BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



           ------------------------------------------------------------ 
          |SENATE RULES COMMITTEE            |                   AB 315|
          |Office of Senate Floor Analyses   |                         |
          |1020 N Street, Suite 524          |                         |
          |(916) 651-1520         Fax: (916) |                         |
          |327-4478                          |                         |
           ------------------------------------------------------------ 
           
                                         
                                 THIRD READING


          Bill No:  AB 315
          Author:   Solorio (D)
          Amended:  5/5/11 in Assembly
          Vote:     27 - Urgency

           
           SENATE INSURANCE COMMITTEE  :  9-0, 6/8/11
          AYES:  Calderon, Gaines, Anderson, Corbett, Correa, Lieu, 
            Lowenthal, Price, Wyland
           
          SENATE APPROPRIATIONS COMMITTEE  :  8-0, 6/27/11
          AYES:  Kehoe, Walters, Alquist, Emmerson, Lieu, Pavley, 
            Price, Steinberg
          NO VOTE RECORDED:  Runner

           ASSEMBLY FLOOR  :  78-0, 5/19/11 - See last page for vote


           SUBJECT  :    Surplus line brokers

           SOURCE  :     Department of Insurance


           DIGEST  :    This bill conforms 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.    

           ANALYSIS  :    

          Existing California law:

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          2

          1. Requires insurers wishing to "transact insurance" in 
             California to be "admitted" (or licensed) by the 
             Department of Insurance (DOI) 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 DOI 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 Insurance Commissioner 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.

          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.

          Existing federal law:

          1. The federal Nonadmitted and Reinsurance Reform Act 
             (NRRA) adopted as Subtitle B of Title V in the 
             Dodd-Frank Wall Street Reform and Consumer Protection 
             Act (Act) last year becomes effective on July 21, 2011.  

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          3

             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:

                         Possesses a net worth in excess of $20 
                   million (as adjusted in accordance with the Act's 
                   requirements); 

                         Generates annual revenues in excess of $50 
                   million (as adjusted in accordance with the Act's 
                   requirements); 

                         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; 

                         Is a not-for-profit organization or public 
                   entity generating annual budgeted expenditures in 
                   excess of $30 million (as adjusted in accordance 

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          4

                   with the Act's requirements); or 

                         Is a municipality with a population in 
                   excess of 50,000 persons.

          The NRRA provides if the commercial purchaser satisfies 
          these 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. Achieves 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 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/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 

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          5

             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 broker to collect the surplus line tax from 
             the home state insured.

          8. Conforms the statutory notice requirements to the new 
             NRRA rules.

          9. Reformulates the surplus line broker licensing law to 
             conform to the NRRA.

          10.Makes numerous technical and conforming amendments.
           
          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, this 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.

           Comments
           
           Purpose of the bill  .  This bill's purpose is to conform 
          California's Surplus Lines law to the provisions of the 
          NRRA adopted as Subtitle B of Title V in the Act which 

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          6

          President Obama 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, 2011, California's authority to 
          collect the surplus line tax would also be limited.

          States have until July 21, 2011 to conform their laws to 
          the NRRA.  After that date, its preemption provisions kick 
          in. 

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes   
          Local:  No
          According to the Senate Appropriations Committee:

                         Fiscal Impact (in thousands)

           Major Provisions              2011-12      2012-13     
           2013-14   Fund  

          Admin expenses   ----------minor, absorbable----------      
                           Special*

          Gross premium tax           Unknown, potentially several 
          million                     General
                           revenue gain or loss 
                                 
          *Insurance Fund

           SUPPORT  :   (Verified  6/27/11)

          Department of Insurance (source)
          California Insurance Wholesalers Association  
          Insurance Brokers and Agents of the West 
          National Association of Professional Surplus Line Offices  

           ARGUMENTS IN SUPPORT  :    The DOI, this bill'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 this bill's urgency clause is 

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          7

          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 
            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 

                                                           CONTINUED





                                                                AB 315
                                                                Page 
          8

            to avert federal preemption.  AB 315 incorporates 
            applicable provisions of the Dodd-Frank Act into 
            California law."


           ASSEMBLY FLOOR  :  78-0, 5/19/11
          AYES:  Achadjian, Allen, Ammiano, Atkins, Beall, Bill 
            Berryhill, Block, Blumenfield, Bonilla, Bradford, 
            Brownley, Buchanan, Butler, Charles Calderon, Campos, 
            Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, 
            Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, 
            Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove, 
            Hagman, Halderman, Hall, Harkey, Hayashi, Roger 
            Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, 
            Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, 
            Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, 
            Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, 
            Portantino, Silva, Skinner, Smyth, Solorio, Swanson, 
            Torres, Valadao, Wagner, Wieckowski, Williams, Yamada, 
            John A. Pérez
          NO VOTE RECORDED:  Alejo, Gorell


          JJA:kc  6/28/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

                                ****  END  ****

















                                                           CONTINUED