BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2404
                                                                  Page  1

          Date of Hearing:   April 21, 2010

                           ASSEMBLY COMMITTEE ON INSURANCE
                                 Jose Solorio, Chair
                     AB 2404 (Hill) - As Amended:  April 14, 2010
           
          SUBJECT  :   Insurance: premium refunds: market conduct  
          examinations

           SUMMARY  :   Requires insurance policies that will refund premiums  
          on other than a pro rata basis to disclose that fact in writing,  
          and authorizes the Insurance Commissioner (IC) to forgo a market  
          conduct examination of an insurer up to an additional five years  
          if certain information is obtained.  Specifically,  this bill  :  

          1)Requires any insurance policy that includes a provision to  
            refund premium other than on a pro rata basis, including the  
            assessment of cancellation fees, to separately disclose that  
            fact in writing.  The writing shall include a description of  
            the cancellation process and the actual fees or penalties to  
            be applied.

          2)Requires the disclosure that is noted in item #1 above to be  
            provided prior to, or concurrent with, the application and  
            prior to each renewal.

          3)Provides that if an application is made by telephone, the  
            disclosure shall be mailed to the applicant or insured person  
            within three business days.

          4)Permits the disclosure to be made electronically.

          5)Specifies that the provisions of this bill that are noted in  
            items #1 to #4 above do not apply to cancellations that  
            involve a financed insurance policy or when the insured person  
            discontinues payments to the lender. 

          6)Authorizes the IC to forgo a market conduct examination for up  
            to an additional five years if information derived from a  
            market analysis process that considers criteria, such as prior  
            examination results, consumer complaint data, market share,  
            actions taken by other states, and information from other  
            sources, does not indicate that an examination is warranted.  

           EXISTING LAW  :








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          1)Provides that an insured person is entitled to a return of his  
            or her premium if the policy is canceled, rejected,  
            surrendered, or rescinded, unless the insurance contract  
            specifies otherwise. 

          2)Prohibits any contract for individual automobile liability or  
            homeowners' multi-peril insurance from containing a provision  
            which mandates that the premium for the policy shall be fully  
            earned upon the happening of any contingency except the  
            expiration of the policy itself. 

          3)Provides that the Insurance Commissioner (IC), whenever he or  
            she deems it necessary, shall examine the business and affairs  
            of an insurer, or when requested by petition by 25  
            shareholders, policyholders, or creditors. 

          4)Requires the IC to conduct an examination of every insurer  
            admitted in this state at least once every five years.  In  
            connection with this examination, the IC may examine or  
            investigate any person or the business of any person, insofar  
            as the examination or investigation is necessary or material  
            to the examination of the insurer.

           FISCAL EFFECT  :   Undetermined.

           COMMENTS  :

           1)Purpose.   The purposes of this bill are: (1) to require the  
            disclosure of any cancellation assessments or fees prior  
            insurance policy inception or renewal, and (2) allow a waiver  
            of the requirement that all insurers be examined in a market  
            conduct exam every five years, provided the insurer meets  
            certain criteria.

           2)Background.    Current law requires the disclosure of the  
            cancellation fees within the terms of the policy.  Current law  
            requires the Department of Insurance (DOI) to conduct market  
            examinations of licensed insurers at least once every five  
            years.  This requirement is the same regardless of a company's  
            premium volume, number of consumer complaints, or the findings  
            of previous market conduct examinations.

           3)Arguments in Support.   The author and DOI, the bill's sponsor,  
            state that based on the number of consumers contacting DOI  








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            annually to complain abut unknown penalties/fees for canceling  
            a policy, the existing disclosure method for some lines of  
            insurance appears inadequate.  This bill requires a written  
            disclosure regarding cancellation fees or short-rate penalties  
            to be provided to the applicant or insured prior to policy  
            inception and prior to each renewal.

          The author and sponsor state that budget reductions and spending  
            authority limitations mean that departmental resources are  
            limited.  On-site market conduct exams serve an important  
            purpose, and help protect consumers.  With limited resources,  
            consumers would be better protected if resources were directed  
            to the state's largest insurers, and places where consumer  
            complaints exist.  A risk-based approach to the examination  
            process would enhance DOI's regulatory oversight activities by  
            enabling DOI to focus limited staff resources on problematic  
            insurers and those that have the highest market shares.  The  
            bill would not affect DOI's authority to conduct a market  
            conduct exam at any time the Department has reason to believe  
            any insurer is engaging in unlawful behavior.

           4)Electronic disclosure can be clarified.   The bill specifies  
            that if an application is made by telephone, then the  
            disclosure shall be  mailed  to the applicant or insured within  
            three business days.  The bill also states that the disclosure  
            may be made electronically pursuant to a provision of existing  
            law.  As the bill is written, it is not clear whether a person  
            who applies for insurance by telephone must both receive a  
            mailed form of the disclosure as well as an electronic version  
            of this same disclosure.  It is recommended that the bill be  
            amended to clarify this point.  One option to accomplish this  
            is to amend page 3, lines 16 - 17 of the bill to state:  "(3)  
            The disclosure may be made electronically pursuant to Section  
            38.5  in lieu of being mailed  ."

          5)Notice provisions.   It is understood that several insurers  
            have a concern with Section 1 of the bill concerning the  
            notice requirements associated with the cancellation of an  
            insurance policy.  The DOI and the insurers are continuing to  
            discuss clarifying language as the bill moves through the  
            process.

           6)Clarifying amendment regarding market conduct examinations.    
            The bill would allow the IC to forgo conducting a market  
            conduct examination of insurers for up to an additional five  








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            years if certain information is obtained.  The bill would  
            allow this time extension "if information derived from a  
            market analysis process that  considers  criteria, such as prior  
            examination results, consumer complaint data, market share,  
            actions taken by other states, and information from other  
            sources, does not indicate that an examination is warranted."   
            The Department of Insurance (DOI) recognizes that language  
            does not provide sufficient guidance on when an extension may  
            be granted, and is recommending a clarifying amendment.   
            Specifically, on page 4 of the bill, delete lines 35 -39, and  
            on page 5, delete lines 1 - 2, and insert:

               (e) The commissioner may forgo a market conduct  
               examination, otherwise required by this article, for up to  
               an additional three years if information derived from a  
               market analysis indicates  all  of the following:
                  (1)       the prior examination of the insurer resulted  
                    in no significant negative finding;
                  (2)       the number of consumer complaints received by  
                    the insurer is in the lowest quartile of complaints,  
                    on a ratio basis, for insurers in that line of  
                    business;
                  (3)       the insurer's California written premium is  
                    less than $10 million per annum, and
                  (4)       the market analysis identifies no other issues  
                    of significant concern.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Department of Insurance (Sponsor)

           Opposition 
           
          None received.
           
          Analysis Prepared by  :    Manny Hernandez / INS. / (916) 319-2086