BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1216 (Lowenthal) - Reinsurance.
Amended: May 7, 2012 Policy Vote: Ins 8-0
Urgency: No Mandate: No
Hearing Date: May 14, 2012 Consultant: Maureen Ortiz
This bill does not meet the criteria for referral to the
Suspense File.
Bill Summary: SB 1216 conforms California law with the National
Association of Insurance Commissioner's Credit for Reinsurance
Model Law and provides the Insurance Commissioner with the
needed authority to carry out the new reinsurance regulatory
activities.
Fiscal Impact: Costs of up to $122,396 fully recoverable by
filing fees and cost recovery (Special Fund) as follows:
FY 2012-13 costs of $51,616 with expected filing fee
revenue of $4,500 and cost recovery of approximately
$21,000. (Special)
FY 2013-14 costs of $122,396 with expected filing fee
revenue of $28,000 and cost recovery of about $94,000.
(Special)
FY 2014-15 costs of $38,035 with filing fee revenue of
approximately $27,000 and cost recovery of $11,000.
(Special)
The Department of Insurance anticipates the need for 0.8 PY
temporary Staff Counsel during the 2013-14 peak impact year.
Any costs incurred by the Department of Insurance will either be
offset by filing fee revenue or recovered directly from the
insurer. SB 1216 provides for a $2,500 professional reinsurer
filing fee, however, the department does not anticipate a
significant number of insurers applying for qualification as a
professional reinsurer. The $1,500 filing fee for a certified
reinsurer will be established via regulations and will include a
$1,500 annual certification renewal fee. The department
anticipates about 18 reinsurers applying for certification in
the first three years and an occasional one applying thereafter.
Any costs not recoverable such as those for rulemaking will be
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minor and absorbable within the department's existing budget.
Background: The National Association of Insurance Commissioners
(NAIC) adopted its revised Credit for Reinsurance Model Law on
November 6, 2011. The revisions are, in part, built around the
Nonadmitted and Reinsurance Reform Act, part of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act).
The Dodd-Frank Act provides that even though a reinsurer may
sell in many states, only the state where the reinsurer is
domiciled (where it is incorporated or entered through) may
regulate the financial solvency of a reinsurer. However, it
defines "reinsurer" as an insurer that is principally engaged in
the business of reinsurance. SB 1216 conforms California law to
the Model Law, which in turn incorporates the relevant mandates
of the Dodd-Frank Act.
An insurer assumes liability or risk of loss by selling policies
and California law limits the aggregate amount of insurance an
insurer can sell according to a cap defined by its available
assets. Reinsurance offers an insurer a way to subtract some
liability in that formula. Through a reinsurance agreement, an
insurer (known as a ceding insurer) may pass risk of loss or
liability to a third person known as the assuming insurer or
reinsurer. By passing along that risk, the ceding insurer
receives a credit against its liabilities which allows the
ceding insurer to accept more risk.
Existing law requires that credit for reinsurance as an asset or
deduction from liability be allowed a domestic ceding insurer
only if the reinsurance contract includes certain provisions
that the reinsurance will be paid in the event of insolvency.
An accredited reinsurer is one that maintains a surplus that is
either not less than $20 million and whose accreditation has not
been denied by the commissioner within the last 90 days, or
maintains a surplus that is less than $20 million and whose
accreditation has been approved by the commissioner.
Additionally, credit is allowed when reinsurance is ceded to an
assuming insurer that maintains a trust fund as specified.
Existing law provides that credit for reinsurance as an asset or
a deduction from liability is allowed to a foreign ceding
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insurer to the extent that the credit has been allowed by the
ceding insurer's state of domicile if it is accredited by the
NAIC, or if the credit or deduction from liability would be
allowed if the foreign ceding insurer were domiciled in this
state.
Existing law also permits the Insurance Commissioner to disallow
credit for reinsurance if it is determined that the financial
condition, collateral or other security provided by the
reinsurer does not satisfy the credit for reinsurance
requirements applicable to a ceding insurer domiciled in this
state.
Proposed Law: SB 1216, among other things, will do the
following:
a) Authorizes the commissioner to designate an insurer as a
professional reinsurer as specified;
b) Revises the requirement that credit for reinsurance be
allowed to include specified provisions in the event of a
change in status of the ceding company;
c) Requires a ceding insurer to manage its reinsurance
recoverables proportionate to its own book of business and
to diversify its reinsurance program;
d) Provides notification requirements on domestic ceding
insurers when recoverables exceed 50% of its last reported
surplus; or after ceding more than 20% of the gross written
premium in the prior calendar year;
e) Requires a reinsurer to demonstrate that it has adequate
financial capacity to meet its reinsurance obligations;
f) Imposes various filing requirements on certified
reinsurers including notification within 10 days of any
regulatory actions taken against the certified reinsurer as
well as annual audited financial statements;
g) Authorizes the department to certify reinsurers and
ensure that they are properly capitalized;
h) Authorizes state evaluation of reinsurers that apply for
certification and requires posting collateral
corresponding to the reinsurer's rating;
i) Changes the collateral requirements to be based on a
sliding scale depending on a rating assigned by the
Insurance Commissioner; and,
j) Provides the Insurance Commissioner with greater
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regulatory authority over the reinsurers doing business
with California insurers.
SB 1216 will enhance the regulation of reinsurance in order to
allow the Department of Insurance to ensure appropriate
financial solvency standards that will protect consumers.