BILL ANALYSIS Ó
AB 736
Page 1
Date of Hearing: May 18, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 736 (Calderon) - As Amended: April 4, 2011
Policy Committee:
InsuranceVote:11-1
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill authorizes a person licensed to transact accident and
health insurance to be an agent, a broker, or both.
Specifically, this bill:
1)Removes the prohibition on an "insurance broker" from
transacting disability and health insurance. An insurance
broker would continue to be prohibited from transacting life
insurance.
2)Defines a "life licensee" as a person authorized to act in one
or more of the following capacities: (a) life-only, (b)
accident and health.
3)Specifies that a life licensee authorized to transact accident
and health insurance may be an agent, or a broker, or both.
4)Specifies that an organization may hold a license to act as an
accident and health broker.
5)Allows an accident and health broker license to be issued to a
nonresident if that person possesses a resident license in
another state, territory of the United States, or province of
Canada to transact life insurance or disability insurance.
6)Requires the Insurance Commissioner (IC), whenever declaring
any region of the state an auto insurance fraud crisis area,
to provide a copy of that declaration to the respective chairs
of the Senate and Assembly committees on insurance.
FISCAL EFFECT
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The potential fiscal impact is unknown, but could potentially
exceed $150,000. The impact would depend on how many individuals
selling health insurance exercised the broker designation
instead of the agent designation. If 100% of agents exercised
the broker designation instead, and insurers collectively
lowered premiums by the same amount they were paying in
commission, there could be a potential loss of revenue to the
state from reduced premium tax collections of up to $6.7 million
annually.
However, the actual impact would likely be smaller because not
all agents would exercise a broker designation, and insurance
companies would be unlikely to directly reduce premiums by the
total amount of agent commission.
COMMENTS
1)Rationale . The purpose of this bill is primarily to allow a
person selling accident and health insurance to be an agent, a
broker, or both, with the intent of allowing individuals to
sell health insurance as a broker. The sponsor of this bill,
Insurance Brokers and Agents of the West, states that
insurance brokers often enter into agreements with their
clients to charge fees for providing particular services.
However, insurance agents cannot charge a fee. In the area of
health care, insurance brokers, at the option of their
employer clients, often provide auxiliary services to assist
their client's employees in the provision of benefits provided
by the employer. According to the sponsor, this bill would
allow individuals selling health insurance to exercise a
broker designation and charge a broker fee that is agreed on
between the individual and their client, in order to allow the
individual to continue providing these services.
2)Agents and Brokers . An "insurance broker" is defined as a
person who, for compensation and on behalf of another person
(the consumer) transacts insurance, but not on behalf of an
insurance company. In this circumstance, the consumer is
typically a business purchasing a group health insurance
policy for its employees. An "insurance agent" is defined as
a person who transacts insurance on behalf of an insurance
company. The primary difference between these two licenses is
that the insurance agent represents the insurer and can only
place insurance coverage with an insurer that has appointed
AB 736
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him or her as their agent. An insurance broker represents the
consumer as his or her client, and may place insurance with
any insurer willing to accept business from the broker.
3)Ability of Brokers to Sell Health Insurance . AB 2782
(Insurance Committee), Chapter 400, Statutes of 2010 made a
number of changes to insurance agent licensing in order to
bring oversight of insurance agents in California into
alignment with other states. AB 2782 provided that property
and casualty broker-agents can no longer sell health
insurance, and that health insurance can only be sold by
individuals in possession of an accident and health agent
license. According to the sponsor, prior to AB 2782, property
and casualty broker-agents were able to sell health insurance,
often packaged health insurance with other products and
auxiliary services, and were compensated through broker fees.
However, even prior to AB 2782, state law allowed property and
casualty broker-agents to sell health insurance, but only as
appointed agents.
The sponsor indicates the distinction between agent and broker
does not reflect modern commercial reality, and that there was
a disconnect between the letter of the law on this issue and
common practice in the insurance marketplace.
4)Medical Loss Ratio. A medical loss ratio (MLR) refers to the
ratio of dollars spent on medical benefits in relation to
premium dollars paid. This ratio gives some indication of what
percentage of premiums are spent on patient care as opposed to
administration, overhead and profit.
Beginning in 2011, the federal Patient Protection and
Affordable Care Act (ACA) requires health insurance companies
in the individual and small group markets to spend at least 80
% of the premium dollars they collect on medical care and
quality improvement activities. Insurance companies in the
large group market must spend at least 85 % of premium dollars
on these activities. On November 22, 2010, the federal
government issued a regulation implementing the MLR.
Because agents are operating on behalf of the insurance
company, an agent's commission is part of the premium. Thus,
agents' commission would be included in the calculation of
administrative expenses in the MLR. Using a broker
designation, as opposed to an agent designation, would allow
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the broker fees to be paid separate from premiums, such that
they would not count toward administrative expenses in the
MLR. Insurers would more easily meet the minimum MLR
requirements if individuals selling health insurance collected
broker fees outside the MLR, as this would create additional
"room" for non-medical care costs.
5)Premium Tax . Insurance companies in California are subject to
a gross premiums tax, established in the California
constitution, equal to 2.35 % of all California premiums
written. If agents selling health insurance exercised the
broker designation instead of the agent designation, the
commission earned by agents in the state would not be subject
to the gross premiums tax.
6)Related Legislation . AB 2782 (Insurance Committee), Chapter
400, Statutes of 2010 was omnibus legislation that brought
California insurance laws into conformity with the Producer
Licensing Model Act (PMLA) adopted by the National Association
of Insurance Commissioners. This bill established uniformity
in six major lines of insurance: life, health, property,
casualty, life and annuity, and personal lines.
Analysis Prepared by : Lisa Murawski / APPR. / (916) 319-2081