BILL ANALYSIS AB 1837 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1837 (Gaines) As Amended August 10, 2010 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |58-1 |(May 28, 2010) |SENATE: |32-0 |(August 18, | | | | | | |2010) | ----------------------------------------------------------------- Original Committee Reference: INS. SUMMARY : Allows a domestic insurer that has a nonadmitted affiliate in another state to provide specified services to the nonadmitted affiliate. The Senate amendments : 1)Clarify the scope of the functions that the domestic insurer may provide in California to its out-of-state nonadmitted affiliate. 2)Provide that the nonadmitted insurer's board of directors may not have a majority of directors who are also on the board of the domestic insurer. 3)Add the authority for the domestic insurer to assist the nonadmitted affiliate in executing its investment strategy, provided that the domestic does not establish the strategy or determine liquidity needs for the nonadmitted affiliate. 4)Add double-jointing language to avoid chaptering out problems with AB 1708. AS PASSED BY THE ASSEMBLY , this bill: 1)Authorized 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)Authorized a California domiciled insurer to provide the following administrative services to its nonadmitted AB 1837 Page 2 affiliate: 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 affiliate; 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; and, e) Investing services, provided that decisions on investment goals, risk assumptions, diversification and liquidity needs are made directly by the nonadmitted affiliate. 3)Specified 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. FISCAL EFFECT : This bill is tagged non-fiscal. COMMENTS : A "nonadmitted insurer" is an insurer that is not licensed to do business in California. However, because Californians often need insurance that the licensed companies are not providing, nonadmitted insurers can sell insurance under limited, controlled conditions. If, however, an out-of-state nonadmitted insurer is owned, controlled, operated and managed totally by a California-based parent insurer, it creates a fiction that the nonadmitted insurer is really an out-of-state company. At its worst, excessive operational control is no more than an effort to dodge the insurance licensing laws of California. AB 1837 represents a carefully balanced listing of ministerial functions that serve to level the playing field for nonadmitted insurers as between nonadmitted insurers owned by California AB 1837 Page 3 companies, and nonadmitted insurers owned by non-California companies. Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086 FN: 0006043