BILL ANALYSIS Ó AB 315 Page 1 Date of Hearing: March 30, 2011 ASSEMBLY COMMITTEE ON INSURANCE Jose Solorio, Chair AB 315 (Solorio) - As Amended: April 7, 2011 SUBJECT : Surplus Lines Insurance SUMMARY : Conforms California surplus line insurance regulatory and tax laws to the recently enacted federal financial reform law. Specifically, this bill : 1)Repeals the requirement that, in most circumstances, prohibits placement of insurance with a nonadmitted insurer unless that insurer is on the List of Eligible Surplus Lines Insurers (LESLI List). 2)Repeals the substantive criteria necessary for an insurer to be placed on the LESLI List, but readopts similar criteria for placement on a voluntary list of acceptable insurers. 3)Establishes the financial requirements that a nonadmitted insurer not on the voluntary list must meet in order for a surplus line broker to place insurance with that insurer. 4)Defines a "home state insured" as an insured or applicant that has its principal place of business in the state, or, if an individual, has his or her principal place of residence in this state. 5)Defines "commercial insured" as a company that pays over $100,000 in annual property/casualty insurance premium, has a qualified risk manager on staff, and has one of the following attributes: a net worth of over $20,000,000, annual revenues of over $50,000,000, is a non-profit or municipality with an annual budget of over $30,000,000, is a municipality of over 50,000 residents, or has over 500 full-time employees. 6)Exempts a commercial insured from the requirement that a surplus line broker must make a diligent search of the admitted market prior to placement of insurance with a nonadmitted insurer. 7)Imposes on a surplus line broker the duty to ascertain if an insured is a home state insured, and requires the surplus line AB 315 Page 2 broker to collect the surplus line tax from the home state insured. 8)Conforms the statutory notice requirements to the new rules required by federal law. 9)Reformulates the surplus line broker licensing provisions to conform to the new federal law. 10)Makes numerous technical and conforming amendments. 11)Provides that the bill is an urgency statute, to take effect immediately. EXISTING LAW : 1)Requires generally that insurance in California be sold by "admitted" (licensed) insurance companies, but allows, where admitted companies cannot fulfill an insurance need of a California resident or company, nonadmitted insurance to be purchased through a specially licensed surplus line broker. 2)Requires generally that a nonadmitted insurer meet detailed financial requirements, and be on the LESLI List before a surplus line broker may place a policy with that insurer. 3)Requires the surplus line broker to collect the surplus line tax, which is 3% of the gross premium on the policy, and remit that amount to the state. 4)Provides, as a matter of federal law, that a state is limited in its collection of its surplus line tax after July 21, 2011, unless federal conformity legislation is enacted. 5)Provides, as a matter of federal law, that a state is limited in applying its existing laws regulating nonadmitted insurance after July 21, 2011. FISCAL EFFECT : Undetermined. COMMENTS : 1)Purpose . AB 315 is intended to conform California law to the AB 315 Page 3 Nonadmitted and Reinsurance Reform Act ("NRRA") that is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted last year by the federal government. That federal act included provisions to add uniformity and simplicity to the states' regulatory laws governing the placement of surplus line insurance, and collection of the surplus line tax. It pre-empts certain regulatory requirements of California law, but more importantly, unless conforming law is enacted by July 21 of this year, California's authority to collect the surplus line tax would also be limited. 2)The Bill Is Not As Complicated As It Appears . The bill contains 14 pages of strikeout, and 16 pages of new text, in addition to amendments to numerous Insurance Code sections with technical conforming changes (mostly striking references to the LESLI List, and inserting references to "home state insured"). But the principles are not as complex as the language may appear. The federal law prohibits states from having mandatory listing requirements like the LESLI List, but does not prohibit establishment of financial solvency requirements. The surplus line community, however, enjoys the convenience of a formalized list of insurers that are known to be in compliance and acceptable. But under the federal law, a list must be voluntary. As a result, the bill repeals the LESLI list and its detailed financial requirements, but then re-enacts very similar detailed financial requirements twice - once as elements of the criteria to be placed on the voluntary list, and a second time to govern the criteria of insurers that are not interested in complying with the voluntary listing regulatory requirements. The financial standards, which were increased with industry support to ensure policyholder protection as recently as last Session, remain in place essentially in the same form and amount as before. 3)Deletion of Interstate Compact Language . The most important amendment to the introduced version of the bill is the deletion of Sections 27 and 34, which would have delegated the authority to select an interstate tax collection compact to the Executive Branch. The authorization in federal law for states to enter into compacts to collect the surplus line tax has generated substantial debate. There are a number of policy considerations that have not yet been resolved, and are AB 315 Page 4 unlikely to remain unresolved by the time this bill needs to be chaptered. a. Need for a compact . The surplus line tax produces revenue of approximately $140 million annually. Approximately 5% of this is related to "multi-state risks," which are policies issued to a policyholder in California, but which cover risks in California and at least one other state. In theory, a surplus line broker would compute how much of the premium is attributable to each state, and remit taxes accordingly. Dodd/Frank, however, provides that the tax should be collected fully by the state of the "home state insured" unless there is a permissive interstate compact that provides for the apportionment of the small amount associated with multi-state risks. b. Competing compact proposals . The National Association of Insurance Commissioners (NAIC) has a compact proposal, known as the Nonadmitted Insurance Multistate Agreement or (NIMA). The National Conference of Insurance Legislators (NCOIL) has an alternative proposal known as the Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT). Neither of these proposals have been fully fleshed out to the point that a sound policy debate could occur on the relative merits of each proposal. In general, regulators and tax collectors prefer the NIMA approach, and, thus far, surplus line brokers have preferred the SLIMPACT approach. However, there is increasing concern that any compact would be unreasonably burdensome in light of the minor amount of revenue involved, and the fact that this sort of apportionment is not done for the admitted insurance premium tax where multi-state risks are involved. Neither compact, however, is sufficiently developed to allow a reasonable comparative debate on the merits. c. No compact at all ? The federal statute authorizes, but does not require, that states enter into a compact. In the absence of a compact, federal law provides that each state retains the tax paid by its "home state insureds" regardless of the existence of a minor component of that premium tax that is attributable to out-of-state operations. This is one of the tax simplifications that both the surplus line industry and AB 315 Page 5 its customers sought with the federal legislation. However, there is no incentive for a "donor" state - a state that would lose money collected from its home state insureds if it allocated some of the revenue to other states via an interstate compact - to ever join the compact. Conversely, only "recipient" states - those that would gain revenue - would have an incentive to join a compact. Thus, absent a federal mandate, there is a strong likelihood that there will not be a functioning compact. And in the short term, prior to July 21, when this bill must be enacted, it is highly unlikely that a consensus around a single functional compact can be developed nationally. However, the author has expressed the desire to entertain compact language in the event that consensus can be developed. 4)Additional Amendments . It is anticipated that the bill will require additional amendments, such as adoption of a definition of "qualified risk manager," and other technical implementation matters that are being discussed by DOI and other interested parties. The expectation is that these amendments will be adopted before the bill passes out of the Assembly, so that Senate amendments will not be necessary and cause additional delays in meeting the July 21 deadline. REGISTERED SUPPORT / OPPOSITION : Support Department of Insurance (Sponsor) California Insurance Wholesalers Association (CIWA) Insurance Brokers and Agents of the West (IBA West) National Association of Professional Surplus Line Offices (NAPSLO) Opposition None received. Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086