Insurance is regulated almost exclusively at a state level, unlike the other primary sectors of the financial services industry, banking and securities. Although the Supreme Court has ruled that Congress has the power to regulate insurance, the 1945 McCarran-Ferguson Act devolved this power to the individual states, and this was specifically reaffirmed in the 1999 Gramm-Leach-Bliley Act. It has long been recognized that some uniformity in insurance regulation is desirable as it allows greater efficiencies in the insurance market. This argument has grown stronger as insurers compete more with banks and securities firms, who do have uniform regulation, and as capital markets have become more globalized. Insurers rely increasingly on global capital markets both as a place to invest premiums that are not quickly paid out in claims and as a source of funding, particularly after a catastrophe that causes large losses. Recognizing the need for relatively standardized regulation, the individual states have developed model rules and regulations through the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL). Harmonization efforts by the states, however, have been hampered by the lack of authority invested in either the NAIC or NCOIL. Although both are made up of public officials, the organizations themselves are voluntary, non-governmental associations and cannot require that any states enact their models. As a consequence, there is significant variation in how different states regulate insurance and there have been various calls for Congress to act through a federal charter or some other kind of federal intervention. The recent financial crisis added an additional argument for increased federal attention to the regulation of insurance, particularly with the failure of AIG, a company that happened to be the largest surplus lines insurer in the United States. Surplus lines insurance regulation differs from other insurance regulation both in substance and in the primary focus. In regulating regular insurance transactions, much of the state's focus is on the insurer itself. States have specific requirements for financial solvency, including how much capital an insurer must hold, and how the insurer can invest this capital. In cases of insolvency, states have established guaranty funds, funded by the rest of the insurers in the marketplace, to pay off the insolvent insurer's claims. The states also regulate both the substance of an insurance policy and the price of that policy, with many states requiring specific state approval before policy terms or prices can be changed. In surplus lines insurance, states have some oversight on the solvency of insurers, generally requiring that financial information be filed by surplus lines insurers to judge whether the insurers are sufficiently capitalized. There is, however, no participation in state guaranty funds by surplus lines insurers, nor state oversight of policy terms and prices charged. Most surplus lines transactions revolve around an intermediary, typically an insurance broker, who may specialize in the unusual risks that require such coverage. Because they have relatively little oversight on surplus lines insurers themselves, the states generally focus their attention on these intermediaries in regulating surplus lines insurance. To operate as a surplus lines broker, most states require an additional license on top of the license required for insurance brokers in general. To retain this license, surplus lines brokers are required to take various steps with surplus lines transactions that are not required in regular insurance. The first step in a surplus lines transaction is generally a state-required "diligent search" of the regular insurance marketplace to establish that there is no licensed insurer available to offer the required coverage. Typically, this requirement is satisfied by having some number, usually three to five, licensed insurers decline to offer coverage with the broker being responsible for an affidavit describing the search and certifying that no coverage is available in the licensed market. In some cases, states have established lists of coverages that are almost always placed in the surplus lines market and thus are exempt from the diligent search requirements. Once the consumer's eligibility to use the surplus lines marketplace is established following whatever state rules are in place, the broker would then approach various surplus lines insurers seeking the desired coverage at a suitable price. At this point, while the consumer is outside of the regular insurance market, the states generally continue to establish standards to protect consumers against surplus lines insurers who might be unable to pay claims that are made. Some states establish a list of eligible surplus lines insurers, and state-licensed brokers are only allowed to transact with insurers on that list. Others take the opposite approach and issue a list of ineligible insurers that may not be used by state-licensed brokers. A third approach is to make the brokers responsible if a surplus lines insurer refuses or is unable to pay legitimate claims; this is seen as causing the broker to be more cautious as to which insurance companies are used. States also generally require that brokers provide specific disclosure statements to clients purchasing surplus lines insurance detailing that the insurance is not subject to the same regulatory oversight as insurance bought from state licensed insurers. All states levy specific premium taxes on insurance and generally require a licensed insurer to collect and remit these taxes as a condition of licensure. With the absence of licensure requirements on surplus lines insurers, the requirement to remit taxes is placed on the state-licensed broker. The precise amount of the tax depends on individual state laws. The situation becomes somewhat unclear, however, when the consumer, the broker, or the insured property are in different states. Such a multi-state situation requires apportioning the premium taxes among the different states. State laws, however, differ significantly not only on the amount of such taxes but also on what exactly is to be taxed and how that tax should be apportioned among the multiple states. The property/casualty insurance market has been marked by the so-called insurance cycle, a tendency to have alternating periods of high prices and short supply ("hard markets") with periods of low prices and plentiful supply ("soft markets"). The size of the surplus lines market has been significantly affected by these cycles, with surplus lines growing faster than the entire market in hard markets and more slowly in soft markets. In the past 30 years, there have been generally hard markets in four periods: the late 1970s, the middle 1980s, the early 1990s, and the early 2000s. Growth in net premiums for U.S. professional surplus lines insurers in three of these four periods has reached 70% at the peak and then dropped to nearly zero or below within a few years afterwards. In 2008, surplus lines direct premiums totaled $34.4 billion, 13.8% of the total commercial lines premiums of $249.3 billion. The surplus lines market in the United States has two large groups, AIG and Lloyd's of London, which had 23.5% and 19.7% of the market respectively. The next largest is Zurich Financial with 5.0% market share, which was followed by a number of companies in the 2% to 4% range. The 10 th -largest company had a 2.1% share, whereas the 20 th had a 1.1% market share. Senators John Sununu and Tim Johnson introduced S. 2509 on April 5, 2006, and it was referred to the Senate Banking, Housing, and Urban Affairs Committee. The committee held two hearings on general insurance regulation in July 2006 where the bill was discussed, but it did not take other action on S. 2509 . Although not directly addressing surplus lines insurance, the bill could potentially have had a significant impact on the operation of the current surplus lines market. S. 2509 would have created a federal charter for insurers and insurance intermediaries and given them the choice of operating under the federal system instead of the state system. Holders of a federal license would have been able to operate throughout the United States without separate state insurance licenses. In addition, the National Insurance Act would have preempted state laws requiring product and price approvals for federally chartered insurers. A federal charter as envisioned in S. 2509 would thus offer many of the same freedoms currently enjoyed by surplus lines insurers, namely, the ability to sell insurance across the country without individual state licenses and with product and rate flexibility. At the same time, S. 2509 would have offered the possibility of avoiding the conflicting state regulatory system that surplus lines insurers currently point to as a significant burden. Representative Ed Royce introduced H.R. 6225 on September 28, 2006. It was jointly referred to the House Committees on Financial Services and on the Judiciary. Although not identical to S. 2509 , the bill was essentially similar and would have created the same dual regulatory system with both federal and state charters available for insurers and insurance intermediaries. No committee hearings were held on H.R. 6225 . Passage of either version of the National Insurance Act of 2006, however, would not have offered a uniformly positive federal option from the viewpoint of surplus lines insurers. Unlike current state laws for surplus lines insurers, insurers with a federal charter would have been required to participate in state guaranty funds. In addition, federally chartered insurers would likely have had more stringent financial oversight than the states currently undertake with surplus lines insurers. It is difficult to predict whether large numbers of surplus lines insurers would actually opt out of the state system until the details of a federal chartering system were put in place. The largest surplus lines insurer, AIG, would seem very likely to become a national insurer, as its then-chairman testified before Congress supporting an optional federal charter in 2002. A.M. Best's 2006 survey of the surplus lines industry concluded, however, that "whether or not the National Insurance Act becomes a reality, surplus lines insurers will continue to play a major role in providing specialty coverage to commercial insurance consumers." Representative Ginny Brown-Waite, along with 16 cosponsors, introduced H.R. 5637 on June 19, 2006. It was referred to the House Financial Services Committee where hearings were held and the bill amended and reported on to the full House ( H.Rept. 109-649 ). H.R.