BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 315 (Solorio) Hearing Date: June 8, 2011
As Amended: May 5, 2011
Fiscal: Yes
Urgency: Yes
SUMMARY Would conform California law applicable to surplus
line insurance to mandatory changes included in the federal
Nonadmitted and Reinsurance Reform Act provisions of last year's
Dodd-Frank Wall Street Reform and Consumer Protection Act.
DIGEST
Existing California law
1.Requires insurers wishing to "transact insurance" in
California to be "admitted" (or licensed) by the California
Department of Insurance (CDOI) for that purpose;
2.Provides, as a key element of licensing, financial oversight
in the form of solvency monitoring activities. The primary
focus of financial analysis at the CDOI is on licensed
multi-state insurers and licensed California-domiciled
companies;
3.Authorizes licensed "surplus lines brokers", when a risk
cannot be placed with an admitted insurer, to place the risk
with an insurer that is not fully licensed in California,
subject to rules and financial requirements designed to
strengthen the public's confidence when dealing with such
entities;
4.Requires that such nonadmitted insurers must apply for
placement on the DOI's "List of Eligible Surplus Lines
Insurers" (LESLI) list, and they cannot be added until the
California Insurance Commissioner (CIC) approves the
application as meeting statutory requirements;
5.Requires insurance exchanges, which are a class of
state-regulated entity which can accept surplus lines risks,
to maintain capital and surplus in the same amount as a
surplus line company;
AB 315 (Solorio), Page 2
6.Prohibits, for most purposes, a nonadmitted insurer from
selling insurance in California except though a surplus lines
broker, who reaches out and places the California insurance
with the nonadmitted insurer outside of the state. In this
sense, the nonadmitted insurer is not "transacting" insurance
in California;
7.Imposes various duties on surplus lines broker to ensure
compliance with the Surplus Lines law;
AB 315 (Solorio), Page 3
Existing Federal law
1.The federal Nonadmitted and Reinsurance Reform Act (NRRA)
adopted as Subtitle B of Title V in the Dodd-Frank Act last
year becomes effective on July 21, 2011. The NRRA includes
provisions preempting state laws applying to nonadmitted
insurance other than laws from the policyholder's home state
as of July 21, 2011.
2.The NRRA grants the home state of a policyholder the exclusive
authority to require payment of premium taxes and placement
regulation by nonadmitted insurers. The Act establishes a
uniform mechanism for payment and allocation of nonadmitted
insurance and regulation of surplus lines brokers.
3.The NRRA revises the process for exempt commercial purchasers
to obtain insurance from surplus lines carriers and defines
"exempt commercial purchaser" as any person that, at the time
of placement, satisfies the following requirements:
a. Employs or retains a qualified risk manager to
negotiate insurance coverage;
b. Has paid aggregate nationwide commercial property
and casualty insurance premiums in excess of $100,000 in
the immediately preceding 12 months; and
c. The person meets at least one of the following
criteria:
i. Possesses a net worth in excess of $20M
(as adjusted in accordance with the Act's
requirements);
ii. Generates annual revenues in excess of
$50M (as adjusted in accordance with the Act's
requirements);
iii. Employs more than 500 full-time or
full-time equivalent employees per individual
insured or is a member of an affiliated group
employing more than 1,000 employees in the
aggregate;
iv. Is a not-for-profit organization or
public entity generating annual budgeted
expenditures in excess of $30M (as adjusted in
accordance with the Act's requirements); or
v. Is a municipality with a population in
excess of 50,000 persons.
The NRRA provides if the commercial purchaser satisfies these
AB 315 (Solorio), Page 4
requirements, then the surplus lines broker will be exempt
from state law requirements to determine whether the amount or
type of coverage sought is available from admitted insurers.
This bill
1. Would achieve conformity with the NRRA by repealing 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 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 financial requirements that nonadmitted
insurers 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 broker to collect the surplus line tax from the
home state insured.
8. Conforms the statutory notice requirements to the new NRRA
rules.
AB 315 (Solorio), Page 5
9. Reformulates the surplus line broker licensing law to
conform to the NRRA.
10. Makes numerous technical and conforming amendments.
11. Provides that the bill is an urgency statute, to take
effect immediately, to meet the July 21st, 2011 deadline
states are subject to under the Dodd-Frank Act.
COMMENTS
1. Purpose of the bill SB 315's purpose is to conform
California's Surplus Lines law to the provisions of the
Nonadmitted and Reinsurance Reform Act (NRRA) adopted as
Subtitle B of Title V in the Dodd-Frank Wall Street Reform
and Consumer Protection Act which the President signed into
law on July 21st, 2010.
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, and, unless conforming law
is enacted by July 21 of this year, California's authority
to collect the surplus line tax would also be limited.
States have until July 21st of this year to conform their
laws to the NRRA. After that date, its preemption provisions
kick in.
2. Background and Discussion: The newly adopted federal law
(NRRA) prohibits states from having mandatory listing
requirements like California's current LESLI List, but does
not prohibit state 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 and they are allowed under the
NRRA if voluntary.
Accordingly, AB 315 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
AB 315 (Solorio), Page 6
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. Summary of Arguments in Support:
a. The California Department of Insurance, AB 315's
sponsor, states "AB 315 incorporates into California law
applicable provisions of recently enacted federal law
that revamped the business and taxation practices of
surplus lines insurance." The reason for the bill's
urgency clause is addressed as follows:
"Enactment of AB 315 by July 21, 2011, is
integral for the smooth transition of
California's surplus lines market to the new
federal requirements. Failing to meet this
deadline could result in market disruption and
the potential for loss of business even in the
admitted market."
In additional commentary, the DOI states:
"A surplus lines insurer, also known as a
non-admitted insurer, is not licensed in
California, but is licensed in another state or
country. Under current state law, surplus lines
brokers may place coverage with a surplus lines
insurer if insurance for the risk is not
available from an admitted insurer and other
specified criteria are satisfied. Surplus lines
premium tax imposed on the insured is collected
by the CDI from the broker placing the coverage,
and remitted to the state's General Fund. An
insured also may directly obtain coverage from a
surplus lines insurer under specified conditions,
and in these cases the insured remits the premium
tax directly to the Franchise Tax Board. For
multi-state policies, California collects premium
tax associated with only its allocated portion of
the policy risks.
Last year, President Obama signed into law the
AB 315 (Solorio), Page 7
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Act). In addition to making
extensive changes in the financial markets, the
Act provides:
§ Exclusive rights to the home
state of the insured for regulation of surplus
lines insurance placements and broker license
requirements;
§ Specifies that the home state of
the insured has sole authority to collect
surplus lines premium taxes; and,
§ Permits states to enter into tax
sharing arrangements to allocate taxes on
multi-state surplus lines policies.
California, as well as the other states, has
until July 21, 2011, to enact the applicable
provisions of the Act to avert federal
preemption. AB 315 incorporates applicable
provisions of the Dodd-Frank Act into California
law."
a. The National Association of Professional Surplus
Line Offices (NAPSLO) , California Insurance Wholesalers
Association (CIWA) , and Insurance Brokers and Agents of
the West (IBA West) are in support of this bill.
They state "(t)he intent of this legislation is to bring
California statutes into line with the Nonadmitted and
Reinsurance Reform Act (NRRA) enacted by Congress as
part of the Dodd-Frank Wall Street Reform and Consumer
Protection Act."
These groups additionally state:
"In order for California to take advantage of the
change in the tax and regulatory structure for
Nonadmitted insurance placements, it is important
that the Legislature pass AB 315. Compliance with
the aforementioned federal law will benefit both
surplus lines brokers and the California
businesses they serve."
1. Summary of Arguments in Opposition:
AB 315 (Solorio), Page 8
a. None
2. Amendments:
None
3. Prior and Related Legislation:
None
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Department of Insurance (Sponsor)
National Association of Professional Surplus Line Offices
(NAPSLO)
California Insurance Wholesalers Association (CIWA),
Insurance Brokers and Agents of the West (IBA West)
Opposition
None
Consultant: Ken Cooley (916) 651-4110