BILL ANALYSIS AB 2002 Page 1 Date of Hearing: April 7, 2010 ASSEMBLY COMMITTEE ON INSURANCE Jose Solorio, Chair AB 2002 (Huffman) - As Introduced: February 17, 2010 SUBJECT : Insurers: Reserve Requirements SUMMARY : Repeals an outdated mandate that insurers calculate reserves for certain liability lines of insurance based on a statutory 60% formula. Specifically, this bill : 1)Repeals the requirements that reserves for each of the three previous years for lines of insurance described on insurers' annual statements as "liability other than automobile bodily injury" and "automobile bodily injury" be not less than 60% of the earned premiums for each of those three years. 2)Repeals the statute that mandates that the regulations adopted by the Insurance Commissioner (IC) governing reserves generally include a reserve requirement consistent with the above rule. EXISTING LAW : 1)Provides that reserves for each of the three previous years for lines of insurance described on insurers' annual statements as "liability other than automobile bodily injury" and "automobile bodily injury" be not less than 60% of the earned premiums for each of those three years, and that the Insurance Commissioner's regulations reflect this rule for these lines of insurance. 2)Grants the IC a broad range of powers to regulate the solvency of insurance companies doing business in California, including the right to examine any insurer's books and records, to evaluate the quality of its investments, to evaluate the type of insurance risk it has assumed, and to evaluate the reinsurance it has purchased, among other tools. 3)Establishes a financial analysis tool called "risk-based capital" (RBC) which involves an analysis of each insurer's risk profile, including its underwriting risks, its investment risks, its credit risks, and other factors designed to evaluate the ability of the insurer to meet its obligations. AB 2002 Page 2 Depending on an insurer's RBC "score," an escalating level of regulatory intervention is authorized. 4)Requires insurers generally to comply with the Accounting Practices and Procedures Manual (APPM) adopted by the National Association of Insurance Commissioners (NAIC), unless a specific statute overrides this rule. The 60% reserve rule, which predates both the RBC law and the NAIC APPM law, operates in California as an exception to this requirement. FISCAL EFFECT : None. COMMENTS : 1)Purpose . According to the author, this bill is intended to eliminate an outmoded and unnecessary rule that has the effect of causing insurers to allocate capital in an inefficient manner, which can lead to restricted capacity to write insurance in California if unneeded mandatory reserves obligate the insurer to set funds aside that could otherwise be used to support expanded writing. 2)Past Legislation . In 2007, SB 316 (Yee), Statutes 2007, chapter 431, repealed a similar "65% reserve rule" applicable to workers' compensation insurers. SB 316 was passed unanimously by both the Assembly and Senate. 3)Outdated Requirement . Committee staff have reviewed with Department of Insurance the basis and value of this rule in addition to the RBC and other solvency tools possessed by the Insurance Commissioner. Committee staff have been satisfied that this is an appropriate repeal of an unnecessary law. REGISTERED SUPPORT / OPPOSITION : Support Fireman's Fund Insurance Company Opposition None received. Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086