BILL ANALYSIS
AB 1708
Page 1
Date of Hearing: April 7, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 1708 (Villines) - As Amended: April 5, 2010
SUBJECT : Surplus Lines Insurers: Capital and Surplus
SUMMARY : Increases the capital and surplus requirements for
nonadmitted insurers to be placed on the list of eligible
surplus lines insurers from $15 million to $45 million.
Specifically, this bill :
1)Raises the minimum capital and surplus requirements for
nonadmitted insurers to be placed on the List of Eligible
Surplus Lines Insurers (LESLI) from $15 million to $45
million.
2)Increases from $15 million to $25 million the amount of this
capital and surplus that must be in cash or liquid securities.
3)Provides that any nonadmitted insurer already on the LESLI
list that does not currently meet the new capital and surplus
requirements is entitled to a phase-in as follows:
a) by December 31, 2011, capital and surplus must total $30
million; and
b) by December 31, 2012, capital and surplus must total $45
million.
EXISTING LAW :
1)Requires insurers that "transact" insurance in California to
be "admitted" to transact in the state. "Admitted" is the
Insurance Code terminology for being licensed to transact
insurance in this state.
2)Authorizes "nonadmitted" insurers to sell insurance to
Californians on a limited basis, through specially licensed
"surplus lines brokers."
3)Provides broadly that nonadmitted insurers may sell insurance
to Californians when the insurance is needed by the
policyholder, but generally not available from admitted
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insurers.
4)Requires that, before selling insurance on a nonadmitted basis
in California, the nonadmitted insurer must apply to be placed
on the LESLI list, and the Insurance Commissioner (IC) must
approve the application based on statutory criteria before
placing the nonadmitted insurer on the list.
5)Prohibits in virtually all circumstances a nonadmitted insurer
from selling insurance in California except though a surplus
lines broker, who reaches out and places the California
insurance with the nonadmitted insurer outside of the state.
In this sense, the nonadmitted insurer is not "transacting"
insurance in California.
6)Places a series of duties on the surplus lines broker to
ensure that these requirements are met.
7)Recognizes the role of the Surplus Lines Association (SLA), a
nongovernmental entity, as an administrative agent of the IC
for carrying out certain functions, including a role in tax
collection and a role in pre-screening applicants for
placement on the LESLI list.
8)Establishes the California Insurance Guarantee Association
(CIGA) as essentially the guarantor for the payment of covered
claims in the event an admitted insurer becomes insolvent.
There is no comparable entity for nonadmitted insurers.
FISCAL EFFECT : Undetermined minor administrative costs on the
Department of Insurance (DOI). The bill is not tagged fiscal.
COMMENTS :
1)Purpose . According to the author, and the sponsor, the DOI,
the current capital and surplus requirements are over 15 years
old, and experience has taught that levels much higher than
current requirements are necessary for security in our current
volatile economic times. The sponsor points out that 80% of
the insurers currently on the LESLI list, accounting for over
90% of the premium written by nonadmitted insurers, already
meet or exceed the bill's proposed capital and surplus
requirements. From this fact, DOI argues that the market has
already spoken, and that capitalization at the levels proposed
by the bill are consistent with what the market has determined
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is necessary to protect solvency and the interests of
policyholders and claimants.
2)Background . In the 1980s and early 1990s, the surplus lines
market was far less regulated than it is today. As a result,
extremely poorly capitalized insurers would start writing
business to unsuspecting consumers, and all too frequently
these insurers would default on their obligations. The
automobile insurance crisis was at the point where hundreds of
thousands of Californians were purchasing basic automobile
insurance from nonadmitted insurers.
At that time, the law did not require nonadmitted insurers to
apply for and be placed on an eligibility list. Indeed, there
were not even financial filing requirements. The DOI
attempted to deal with this problem by adopting a regulation
that mandated a contemporaneous financial filing at the time
when a nonadmitted insurer first sold a policy to a
Californian. However, even this approach proved inadequate,
as the courts made it extremely difficult for DOI to shut down
financially unsound nonadmitted insurers, because these
insurers had established a "property right" in the business
that they were conducting.
The Legislature responded to this problem by enacting laws that
in most circumstances prohibit private passenger automobile
insurance to be sold by nonadmitted insurers, and by creating
the LESLI list to ensure no nonadmitted insurer could
establish the foothold "property interest" unless the IC had
affirmatively approved the nonadmitted insurer's status as
financially sound.
3)Support . In support of this proposal, DOI argues that with
the continuing defaults in loans, many of which support
securities that insurers invest in, it is only prudent to
ensure that the nonadmitted insurers whose policies are not
backed by a guarantee association are financially stable. DOI
notes that New York, the no. 1 state in nonadmitted premium
volume (Florida is currently no. 2, and California is no. 3)
has already implemented, and is currently adopting formally by
regulation, the $45 million capital and surplus rule. This is
further evidence of the consensus within the nonadmitted
community - insurers and regulators alike - that increasing
the capital and surplus requirements for nonadmitted insurers
is appropriate.
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The SLA, the California Insurance Wholesalers Association
(CIWA), and the Insurance Brokers and Agents of the West (IBA
West) all write in support of this proposal, making arguments
similar to the points made by the DOI. The SLA, as mentioned
above, is a private entity that carries out public functions
as an agent of the IC. CIWA is an association of surplus
lines brokers, and IBA West includes among its insurance agent
and broker members individuals and firms licensed as surplus
lines brokers. In the view of these organizations, the bill
is necessary to protect the interests of the policyholders -
their customers - to whom they are selling surplus lines
insurance.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Insurance
Surplus Lines Association of California
California Insurance Wholesalers Association
Insurance Agents and Brokers of the West
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086