BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 480 (Solorio) Hearing Date: June 22, 2011
As Amended: June 10, 2011
Fiscal: No
Urgency: No
SUMMARY Would clarify that a captive insurer meeting the
statutory criteria of the Public Resources Code as a postclosure
financial assurance mechanism is recognized as valid insurance
under California's Insurance Code.
DIGEST
Existing law
California Insurance Code
1.Generally requires insurance coverage provided to businesses
and individuals in California to be obtained from an admitted,
or California-licensed insurer, or from a non-admitted insurer
operating under the surplus lines law.
2.California's 1992 adoption of Article 4.8 of Chapter 2 of Part
2 of Division 1 of the Insurance Code,(the Business Transacted
with Producer Controlled Insurer Act of 1992), provides
statutory recognition of "captive insurers". They are defined
in that Act as "either insurance companies which are owned by
another organization and whose exclusive purpose is to insure
risks of the parent organization and affiliated companies, or
in the case of groups and associations, insurance
organizations which are owned by the insureds and whose
exclusive purpose is to insure risks of member organizations
and group or association members and their affiliates." (CIC
Section 1216.1(e)(3))
Public Resources Code
1.Section 43601 requires evidence of financial ability be
provided sufficient to meet the closure and postclosure
maintenance costs of solid waste landfills when needed. It
provides that if this evidence is demonstrated by use of
AB 480 (Solorio), Page 2
insurance, the insurance mechanism may be approved if the
insurance carrier is established by a solid waste facility
operator to meet the financial assurance obligations of that
operator and the insurance meets all of the following
requirements:
(A) The insurance mechanism is in full compliance with
the insurance requirements of subdivision (d) of Section
258.74 of Title 40 of the Code of Federal Regulations.
(B) The insurance carrier is domiciled in the United
States and licensed in its state of domicile to write
that insurance.
(C) The insurance carrier only provides financial
assurance to the operator that established the insurance
carrier as a form of self-insurance and does not market,
broker, or provide insurance to other parties.
D) The insurance carrier maintains an A- or better rating
by A.M. Best Company, or an equivalent rating by any
other agency acceptable to the board.
(E) If requested by the board, an independent financial
audit report evaluating the assets and liabilities of the
insurance carrier and confirming compliance with the
statutory and regulatory requirements of the state of
domicile and an independent actuarial opinion on the
independence and financial soundness of the insurance
carrier by an actuary in good standing with the Casualty
Actuarial Society or the American Academy of Actuaries
regarding the adequacy of the loss reserves maintained by
the insurance carrier shall be submitted to the board
upon application and annually thereafter.
This bill
1.Provides more formal statutory recognition within the
California Insurance Code, that notwithstanding any other law,
an issuer of an insurance policy that meets all of the
requirements of paragraph (2) of subdivision (e) of Section
43601 of the Public Resources Code is recognized for purposes
of the California Insurance Code and shall be eligible to
provide the insurance described in that subdivision.
AB 480 (Solorio), Page 3
2.Clarifies that an issuer of an insurance policy pursuant to
this section shall not be required to be a California admitted
insurer, nor be required to provide the insurance through a
surplus line broker.
COMMENTS
1.Purpose of the bill According to the Author, AB 480:
"Ensures that a captive insurer that meets specified
requirements of California law is an acceptable method for
a landfill operator to meet the post-closure financial
assurance requirements applicable to landfills. Landfill
operators are increasingly asked to invest in a range of
specialty recycling programs that serve us all. However,
the capital costs associated with the operators'
post-closure requirements make it difficult to invest in
these programs.
By ensuring that lower cost capital that is authorized by
law is not impeded by unnecessarily restrictive
regulations, landfill operators will be in a better
position to comply with recycling obligations."
Existing statutory law, Public Resources Code Section 43601
already appears to authorize the use of a qualified captive
insurer, and in fact, the Dept. of Toxic Substances Control
allows use of a qualified captive for the hazardous waste
landfills it regulates. However, a CalRecycle regulation,
in apparent reliance on Insurance Code requirements,
appears to ignore what is authorized by statute.
Specifically, the CalRecycle regulation implements PRC
Section 43601(e)(1), which addresses insurers either
admitted or LESLI-listed. However, PRC Section 43601
(e)(2) ADDITIONALLY allows a captive that meets certain
quality standards. The CalRecycle regulation implements
(e)(1) but ignores (e)(2).
This bill is designed to give life to (e)(2) by making it
clear that nothing in the Insurance Code stands in the way
of use of a nonadmitted, non-LESLI-listed insurer."
Note: "LESLI" is a California Surplus Lines law acronym
which stands for " L ist of E ligible S urplus L ines I nsurers".
(See for example paragraph 4 of the "Notice" set forth in
CIC Section 1764.1)
AB 480 (Solorio), Page 4
2.According to Waste Management, AB 480's sponsor:
"Waste Management has operated a single-parent captive
insurance company, National Guaranty Insurance Company
(NGIC) licensed in the state of Vermont, since 1989. NGIC
has an A- A.M. Best Company rating."
"The use of a single-parent captive insurance company
permits diversification of risk-financing, promotes
superior risk management and claims management, and
facilitates access to reinsurance markets."
"As importantly, the use of a single-parent captive
insurance company permits the insured company to avoid the
volatility of the commercial marketplace where coverage can
become unavailable or very expensive unpredictably and
rapidly."
"The use of captive insurance in a diversified
risk-management portfolio is a commonly-employed and widely
accepted technique. AB 480 provides important clarification
in this regard."
1. Background and Discussion: The focus of this bill is on the
single question of whether evidence of insurance from a
dually established captive insurance company, which meets
the parameters of Public Resource Code Section 43601 as
amended by AB 715 (Figueroa) during the 1997-98 Legislative
Session (Chapter 978 of the Statutes of 1998) is recognized
as valid under California's Insurance Code.
2. AB 480 does not seek to vary the requirements of PRC Section
43601 and the Department of Insurance, which has reviewed AB
480, has advised the Author and the Committee that based
upon an agreed amendment, which was placed in the bill on
June 10th, the DOI "has no problem with the bill".
3. An underlying issue that has been festering for a long time
and seems to have precipitated the author and sponsors
decision to introduce this bill is an apparent lack of
confidence, on the environmental clean-up regulation side,
with the credibility of the financial mechanism represented
by a properly established, capitalized and managed "captive
insurance" mechanism. The balance of this discussion seeks
AB 480 (Solorio), Page 5
to shed light on why captive insurance plays an important
role in the modern risk manager's tool kit and its financial
bonafides.
4. With respect to Waste management and its National Guaranty
Insurance Company of Vermont (NGIC), A.M. Best Company's
November 23, 2010 report assigned to NGIC a rating of A-
(Excellent) and noted that its outlook was "Stable".
The "Rating Rationale" included in the November 23, 2011
report was the following:
"The rating reflects National Guaranty Insurance
Company of Vermont's (NGIC) excellent capital
position, consistently profitable operating
performance, experienced management team and its
parent company's operational controls. Partially
offsetting these positive rating factors is a large
percentage of the captive's surplus is loaned back to
the parent company. The loan back is supported by a
twenty-four hour demand note from NGIC"s parent
company. However, capital levels at NGIC are monitored
by Vermont, and the company must maintain a certain
aggregate exposure to capital ratio as prescribed by
the Vermont Department of Banking, Insurance,
Securities and Health Care Administration.
As a pure captive established to meet the financial
assurance obligations of its parent, Waste Management,
Inc. (WM), under Subtitle D of the Resource
Conservation and Recovery Act, National Guaranty's
financial strength is closely tied to the financial
position of WM. The coverages written apply to
landfills owned and/or operated by the subsidiaries of
WM (WM-owned landfills), and assure that as of the
date of closure there will be sufficient funds to pay
for proper closure and post-closure activities, such
as "capping" and monitoring of the site. The reserves
for these coverages are maintained on WM's balance
sheet. The parent's ability to adhere to its strict
operating guidelines, including reserve adequacy,
ensures that the captive has minimal exposure to
losses."
AB 480 (Solorio), Page 6
5. Regarding "Captive insurers" more generally, a captive
insurance company is a form of Alternative Risk Transfer
(ART). Alternative risk transfer mechanisms have grown as a
key tool in the typical risk manager's tool kit as an
alternative to traditional insurance. Under an ART program,
a company's risks are funded by means other than the
purchase of insurance through an agent broker from an
admitted insurer. Forms of ART that are commonly encountered
vary widely - they include surplus lines placement,
self-insured trusts, risk retention groups and captive
insurance companies.
The ART market permits businesses to control costs
associated with insurance brokerage while allowing the
business a means to finance all or a portion of its risk.
6. Captive insurance companies are a distinct and recognized
form of ART, and as indicated above, they have been
recognized as a class of risk management under California's
Insurance Code since 1992. As described in CIC Section
1216.1 "captive insurers are either insurance companies
which are owned by another organization and whose exclusive
purpose is to insure risks of the parent organization and
affiliated companies, or in the case of groups and
associations, insurance organizations which are owned by the
insureds and whose exclusive purpose is to insure risks of
member organizations and group or association members and
their affiliates.
7. Captive insurance is a regulated form of ART self-insurance
that has existed since the 1960's. They are a closely held
insurance company whose insurance business is primarily
supplied by and controlled by owners, and in which the
original insureds are the principal beneficiaries. The
insureds have direct involvement and influence over the
company's major operations, including underwriting, claims
and management policy and investments. There are currently
5,000 captives licensed worldwide that service their
parents' risk financing needs. US-owned captives account for
AB 480 (Solorio), Page 7
about 2/3rds of the 5,000 captives worldwide. While captives
can be domiciled and licensed in a wide number of domiciles
both in the US and off-shore, almost half of US states and
more than 3 dozen countries have established legal
frameworks to attract captive insurance entities to domicile
there.
8. Vermont, which began serving as a domiciliary state for
captive insurers upon its legislature's 1981 adoption of
Vermont's Special Insurer Act, is now recognized as the
largest captive insurance domicile in the U.S. and the third
largest in the world, with an excess of $25 billion in gross
written premium in 2010. Vermont is also home to 42 of the
companies that make up the Fortune 100, and 18 of the
companies that make up the Dow 30 have Vermont captives.
9. The consulting firm of Towers Watson, which describes itself
as a "leading global professional services company that
helps organizations improve performance through effective
people, risk and financial management", has provided an
online summation of the contemporary financial and
managerial reasons why companies form captives:
"Reasons to Form a Captive Insurance Company
There are many reasons for starting or continuing to
use a captive insurance company. These reasons tend to
change in priority over time as the needs of the
owners evolve. For example, during hard insurance
market cycles, cost and capacity are key drivers for
the use of a captive insurance company. Owners have
started or continue to use a captive in order to:
Reduce or stabilize cost: Typically, financing risk in
a captive lowers overall costs and helps an
organization to stabilize costs over the long-term
because it is less susceptible to the vagaries of the
insurance market. Cost savings include no profit load,
AB 480 (Solorio), Page 8
elimination or reduction of broker commissions, and
lower administrative costs. The owners share in all
earnings through policyholder dividends or shareholder
dividends. Another element of savings is the avoidance
of costly insurance regulations, including payments
into residual market pools and state premium taxes.
Loss-cost savings might also be achievable where the
captive serves to heighten risk management and cost
awareness of senior management and operating
management. These savings often exceed the cost of
setting up and running the captive.
Increase capacity and provide access to reinsurance:
Captives by themselves offer only limited capacity.
Captives can, however, access the capacity of the
reinsurance markets and may be able to offer more
limits of coverage than are available in the retail
market. For example, multiple reinsurers may
participate on a "slip" to offer millions of dollars
of additional capacity that would not otherwise be
available.
Exert control: Captives were originally formed by
insurance buyers who were tired of the vagaries and
cycles of the insurance market. They sought control of
underwriting, rates and forms, as well as control of
claim settlements and investments.
Provide coverage: Captives can provide coverage to
subsidiaries and members that would not otherwise be
available. These include professional liability,
punitive damages and business risks.
Provide freedom of rate and form: A direct-writing
captive can offer specially tailored wordings, which
reinsurers may then follow.
AB 480 (Solorio), Page 9
Establish better-than-average claim experience: The
claim history of the captive's insureds may be better
than the overall class of business for a commercial
insurer. If so, there is a good argument for retaining
the risk in a captive rather than subsidizing the poor
claim experience of competitors.
Recapture investment income and accelerate/manage cash
flow: Corporate treasurers like captives because the
investment income that usually stays with commercial
insurers may be wholly or partially recaptured in a
captive.
Take advantage of insurance accounting: Insurance
companies get special tax treatment; they can accrue
tax-deductible reserves for unpaid claims, whether
known or estimated, and in the case of life insurance
reserves, pay no tax on inside build-up of interest
income. Furthermore, tax accounting for non-insurance
companies with captives has been trending toward a
similar treatment.
Take advantage of tax deductibility: There are still
tax advantages to be gained by using captives,
especially those with multiple owners or insureds and
those where the insureds and the shareholders are not
the same. Deductibility of premiums and deferred
taxation of insurance income are the two principal
advantages. Tax issues can be a major driver, but they
should not be the only reason for forming a captive.
If they are, the captive might not stand up under the
scrutiny of tax authorities and regulations. Before
considering a captive, a company should seek the
advice of qualified legal counsel."
Source: Towers Watson Perspectives: Captive 101:
Managing Cost and Risk
AB 480 (Solorio), Page 10
10. Summary of Arguments in Support:
a. The Author believes this bill will serve to clarify
the appropriateness and legitimacy under California's
Insurance Code of captive insurance mechanisms that meet
the standards of paragraph (2) of subdivision (e) of
Section 43601 of the Public Resources Code.
b. For other arguments, see the "Purpose of the Bill"
Section" above.
11. Summary of Arguments in Opposition:
a. CalRecyle (California Department of Resources
Recycling and Recovery) has not notified the committee of
opposition to the bill but did provide a "Primer on
Captive Insurance" which evidently has served as a guide
to how CalRecycle analyzes the use of captive insurance
as a "financial assurance mechanism at solid waste
landfills in California". This document summarizes how
CalRecycle relies on the California Department of
Insurance as follows:
"CalRecycle relies on CDI for their expertise in
reviewing insurance providers and making
determinations regarding the provider's acceptability
under California Insurance Law. CDI performs in-depth
audits of the financial abilities and underwriting
practices of the insurer to determine the continued
ability of the insurer to meet its obligations. In
this regard, CDI will reject providers that fail to
meet California standards. Providers requesting a
license as an admitted carrier and meeting CDI
requirements are granted a license to transact
insurance in California. Further, providers applying
to be listed as eligible carriers for excess and
surplus lines coverage in California and meeting CDI
approval standards are listed as eligible to provide
excess and surplus lines coverage in California
through California licensed surplus lines brokers.
These approvals of the insurer performed by CDI
provide CalRecycle with the ability to resolve
potential problems within the California legal system,
should any claims issues arise, instead of resolving
AB 480 (Solorio), Page 11
problems in the insurer's state of domicile."
The CalRecycle "Primer" additionally states, specifically
with respect to "captive insurance", as follows:
"CalRecycle, by regulation, requires the issuer of an
insurance policy to either be licensed by CDI to
transact insurance in the State of California as an
admitted carrier OR be eligible to provide insurance
as an excess and surplus lines insurer in California
through a surplus lines broker currently licensed
under the regulations of CDI and upon the terms and
conditions prescribed by CDI. Given that the intent
of captive insurers owned by landfill operators is to
provide a form of "self-insurance" and nothing more,
they do not appear able to meet these requirements."
12. Amendments:
a. Technical amendments are required to conform this
bill to AB 315 (Solorio) a Dodd-Frank Act conformity and
urgency bill already passed by this committee. Staff will
work with the author to ensure these amendments are
added.
13. Prior and Related Legislation:
a. AB 715 (Figueroa) of the 1997-98 Legislative Session
(enacted as Chapter 978 of the Statutes of 1998)
summarized its purpose in the August 13, 1998 Committee
Hearing Analysis of the Senate Committee on Environmental
Quality as being "to establish appropriate requirements
for the self-insurance of solid waste facilities
operators"
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Waste Management (Sponsor)
Vermont Captive Insurance Association
Resource Conservation and Recovery Act (RCRA) Corrective Action
Project
Superfund Settlements Project
AB 480 (Solorio), Page 12
Opposition
Los Angeles County Solid waste management Committee/Integrated
Waste Management Task Force
Consultant: Ken Cooley (916) 651-4110