BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 1708 (Villines) Hearing Date: June 16, 2010
As Amended: May 3, 2010
Fiscal: No
Urgency: No
VOTES: Asm. Floor(04/15/10)70-0/Pass
Asm. Ins. (04/07/10)12-0/Pass
SUMMARY Would strengthen the capital and surplus requirements
for surplus lines companies, and specifying the kinds of
investments the funds can be comprised of, with authority in the
Commissioner to disallow specific assets, and provides for a
staged transition to the new capital and surplus requirements by
December 31st, 2013.
DIGEST
Existing law
1.Requires insurers wishing to "transact insurance" in
California to be "admitted" , which means licensed by the
California Department of Insurance (CDOI) for that purpose;
2.Provides, as a key element of licensing, financial oversight
in the form of solvency monitoring activities. The primary
focus of financial analysis at the CDOI is on licensed
multi-state insurers and licensed California-domiciled
companies;
3.Authorizes licensed "surplus lines brokers", when a risk
cannot be placed with an admitted insurer, to place the risk
with an insurer that is not fully licensed in California,
subject to rules and financial requirements designed to
strengthen the public's confidence when dealing with such
entities;
4.Requires that such nonadmitted insurers must apply for
placement on the DOI's "List of Eligible Surplus Lines
Insurers" (LESLI) list, and they cannot be added until the
AB 1708 (Villines), Page 2
California Insurance Commissioner (CIC) approves the
application as meeting statutory requirements;
5.Requires nonadmitted companies, also referred to as Surplus
Lines insurers to maintain minimum capital and surplus of
$15,000,000 (Fifteen million dollars) in assets of a type that
meet the requirements of California's General Investment law;
additional revenues beyond the 15 Million dollar minimum can
be held in assets of the type authorized under California's
Excess Funds law;
6.Requires insurance exchanges, which are a class of
state-regulated entity which can accept surplus lines risks,
to maintain capital and surplus in the same amount as a
surplus line company;
7.Prohibits, for most purposes, 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;
8.Imposes various duties on surplus lines broker to ensure
compliance with the Surplus Lines law;
9.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;
10.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.
This bill
1. Would increase the current 15 million dollar capital and
surplus requirement for surplus line insurers and insurance
exchanges to 45 million dollars;
2. Would require 25 million dollars of this amount to be held
in forms that meet the requirements of the general
AB 1708 (Villines), Page 3
investment law;
3. Would authorize the balance of the required minimum capital
to be held in instruments that are allowable under either
the General Investments Law or the Excess Funds Investments
law;
4. Would, for a surplus lines carrier on the DOI's LESLI list
which does not, as of January 1, 2011, meet the capital and
surplus requirements imposed by this act, require it to have
at least 30 million dollars of capital and surplus as of
December 31, 2011 and at least 45 million dollars of capital
and surplus by December 31, 2013.
5. Would make other technical changes.
COMMENTS
Purpose of the bill To strengthen the capital and surplus
requirements of the surplus lines law.
1. Background The current minimum capital and surplus
requirement of the surplus lines law has not been revised
since 1995. In the current economic turmoil, the CDOI
believes it is appropriate to increase the minimum required
backing of these companies from 15 million to 45 million to
better protect those Californians and businesses which turn
to them.
2. The measure is drafted to permit current LESLI qualified
surplus lines insurers, if they do not meet the new capital
and surplus o requirement on January 1st of 2001, to
transition to full compliance by December 31st, 2013.
3. This proposal is consistent with policy initiatives at the
National Association of Insurance Commissioners to increase
financial analysis and oversight and to strengthen the
protections in the insurance system for customers from
adverse financial events affecting the insurers on whom they
rely.
4. Californians who rely on surplus lines insurers have an
especially high stake in the capital sufficiency of these
insurers as the nonadmitted insurers do not participate in
the state's guaranty fund, thus limiting the insured's
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recourse if the surplus lines insurer becomes insolvent.
5. Under current law, the required minimum of 15 million
dollars of capital and surplus must be held in the form of
assets and investments meeting the requirement of
California's General Investment law. In raising the required
minimum capital three-fold to 45 million dollars, this bill
requires a majority of those funds, (25 million dollars) to
continue to be held in a form which complies with the
General Investment Law while the balance (20 Million
dollars) can be held in a form that complies with either the
General Investment Law or the Excess Funds law. Since the
General Investment law is comprised of high quality and
generally secure and liquid investments, this means a
portion of the new capital requirement (20 million) could be
held in investments which, while already acceptable for an
insurer to hold, are not necessarily of the same kind and
quality.
The DOI in their comments which follow provide a reasonable
response to this facet of AB 1708's new surplus lines
capital structure. Furthermore, given that
a. 80% of surplus lines carriers already meet the
45 million dollar requirement according to the DOI,
b. The bill materially increases public protection
by trebling the capital requirement, and
c. Both now and under this bill the Insurance
Commissioner has express power to "disapprove or
disallow any asset that is not of sound quality, or
that he or she deems to create an unacceptable risk of
loss to the insurer or to policyholders" (See page 4,
lines 2 to 4)
the new requirement for a mandatory 25 million dollars in
capital and surplus in General Investment law compliant
investments and the balance (20 million dollars) in either
General Investment Law or Excess Investment Law compliant
investments appears reasonable.
1. Support The California Department of Insurance, the bill's
sponsor, indicates its purpose is to strengthen the capital
and surplus requirements of the surplus lines law. The DOI
states capital requirements are a principal measure of an
insurer's financial strength and the currently required
minimums, being fifteen years old, offer less consumer
AB 1708 (Villines), Page 5
assurance, particularly given the current financial
environment.
The DOI states about 80 percent of surplus lines insurers on
the LESLI list currently satisfy the proposed $45 million
dollar capital and surplus amount and these companies write
the majority of surplus lines business in California.
Therefore, the DOI believes this bill will not adversely
affect that market.
According to the Department of Insurance, current law's
rationale for having the general investment amount mirror
the total cap and surplus amount of $15M was to ensure that
capital infusion to meet the proposed minimum capital
requirement will be in the form of assets that are readily
available for disposal without loss in value in the event
there is a need for it. The law is structured to avoid
possible capital infusion in the form of assets such as
receivables, equipments, loans from affiliated companies and
the like since this could result in a company not being able
to sell these assets at their book value if additional cash
is needed to pay claims. With the tripling of the required
capital proposed by this bill, however, the DOI believes
imposing a General Investment law asset requirement at the
$45 million would be too restrictive. In the view of the
Department of Insurance, allowing companies to invest a
portion of the capital requirement ($20 million) in
securities allowed by the excess funds law will:
a. Give insurance companies the opportunity to
improve their investment yield
b. Allow companies to expand their invested assets
base subject to the thresholds required by the statutes
c. Allow companies to better diversify their assets
risks (i.e. allow companies to invest in insurance
subsidiaries which are likewise regulated)
1. Opposition None
2. Questions None
3. Suggested Amendments None
4. Prior and Related Legislation None
AB 1708 (Villines), Page 6
POSITIONS
Support
California Department of Insurance (Sponsor)
Oppose
None
Consultant: Kenneth Cooley (916) 651-4102