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  




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              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);




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           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  




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          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:
           




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              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 with  the Annual Audited Financial  
                           Reports instructions contained in the annual  
                           statement instructions as adopted from time to  
                           time   standards 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