BILL ANALYSIS                                                                                                                                                                                                    


          |SENATE RULES COMMITTEE            |                  AB 1837|
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                                 THIRD READING

          Bill No:  AB 1837
          Author:   Gaines (R)
          Amended:  8/10/10 in Senate
          Vote:     21

           SENATE BANKING, FINANCE, AND INS. COMMITTEE  :  10-0, 6/30/10
          AYES:  Calderon, Cogdill, Correa, Florez, Kehoe, Liu,  
            Lowenthal, Padilla, Price, Runner
          NO VOTE RECORDED:  Cox

           ASSEMBLY FLOOR  :  58-1, 5/28/10 - See last page for vote

           SUBJECT  :    Insurance transactions:  nonadmitted insurers

           SOURCE  :     Pacific Association of Domestic Insurance  

           DIGEST  :    This bill permits a California domestic insurer  
          to provide designated administrative services to an  
          affiliated non-admitted insurer which is approved by the  
          Department of Insurance for accepting surplus lines  
          placements in California.

           Senate Floor Amendments  of 8/10/10 add double-jointing  
          language with
          AB 1708 (Villines).

           ANALYSIS  :    

           Existing law


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          1. Requires insurers that "transact" insurance in  
             California be "admitted" to transact in the state.   
             "Admitted" is the Insurance Code terminology for being  
             licensed to transact insurance in this state.

          2. Provides that "transact" as it applies to insurance  
             includes solicitation, negotiations preliminary to the  
             execution of an insurance contract, execution of the  
             contract, and transaction of matters subsequent to the  
             execution of, and arising out of, the insurance  

          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. Provides broadly that nonadmitted insurers may sell  
             insurance to Californians when the insurance is needed  
             by the policyholder, but generally not available from  
             admitted insurers.

          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  

          6. Requires that, before selling insurance in California,  
             the nonadmitted insurer must apply to be placed on the  
             list of eligible surplus lines insurers (LESLI list),  
             and the Insurance Commissioner must approve the  
             application based on statutory criteria before placing  
             the nonadmitted insurer on the list.

          7. Imposes various duties on surplus lines broker to ensure  
             compliance with the Surplus Lines law.

          8. Recognizes the role of the Surplus Lines Association  


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             (SLA), a nongovernmental entity, as an administrative  
             agent of the Commissioner for carrying out certain  
             functions, including a role in tax collection and a role  
             in pre-screening applicants for placement on the LESLI  

          9. 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.

          10.Defines a "domestic" insurer as one that is organized  
             under the laws of California.

          11.Defines "nonadmitted" as an entity that is not entitled  
             to transact the insurance business in California.

          This bill:

          1. Authorizes a nonadmitted insurer that is affiliated with  
             a California domestic insurer to have common directors,  
             provided that the directors do not perform management  
             functions for the nonadmitted affiliate, and provided  
             that the common directors do not constitute a majority  
             of the nonadmitted affiliate's board.

          2. Authorizes a California domiciled insurer to provide the  
             following administrative services to its nonadmitted  

             A.    Computer operations, as specified, that are  
                unrelated to the underwriting process.

             B.    Clerical and administrative staffing support,  
                provided that the staff providing these services to  
                not have contact or interaction with policyholders  
                of the nonadmitted affiliate.

             C.    Human resources provided that hiring and firing  
                decisions, employee discipline, and compensation  
                decisions are handled directly by the nonadmitted  


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             D.    Claims adjusting, as described in a specified  
                Insurance Code section, provided that the notices,  
                decisions, and payments are made directly by the  
                nonadmitted insurer.

             E.    Investing services, provided that decisions on  
                investment goals, risk assumptions, diversification  
                and liquidity needs are made directly by the  
                nonadmitted affiliate.

          3. States that nothing in the above provisions permits the  
             nonadmitted insurer to conduct activity that constitutes  
             the "transaction" of insurance, or a violation of  
             specified sections of the Insurance Code.


           According to the author's office and the Pacific  
          Association of Domestic Insurance Companies (PADIC) the  
          sponsor, since foreign insurers and their non-admitted  
          insurer affiliates reside outside of California,  
          administrative services for the non-admitted insurer can be  
          provided by or shared with the admitted insurer in its home  
          state to save costs.  However, this is not the case for  
          many California domestic insurers.  If domestic insurers  
          wish to write business on a non-admitted basis, they are  
          required by the Department of Insurance (DOI) to offer  
          coverage through a separate company located out of the  
          state which cannot be supported administratively by the  
          California domestic insurer.

          According to PADIC, this bill recognizes that the  
          non-admitted regulatory process is fundamentally unfair to  
          small and medium size domestics.  As stated by PADIC, the  
          solution to this problem is to permit California domestic  
          insurers to provide certain administrative services to  
          their DOI approved affiliated non-admitted insurer.  PADIC  
          argues the services being considered by this bill does not  
          constitute transacting insurance but permits the California  
          domiciled insurer to protect California jobs by providing  
          administrative services that do not include any direct  
          contact with the policyholder or claimants to the  
          non-admitted insurer.


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          As explained above, the general rule in California and  
          elsewhere is that an insurance company must be licensed  
          (admitted) to do business in the state.  This requirement  
          empowers the Insurance Commissioner to regulate company  
          solvency, a vital consumer function. In California, a  
          further dimension of this oversight is that admitted  
          property-casualty insurers are subject to rate regulation  
          law under Proposition 103 of 1988.

          However, despite these sound reasons to require all  
          insurers to be admitted, the law recognizes that there are  
          reasons to allow the sale of insurance by nonadmitted  
          insurers.  If there is an insurance need by a California  
          resident, and that need is not being filled by admitted  
          insurers, it is logical that the law allow that need to be  
          filled.  Thus, for unusual risks, or for very large risks,  
          the nonadmitted market plays a crucial role in providing  
          commercial insurance in California.  There is a small  
          amount of personal homeowners insurance sold by nonadmitted  
          insurers in California, but virtually all nonadmitted  
          insurance is in the commercial lines.

           Shared Investment Plan Execution Function  .  Surplus lines  
          insurers are not subject to protection under the California  
          Insurance Guaranty Act, so that their basic financial  
          "promise" and what backs it up is based upon their capital  
          and surplus.  This bill allows an affiliated admitted  
          company to administer the investment management program of  
          the surplus lines company pursuant to Subdivision (o)(E) of  
          Section 1765.1.  The surplus lines company could, as a  
          matter of common business practice, retain a third party  
          investment manager to administer its investment strategy.   
          This bill permits it to use the services of its affiliated  
          admitted company to perform this function. 

          A possible objection to this arrangement is that if there  
          are significant market losses, a surplus line company  
          insured facing a significant loss might attempt to "pierce  
          the corporate veil" and pull in the admitted company's  
          assets to cover their surplus lines losses, asserting  
          "culpability" exists since the admitted affiliate company  
          was managing both investment portfolios. While this  
          possibility does exist, it would appear to be highly  
          remote.  Furthermore, if an affiliated entity is  


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          administering the investments rather than a 3rd party, the  
          affiliated entity actually has a greater stake in the  
          investment program's success, i.e. more "skin-in-the-gam"e.  

          For this reason the authority for a California admitted  
          affiliate of a surplus lines company, where (1) the boards  
          are independent of one another and (2) the investment  
          program for the surplus lines company is directed by the  
          surplus lines company, appears to be reasonable.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No    
          Local:  No

           SUPPORT  :   (Verified  7/28/10)

          Pacific Association of Domestic Insurance Companies  

           ASSEMBLY FLOOR  : 
          AYES:  Adams, Ammiano, Anderson, Arambula, Beall, Block,  
            Blumenfield, Bradford, Buchanan, Caballero, Conway, Cook,  
            Coto, Davis, DeVore, Eng, Evans, Feuer, Fletcher,  
            Fuentes, Fuller, Gaines, Galgiani, Garrick, Gilmore,  
            Hagman, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman,  
            Jones, Knight, Lieu, Logue, Bonnie Lowenthal, Ma,  
            Mendoza, Miller, Monning, Nava, Nestande, Niello,  
            Nielsen, Norby, V. Manuel Perez, Portantino, Ruskin,  
            Saldana, Solorio, Swanson, Torlakson, Torres, Torrico,  
            Tran, Villines, John A. Perez
          NOES:  Yamada
          NO VOTE RECORDED: Bass, Bill Berryhill, Tom Berryhill,  
            Blakeslee, Brownley, Charles Calderon, Carter, Chesbro,  
            De La Torre, De Leon, Emmerson, Fong, Furutani, Hall,  
            Jeffries, Salas, Silva, Skinner, Smyth, Audra Strickland,  

          JJA:do  8/11/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

                                ****  END  ****


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