BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                           Senator Ronald Calderon, Chair


          AB 2404 (Hill)                Hearing Date:  June 30, 2010  

          As Amended: April 27, 2010
          Fiscal:             Yes
          Urgency:       No

          VOTES:              Asm. Floor(05/20/10)72-0/Pass
                         Asm. Appr.                          
                    (05/12/10)16-0/Pass
                         Asm. Ins.                (04/21/10)12-0/Pass

           SUMMARY    Would require insurance policies that will refund  
          premiums on other than a pro rata basis to disclose that fact in  
          writing, and authorizes the Insurance Commissioner to forgo a  
          market conduct examination of an insurer up to an additional  
          three years if certain information is obtained.  
           
          DIGEST
            
          Existing law
            
          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            surrendered, or rescinded, unless the insurance contract  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, 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 Insurance Commissioner to conduct an examination  
            of every insurer admitted in this state at least once every  
            five years.  In connection with this examination, the  
            Commissioner may examine or investigate any person or the  




                                                 AB 2404 (Hill), Page 2




            business of any person, insofar as the examination or  
            investigation is necessary or material to the examination of  
            the insurer.

           This bill

           1.Would require any insurance policy which provides for a refund  
            of premium on other than on a pro rata basis, including the  
            assessment of cancellation fees, to separately disclose that  
            fact in writing, with a description of the cancellation  
            process and the actual fees or penalties to be applied.

          2.Would require this disclosure to be given prior to, or at the  
            same time as the application and prior to each renewal.

          3.Would provide that when an application is made by telephone,  
            the disclosure must be mailed to the applicant or insured  
            person within three business days but would permit the  
            disclosure to be made electronically in lieu of mailing if  
            consented to by the recipient pursuant to existing law.

          4.Would specify that the provisions of this bill do not apply to  
            cancellations of a financed insurance policy or when the  
            insured person stops payments to the lender. 

          5.Would authorize the Insurance Commissioner to forgo a market  
            conduct examination for a period of up to three years if  
            information from a market analysis indicates all of the  
            following:

               a.     prior examination results showed no significant  
                 negative findings;
               b.     consumer complaint numbers for the insurer are in  
                 the lowest quartile of complaints, for insurers in that  
                 line of business; and
               c.        market analysis identifies no other issues of  
                 significant concern. 


           COMMENTS

           1.Purpose of the bill To require advance disclosure of any  
            cancellation assessments or fees prior to an insurance  
            policy's inception or renewal and to allow the Insurance  
            Commissioner to waive the requirement that all insurers be  
            examined every five years, if the insurer meets certain  




                                                 AB 2404 (Hill), Page 3




            criteria.

           2.Background  

          Existing law requires cancellation fees to be disclosed in the  
            policy.  It also requires the Insurance Commissioner to  
            conduct market examinations of licensed insurers at least once  
            every five years.  Currently, this basic requirement does not  
            vary irregardless of a company's premium volume, record with  
            regard to consumer complaints, or the findings of previous  
            market conduct examinations.

           3.Section 1 Issues:  The author and this bill's sponsor and  
            supporters believe Section 1 of the bill addresses a basic  
            unfairness, the lack of advance notice of policy cancellation  
            fees and penalties. . 

            For the proponents, an insurer's ability to impose significant  
            fees and charges without advance notice, if a customer  
            terminates their policy early, is seen as unfair.  

            Against this unfairness concern, the magnitude of the ill can  
            reasonably be weighed against the business practicality that  
            individually generated notices, notices which must include  
            broad detail on matters the average consumer could not care  
            less about, notices which are required to be highly  
            customized, all add up to more than nominal operational  
            expense.  Furthermore, as is obvious, if such a notice is  
            applied retroactively (not prospectively only) that is a  
            significant logistical nightmare as it requires the business  
            (here an insurer) to work backwards through one's entire  
            existing book of business to achieve compliance.  Finally, if  
            such a notice is imposed without lead time to permit the  
            development and testing of systems to provide the notice,  
            including such mundane systems as envelope stuffers/mail  
            assembly equipment which can be in such demand that simply  
            "adding" one new element can raise significant logistical  
            obstacle each requires time and testing to resolve, the  
            "simple notice" can cast a long shadow. 

           4.Impact of Proposed Author's Amendments on Section 1 Issues:   
            While the notice provisions in AB 2404 as it is now in print  
            do in fact raise some of these logistical issues, the  
            amendments which the author will offer in committee appear to  
            meet virtually each of these objections  save the last  . 





                                                 AB 2404 (Hill), Page 4




            As proposed to be amended, if passed into law at session's  
            end, this bill will become effective as of January 1st 2011.  
            For the affected insurers, that may prove a demanding schedule  
            to meet, especially if their compliance strategy includes 1),   
            revision of their policy forms, as it very reasonably might,  
            in addition to 2) the systems design and testing to make sure  
            the right notices are reaching the right people and 3) the  
            people dimension of training key personnel in the new  
            processes and procedures so that whether in back offices or in  
            customer contact settings,  all staff are informed of what the  
            new disclosure duty entails.

           5.Section 2 Issues:    The biggest practical concern with Section  
            2 is that it currently does not exclude its application to  
            very large insurers  . Under current law, examinations are  
            required at least once every 5 years. This bill will permit  
            examinations to be deferred and additional 3 years. This  
            totals 8 years which is a long time for any company that has a  
            large share of the California marketplace to not be subject to  
            examination.  Periodic examinations, beyond offering a time to  
            identify possible problems, also serve the function of  
            re-familiarizing people in the front-line customer service  
            units with what the law requires, what current trends in the  
            broad marketplace are concerning to the regulator and how to  
            make sure that practices remain in place that meet the letter  
            and spirit of California law.  Given these effects, 8 years  
            seems a long gap for the companies whose business rerach is  
            very broad among Californians.   
           
           6.Author's Amendments to be Offered in Committee  The author of  
            AB 2404 has advised the committee he will offer amendments in  
            committee which:

                  a.        Would eliminate the requirement that the new  
                    disclosure be made  separately  from the policy;
                  b.        Would eliminate the requirement that the  
                    disclosure include "  a description of the cancellation  
                    process  ";
                  c.        Would permit the disclosure, as an alternative  
                    to stating the actual fees or penalties to be applied,  
                    permit it to state the "  maximum  " such fees or  
                    penalties and, furthermore, would permit those actual  
                    fees or maximum fees to be "  stated in the form of  
                    percentages of the premium  ";
                  d.        Would relieve an insurer of the new disclosure  
                    obligation if the policy  permits but does not require  




                                                 AB 2404 (Hill), Page 5




                    the insurer to refund premium other than on a pro rata  
                    basis, and the insurer refunds premium on a pro rata  
                    basis  ;
                  e.        Would require that the disclosure notice in  
                    response to a telephonic application be mailed to the  
                    applicant or insured within  five  business days rather  
                    than in  three  business days; 
                  f.        Would apply the disclosure requirements of  
                    this measure prospectively only to policies issued or  
                    renewed after the effective date of this bill; and
                  g.        Would provide that this section does not  
                    require "any additional disclosure of a fee or penalty  
                    for early cancellation if that disclosure is required  
                    by any other provision of law"

               These author's amendments appear in order to 1) reduce the  
               potential burden of compliance, both in terms of the volume  
               of disclosure notices but also by way of eliminating the  
               need to have extreme customization of these notices, and 2)  
               to ease implementation by making the changes prospective  
               only.  The final proposed amendment appears tailored to  
               acknowledge some existing notice duty which is not  
               specified; potentially the verbiage in this provision might  
               be subject to further clarification. 

           7.Arguments in Support.   The DOI, the bill's sponsor, states in  
            support for AB 2404 that:

               "Current law requires that policy cancellation fees or  
               penalties be disclosed in the insurance policy. However,  
               based on numerous complaints that CDI has received from  
               consumers, it is clear that this method of disclosure is  
               not sufficient. This measure will require a clear  
               disclosure to be provided to the applicant or insured  
               before the insurer can impose a penalty for early  
               cancellation. We are continuing to refine the language to  
               ensure the disclosures are focused and appropriate. 

               Current law requires CDI to examine the market conduct of  
               insurers at least every five years. CDI may, and does,  
               conduct MCE more often than every five years for many  
               companies. However, we have discovered, over time that we  
               have many smaller companies that consistently follow the  
               law and provide a level of customer service that results in  
               no complaints to CDI.





                                                 AB 2404 (Hill), Page 6




               Like the rest of state government, CDI's resources are  
               limited, and what we do have must be used as efficiently as  
               possible. This legislation will allow a single waiver of  
               the five-year requirement for small companies  (** See  
               Committee Staff Note Immediately Following)  Below that have  
               a demonstrated history at CDI lacking in consumer  
               complaints or violations of law. This approach will enable  
               the department to focus more resources on problematic  
               insurers and those that have the highest market share, and  
               thus affect the largest number of consumers. The bill would  
               not affect CDI's authority to conduct a MCE at any time if  
               we have reason to believe any insurer is engaging in  
               unlawful behavior."


          8.According to the Insurance Brokers & Agents of the West (IBA  
            West), which supports this "important bill": 

                "AB 2404 ?permits insurers to adopt any short-rate penalty  
               provision they desire - as long as they provide advance  
               notice of that provision to the broker-agent and consumer  
               prior to policy inception.

               Some insurers argue, in opposition to this bill, that it  
               would be impractical for them to make such disclosure in  
               advance of policy inception, given the extent to which the  
               insurance is frequently transacted over the phone or in  
               circumstances in which immediate binding is required.

               In response, we believe the insurers' arguments actually  
               constitute a tacit admission of the need for this law. It  
               confirms the insurers do not adopt a single, consistent  
               policy; it's an implied admission that they make  
               inconsistent ad hoc decisions and do not want to relinquish  
               their ability to "punish" consumers who want to exercise  
               the freedom of contract to find a better deal in the  
               marketplace." 

           9.Opposition    According to the  Personal Insurance Federation of  
            California (PIFC)  , which is opposed to this bill, the PIFC:

                    "strongly believes that the proposed changes to  
                    Section 481,(c),1 would lead to increased costs,  
                    inhibiting to the sales process, and is unworkable.   
                    We also feel that the Department has failed to fully  
                    demonstrate, specifically, the scope and breadth of  




                                                 AB 2404 (Hill), Page 7




                    the problem that this bill would correct.

            Specific objections to the bill enumerated by the PIFC  
          include:

                     Increased Costs
                    When an insurance company accepts a new applicant,  
                    they incur administrative costs to process their  
                    application.  These costs are legitimate and can be  
                    recouped over the life of a policy, but should be  
                    recaptured if someone cancels prior to their  
                    expiration date.  Cancellation fees, whether pre-set  
                    or pro rata, are the way in which companies can recoup  
                    these expenses. AB 2404 would lead to the expensive  
                    creation of new disclosure systems to accommodate the  
                    new law. 


































                                                 AB 2404 (Hill), Page 8




                           (Continued - Personal Insurance Federation of  
                                       California Objections)
                    
                     Inhibiting to the Sales Process
                     The auto and homeowners' insurance market is extremely  
                    competitive in California.  One only has to watch TV  
                    or listen to the radio to get a sense of this  
                    competition.  The marketing tools used by insurance  
                    companies are driven by one thing, price.  It is our  
                    belief that consumers are not purchasing insurance  
                    based on which company has the lowest cancellation  
                    fee, but instead purchase based on price, familiarity  
                    or because they have a relationship with an agent.  
                     
                    Unworkable 
                     AB 2404 proposes to change this paradigm by requiring  
                    all companies to disclose their cancellation policies,  
                    "prior to, or concurrent with, the application and  
                    prior to each renewal."  Forcing companies to discuss  
                    cancellation fees at the point of sale creates a  
                    negative environment for the transaction and puts the  
                    customer in the position of having to shop for a  
                    company based on something that may only happen in a  
                    small number of instances - that the policy might be  
                    cancelled before the term expires.

                    In addition, there are a number of documents that are  
                    important to one's insurance policy, for example, the  
                    list of coverage exclusions, endorsements, and the  
                    insured's responsibilities under the policy.  Why does  
                    the Department of Insurance want to select the  
                    cancellation policy to name up front instead of these?  
                     Under current law, insurers provide cancellation  
                    procedures when we send out the policy and other  
                    related information."

               While the Association of California Insurance Companies  
               (ACIC) indicates support for Section 2 of the bill (the  
               market exam waiver provision) ACIC is opposed to Section 1  
               and states:

                    "ACIC is ? opposed to the section which requires  
                    disclosure of any cancellation policies, except  
                    pro-rata penalties, prior to inception of the policy.  
                    This provision is burdensome, unnecessary and could  
                    result in unintended consequences. Under the  




                                                 AB 2404 (Hill), Page 9




                    provisions of this section, insurers would have to  
                    create an expensive disclosure system to notify  
                    potential customers of the company's cancellation  
                    policy which is already covered in the policy. In  
                    addition, ACIC members note this would be the only  
                    element of the insurance transaction that would  
                    require this special "pre-notice" and wonder whether  
                    cancellation fees are more important than other  
                    critical items like policy exclusions, policyholder  
                    responsibilities and insurer obligations."

           10.Questions  

                a.     Section 1 of the bill:  Delayed Operative Date? -  
                 Should the bill be given a delayed operative date to  
                 allow insurers time to revise policy terms if needed, to  
                 design, test and prepare to implement system processes,  
                 and to work through any "back office" or customer-service  
                 people training issues connected with the new law's  
                 implementation?

                b.     Section 2 of the bill:  Exam Waiver for Big  
                 Companies? - As indicated in Comment paragraph # 5 and  
                 also the text box above, AB 2404's market exam waiver  
                 provision  does not include language to limit the market  
                 examination waiver provision to small companies only  .  
                 Since the largest companies can hold substantial market  
                 share, potentially encompassing millions of individuals  
                 and households, should a waiver policy which extends to  
                 as many as 8 years the period during which such an  
                 insurer would not be subject to examination apply to  
                 large insurance companies?  

           11.Suggested Amendments  

               a.     Delayed effective date: To facilitate the ability of  
                 insurers to integrate the new Section 1 disclosure  
                 requirement into their policies and procedures, a delayed  
                 effective date of April 1st would make for a smoother  
                 transition.

               b.     Scope of Exam Waiver: To limit application of the  
                 new market conduct waiver authorization in Section 2 of  
                 this bill so it only applies to smaller companies where  
                 the potentially 8 year exam deferral (5 of current law +  
                 additional 3 allowed by this bill) will only affect a  




                                                 AB 2404 (Hill), Page 10




                 comparatively small part of the marketplace, the bill  
                 should be amended on Page 5, line 8, after (3) by  
                 inserting:

                 "The insurer's California written premium is less than  
                 $10 million per annum.
                   (4)"  

           
          1.  Prior and Related Legislation   None 

           
          POSITIONS
          
          Support
           
          California Department of Insurance (Sponsor)
          Insurance Brokers & Agents of the West (IBA West)
           
          Oppose
               
          Association of California Insurance Companies (ACIC)
          Personal Insurance Federation of California (PIFC)

          Consultant:   Kenneth Cooley (916) 651-4102