Johnson [01:03:41] Senator Boyd has Senate Bill 48, and he's going to skip over that. He's working on that bill. And that's all the business that I had before me unless other members have something. We are adjourned until Tuesday and we'll try to get that engrossed on the floor with members' help and get that bill back here and get the Bankers Association. Thank you. We're adjourned.
