BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 299 (Assembly Insurance Committee) Hearing Date: July 9, 2009 As Introduced: July 2, 2009 Fiscal: Yes Urgency: No SUMMARY Would make a number of technical, corrective and clarifying amendments to the Insurance Code and the Vehicle Code. DIGEST Existing law 1. Requires the Insurance Commissioner (IC) to annually mail a notice to every domestic insurer, specifying the "reciprocal states." A domestic insurer is prohibited from selling insurance in a "reciprocal state" unless the insurer is authorized pursuant to the laws of that other state to transact insurance (Section 706.7 of the Insurance Code); 2. Authorizes the IC to examine any insurer as often as he/she deems it appropriate, and requires the IC to conduct an examination of every "admitted insurer" at least once every five years. (An "admitted insurer" is an insurance company entitled to transact insurance in this state as a result of meeting the conditions required by law.) In determining the nature and frequency of the examination, the IC shall consider the results of financial statement analyses and ratios, changes in management or ownership, actuarial opinions, reports of independent certified public accountants, and other criteria set forth in the Examiner's Handbook adopted by the NAIC (Section 730 of the Insurance Code); 3. Allows the IC to use and, if appropriate, to make public any final or preliminary examination report, any examiner or company work papers or other documents, or other information discovered during the course of the examination in the furtherance of a legal or regulatory action which the IC AB 299, Page 2 deems appropriate (Section 735.5 of the Insurance Code); 4. Requires the expenses of insurer examinations incurred by the IC to be payable by the insurers, except that special examinations which are in addition to regular examinations may be at the expense of the state in the discretion of the IC (Section 700.2 of the Insurance Code); 5. Requires all insurers doing business in this state to have an annual audit conducted by an independent certified public accountant. The audit shall be conducted in conformity with the Annual Audited Financial Reports instructions contained in the annual statement instructions adopted by the NAIC (Section 900.2 of the Insurance Code); 6. Authorizes the IC to grant a 30-day extension on the filing of the annual audit upon a showing by the insurer and its independent certified public accountant of the reasons for the extension request and the determination by the IC of substantial cause for an extension (Section 900.2 of the Insurance Code); 7. Requires requests for an extension to be submitted in writing within 20 days of the due date (Section 900.2 of the Insurance Code); 8. Requires the IC to permit the deposit of securities on behalf of policyholders and creditors of the insurer in the State Treasury. This provision also states that this authority is subject to two obsolete sections of law (Sections 11715 and 11716 of the Insurance Code), if applicable (Section 942 of the Insurance Code); 9. Allows domestic incorporated insurers to invest their assets in the purchase of certain securities or in loans upon such securities if they conform to specified conditions including, in connection with loans not governed by an obsolete code section (Section 1176 of Insurance Code), the amount loaned does not exceed 85% of the market value (Section 1170 of the Insurance Code); 10. Allows domestic incorporated insurers to invest in accounts in banks or savings and loan associations to the extent the accounts are insured by an agency or instrumentality of the federal government (Section 1182 of the Insurance Code); AB 299, Page 3 11. Limits the percentage of excess funds investments that can be made in a loan to any one borrower, including all affiliates, to 10% of the capital stock and surplus or 1% of the admitted assets of the lending insurer, whichever amount is greater (Section 1197 of the Insurance Code); 12.Prohibits domestic insurers or commercially domiciled insurers from entering into specified transactions unless they have notified the Insurance Commissioner (IC) of their intent to enter into the transaction in advance of entering into the transaction and the commissioner fails to prohibit the transaction. 13.Defines a fraternal benefit society as an incorporated society or supreme lodge without capital stock conducted solely for the benefit of its members and members' beneficiaries and not for profit. Under existing law, a fraternal benefit society may issue certificates of insurance providing for the payment of life and disability insurance benefits. 14.Requires fraternal benefit societies to use mortality tables approved by regulation promulgated by the IC for purposes of determining actuary values. 15.Requires life and disability insurance companies to use mortality tables approved through bulletins issued by the IC for purposes of determining actuary values. 16.Requires policies of automobile insurance to provide for the replacement of a child passenger restraint system that was in use by a child during an accident. This applies to automobile liability insurance, automobile collision coverage, and automobile physical damage coverage (Section 11580.011 of the Insurance Code). 17.Provides that all orders or pleadings on the Department's website pertaining to disciplinary proceedings against a licensee are to be removed 10 years from the date the action becomes final. This bill Would make a series of technical non-controversial changes to AB 299, Page 4 laws governing the authority and duties of the IC and insurance companies. Specifically, this bill: 1. Would require the IC to mail a notice every four years to every domestic insurer (i.e., California-domiciled insurance company), specifying the "reciprocal states." A "reciprocal state" is a state with laws that prohibit an insurer based in that state from insuring the lives or property located in California unless that insurer holds a valid certificate of authority issued by the IC; 2. Would add the following information on which the IC is required to consider when determining the nature and frequency of an examination of an insurer: a. market analysis results including consumer complaint analysis, evaluation of recent and ongoing regulatory activities; b. analysis of data derived from industry surveys or interrogatories; and c. other criteria in the Market Regulation Handbook adopted by the National Association of Insurance Commissioners (NAIC); 3. Would add market analysis data to the list of information that may be shared with other government entities and to the National Association of Insurance Commissioners, provided that the recipient of the information agrees to main confidentiality of the information; 4. Would clarify that insurer analyses as required in Section 730 to be at the expense of the insurer; 5. Would require the mandatory annual audit of all insurers doing business in this state to include required auditor and management reporting in conformity with the standards adopted by the NAIC; 6. Would permit the IC to grant multiple 30-day extension and require insurers to request the extension within 10 days of the audit due date; 7. Would correct reference to 2 non-existent sections in the Insurance Code to accurately reference Section 11691, which applies to deposits by workers' compensation insurers; 8. Would correct an obsolete reference to law that allows AB 299, Page 5 domestic incorporated insurers to invest their assets in the purchase of certain securities or in loans upon such securities if they conform to specified conditions; 9. Would allow domestic incorporated insurers to invest in credit unions to the extent the accounts are insured by an agency or instrumentality of the federal government; 10. Would limit the percentage of excess funds investments that can be made in a loan or any other obligation to any one borrower, including all affiliates, to 10% of the capital stock and surplus or 1% of the admitted assets of the lending insurer, whichever amount is greater;11.Would require policies of automobile insurance to provide for the replacement of a child passenger restraint system that was in use by a child during an accident, or if the child passenger restraint system was in the vehicle and it sustained a loss covered by the policy. This applies to automobile liability insurance, automobile collision coverage, and automobile physical damage coverage. 12.Would require insurers to give the IC advanced notification of its intent to enter into tax sharing agreements. 13.Would authorize fraternal benefit societies to use mortality tables approved by bulletin (not just through regulations) issued by the IC for purposes of determining actuary values. 14.Would provide that if an enforcement action against a licensee is withdrawn, then each pleading, document, or order against that licensee shall be removed from the Department's web site within 30 days of the withdrawal. If a matter involves multiple licensees and the DOI withdraws all allegation against one or more of the licensees, the DOI will be required to post appropriate clarifying documents indicating the action has been withdrawn on the website. COMMENTS 1. Purpose of the bill This committee bill incorporates a series of corrective and clarifying amendments suggested by the Department of Insurance, which are explained below: AB 299, Page 6 Section 1 of the bill would require the notice to domestic insurers of "reciprocal states" to be made every four years, instead of annually, because that notice is rarely needed, and existing California law now makes it possible for the IC to stop unlawful transactions by non-domestics directly. This change will save the Department time and the cost of updating a bulletin which is very seldom used or changes in content. Sections 2, 3, and 4 of the bill would require new factors for the IC to consider in determining the nature and frequency of examinations for insurers. This section also clarifies that the analysis performed is at the expense of the insurer being examined. Section 5 of the bill would require the mandatory audit of insurers to comply with the NAIC accreditation requirements and improve the quality of financial reporting by increasing accountability of management oversight and provides authority for the IC to promulgate regulations. Also would permit the IC to grant multiple 30-day extension and require insurers to request the extension within 10 days of the audit due date. Sections 6 and 7 of the bill would make technical corrections to three code references. Section 8 of the bill would allow insurers to invest in credit unions and, thereby, provide another option that can help in making community development investments. Section 9 of the bill would clarify that limits on excess funds investments applies to both loans and obligations. This would address an NAIC accreditation requirement that calls for state laws to address single investment limits. Section 10 would require an insurer to give the Insurance Commissioner advanced notification of its intent to enter into tax sharing agreements. Section 11 makes only a technical, nonsubstantive change to renumber a duplicate section in the Insurance Code. Section 12 would authorize fraternal benefit societies to use mortality tables approved by bulletin (not just through regulations) issued by the Insurance Commissioner for AB 299, Page 7 purposes of determining actuary values. Section 13 of the bill would provide that child safety seats that are damaged during an event such as auto theft, fire or collision where the seat is destroyed or damaged, would be covered under an automobile policy. The Department reports that although some insurers interpret "use" of the child passenger restraint system as "being available for use" others take a more literal approach to the word "use" such as attempting to avoid replacement if that system is in a stolen, unoccupied vehicle. This change is intended to broaden the opportunities for coverage for child passenger restraint systems under an automobile insurance policy. Section 14 revises the law governing the Internet posting of all orders or pleadings on the Department's website arising from disciplinary proceedings to provide that if an enforcement action against a licensee is withdrawn, then each pleading, document, or order against that licensee shall be removed from the Department's web site within 30 days of the withdrawal. If a matter involves multiple licensees and the DOI withdraws all allegation against one or more of the licensees, the DOI will be required to post appropriate clarifying documents indicating the action has been withdrawn on the website. 2. Author's Amendments to be Offered in Committee: i. The Department is requesting an amendment to Insurance Code Section 900.2 to clarify the Commissioner's authority to promulgate all of the substantive provisions of the NAIC Annual Financial Reporting Regulation. The proposed amendment will conform the existing grant of authority in the Insurance Code to current provisions and terminology used to describe these matters in the NAIC as follows: 900.2. (a) All insurers doing business in this state shall have an annual audit by an independent certified public accountant. The audit , including required auditor and management reporting, audit committee and its AB 299, Page 8 membership, and other aspects of the audit content and process, shall be conducted , and the audit report prepared and filed , in conformity withthe Annual Audited Financial Reports instructions contained in the annual statement instructions as adopted from time to timestandards adopted by the National Association of Insurance Commissioners. ii. To conform AB 299 to AB 3054 as approved last year, and for internal consistency with the use of the term "obligor" as added by this bill, amend Insurance Code Section 1197 by inserting on page 8, line 26, after "loan", the phrase "or any other obligation" 3. Support . The State Department of Insurance is the sponsor of the bill. The Department states that it is an omnibus bill which will incorporate a series of corrective and clarifying amendments. 4. Opposition . None received. 5. Prior Legislation AB 3054 of the 2007-2008 legislative session was an essentially identical measure that was sent to the Governor but subject to a veto for reasons unrelated to its content last fall. SB 203 (Lewis) Ch 28, Statutes of 1997 allowed the Insurance Commissioner to approve and issue mortality tables by bulletin as discussed above. 6. Veto Message In his 208 message vetoing AB 3054 the Governor did not identify any substantive concerns with AB 3054, stating only as follows: To the Members of the California State Assembly: I am returning Assembly Bill 3054 without my signature. The historic delay in passing the 2008-2009 State Budget has forced me to prioritize the bills sent to my desk at the end of the year's legislative session. Given the delay, I am only AB 299, Page 9 signing bills that are the highest priority for California. This bill does not meet that standard and I cannot sign it at this time. Sincerely, Arnold Schwarzenegger POSITIONS Support California Department of Insurance America's Health Insurance Plans Oppose None Principal Consultant: Kenneth Cooley (916) 651-4102