BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1708|
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THIRD READING
Bill No: AB 1708
Author: Villines (R)
Amended: 8/10/10 in Senate
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-0, 6/16/10
AYES: Calderon, Cogdill, Florez, Kehoe, Liu, Lowenthal,
Padilla, Price, Runner
NO VOTE RECORDED: Correa, Cox
ASSEMBLY FLOOR : 70-0, 4/15/10 - See last page for vote
SUBJECT : Insurance: surplus line brokers
SOURCE : California Department of Insurance
DIGEST : This bill strengthens 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 31, 2013.
Senate Floor Amendments of 8/10/10 add double-jointing
language with AB 1837 (Gaines).
ANALYSIS : Existing law:
1. Requires insurers wishing to "transact insurance" in
California to be "admitted", which means licensed by the
CONTINUED
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California Department of Insurance (CDI) 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 CDI 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 CDI's "List of Eligible Surplus Lines
Insurers" (LESLI) list, and they cannot be added until
the California Insurance Commissioner 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
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compliance with the Surplus Lines law.
9. Recognizes the role of the Surplus Lines Association, a
nongovernmental entity, as an administrative agent of
the Insurance Commissioner 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 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. Increases the current 15 million dollar capital and
surplus requirement for surplus line insurers and
insurance exchanges to 45 million dollars.
2. Requires 25 million dollars of this amount to be held in
forms that meet the requirements of the general
investment law.
3. Authorizes 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. Requires, for a surplus lines carrier on the CDI's LESLI
list which does not, as of January 1, 2011, meet the
capital and surplus requirements imposed by this act, 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. Makes other technical changes.
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 CDI believes it is
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/17/10)
California Department of Insurance (source)
ARGUMENTS IN SUPPORT : CDI indicates its purpose is to
strengthen the capital and surplus requirements of the
surplus lines law. CDI 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 assurance, particularly given the
current financial environment.
CDI 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, CDI believes this bill will not adversely affect
that market.
According to CDI, 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, CDI 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
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capital requirement ($20 million) in securities allowed by
the excess funds law will:
1. Give insurance companies the opportunity to improve
their investment yield.
2. Allow companies to expand their invested assets base
subject to the thresholds required by the statutes.
3. Allow companies to better diversify their assets risks
(i.e. allow companies to invest in insurance
subsidiaries which are likewise regulated).
ASSEMBLY FLOOR :
AYES: Ammiano, Anderson, Arambula, Bass, Beall, Bill
Berryhill, Tom Berryhill, Blakeslee, Blumenfield,
Bradford, Brownley, Buchanan, Caballero, Charles
Calderon, Carter, Chesbro, Conway, Cook, Coto, Davis, De
La Torre, De Leon, Emmerson, Eng, Feuer, Fletcher, Fong,
Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,
Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill,
Huber, Huffman, Jeffries, Knight, Lieu, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande,
Niello, Nielsen, V. Manuel Perez, Portantino, Salas,
Saldana, Silva, Skinner, Smyth, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Villines, Yamada,
John A. Perez
NO VOTE RECORDED: Adams, Block, DeVore, Evans, Jones,
Norby, Ruskin, Torrico, Tran
JA:nl 8/10/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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