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           SUMMARY  :   Repeals an outdated mandate that insurers calculate  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
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            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