BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair


          AB 1391 (Committee on Insurance) Hearing Date:  June 26, 2013  

          As Amended:June 17, 2013
          Fiscal:             Yes
          Urgency:       No
          
          VOTES:              Asm. Floor(05/09/13)75-0/Pass
                         Asm. Appr.          (05/01/13)17-0/Pass


          SUMMARY:  This bill is the annual insurance omnibus bill and  
          would make a number of technical, clarifying, or minor  
          modifications to the Insurance Code.
          
           
           DIGEST
           
          Existing law
           
           1.  Provides that a risk retention group may be a corporation,  
              public entity, or other limited liability association that meets  
              certain criteria, including that its primary activity consists  
              of assuming and spreading all, or any portion, of the liability  
              exposure of its group members:


              A.    Requires an entity seeking to be licensed as a risk  
                retention group to be organized under California law and  
                licensed as a liability insurance company; and


              B.    Exempts risk retention groups from the Business Transacted  
                with Producer Controlled Insurer Act, which regulates  
                controlled insurers, as prescribed.

           1.  Conditions the cancelation of a motor vehicle policy on the  
              mailing of a notice a specified number of days prior to the  
              effective date of the cancelation.


              A.    Provides that no cancellation of a motor vehicle insurance  
                policy, not subject to certain cancellation protections  




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          1391 (Committee on Insurance), Page 2



                because it has been in effect less than 60 days, is effective  
                unless a notice of cancellation, subject to certain notice  
                provisions, is mailed or delivered by the insurer to the named  
                insured not later than the 59th day following the effective  
                date and at least 10 days prior to the effective date of  
                cancellation.

              B.    Provides no notice of cancellation of a motor vehicle  
                insurance policy, where the cancellation is based on, among  
                other things, nonpayment of premium, is effective unless  
                mailed or delivered by the insurer to the named insured,  
                lienholder, or additional interest at least 20 days prior to  
                the effective date of cancellation, except as specified.

           1.  Defines the term "Adjusted RBC Report" as a Risk-Based Capital  
              (RBC) report that has been adjusted by the Insurance  
              Commissioner in accordance with specified provisions governing  
              the determination of a property and casualty insurer's RBC.

           2.  Provides for continuing education requirements, prior to  
              license renewals, for specified insurance agents and  
              broker-agents, including personal lines broker-agents and  
              limited lines automobile insurance agents.
                         
           3.  Requires every life agent who sells annuities to satisfactorily  
              complete 8 hours of training prior to soliciting individual  
              consumers, and requires every life agent who sells annuities to  
              satisfactorily complete 4 hours of training prior to each  
              license renewal.

           4.  Prohibits the Insurance Commissioner from granting authority to  
              transact variable contracts unless the life agent or applicant  
              furnishes proof that he or she is registered to sell securities  
              in accordance with the rules of the United States Securities and  
              Exchange Commission or the Financial Industry Regulatory  
              Authority.

           5.  Requires an individual holding an insurance adjuster license,  
              not otherwise exempt, to complete a minimum of 24 hours of  
              continuing education courses, as specified.

           6.  Defines an insurance solicitor as a natural person employed to  
              aid an insurance agent or insurance broker in transacting  
              insurance other than life.

           7.  Provides that a nonresident licensee who applies for a property  




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          1391 (Committee on Insurance), Page 3



              broker-agent, casualty broker-agent, personal lines  
              broker-agent, or life agent resident license in this state, and  
              who is currently licensed for the same lines of authority in the  
              state of his or her current resident license, is not required to  
              complete an examination. The application for examination is  
              required to be received within 90 days of the cancellation of  
              the applicant's resident license and the producer database  
              records, maintained by the National Association of Insurance  
              Commissioners, are required to indicate that the producer is  
              licensed in good standing for the line of authority requested.

           8.  Regulates the sale of portable electronics insurance policies  
              and requires all portable electronics vendors offering that  
              insurance to be licensed, as specified.

           9.  Defines a title insurer as any company issuing title policies  
              as insurer, guarantor or indemnitor.  

              A.    Authorizes an underwritten title company to engage in the  
                business of preparing title searches, title reports, title  
                examinations, or certificates or abstracts of title, upon the  
                basis of which a title insurer writes title policies.  

              B.    Authorizes any insurer, upon payment of the fees and costs  
                and surrender to the commissioner of its certificate of  
                authority, to apply to withdraw from this state, as provided.
           























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          This bill    

           1.  Risk Retention Groups 

              A.    Would require, on and after January 1, 2015, a risk  
                retention group to comply with specified corporate  
                governance requirements at the time of licensure,  
                including that the board of directors have a majority of  
                independent directors, as defined, that the term of any  
                material service provider contract with a risk retention  
                group not to exceed 5 years, and that the risk retention  
                group have an audit committee composed of at least 3  
                independent board members.

              B.    Would also delete the risk retention group exemption  
                from the Business Transacted with Producer Controlled  
                Insurer Act. 

           1.  Motor Vehicle Insurance Cancelation Notices.  Would remove the  
              requirements for cancellation of a motor vehicle insurance  
              policy less than 60 days old, and would apply the requirements  
              regarding notice of cancellation for nonpayment of premiums, and  
              other specified reasons, to all cancellation circumstances.

           2.  Risk-based Capital Report.  Would revise that definition to  
              also include a risk-based capital report that has been  
              adjusted by the commissioner in accordance with specified  
              provisions governing the determination of a life or health  
              insurer's RBC.  

           3.  Continuing Education - Ethics.  Would provide that  
              continuing education requirements include 3 hours of ethics.  


           4.  Continuing Education - Annuity Training.  Would clarify the  
              completion of an 8-hour training requirement to initially  
              procure a license to sell annuities does not satisfy the  
              requirement to complete a 4-hour training course in order to  
              renew the annuity license. 

           5.  Authority to Transact Variable Contracts.  Would make clear  
              that the life agent or applicant is required furnish proof  
              that he or she is registered to sell securities in  
              California in accordance with the rules of the United States  
              Securities and Exchange Commission or the Financial Industry  
              Regulatory Authority.  




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           6.  Continuing Education - Exemption for P&C  
              Broker-Agent/Insurance Adjuster.  Would authorize an  
              exemption from the continuing education requirements for an  
              individual licensed as an insurance adjuster and as a  
              property or casualty broker-agent who has met other  
              specified continuing education requirements. 

           7.  Disability Insurance - "Insurance Solicitor".  Would  
              redefine an insurance solicitor to mean a natural person  
              employed to aid a property and casualty broker-agent acting  
              as an insurance agent or insurance broker in transacting  
              insurance other than life, disability, or health. 

           8.  License Exam Waiver for Licensees Moving to California.   
              Would provide that upon issuance of the California resident  
              license, the examination waiver also applies to adding  
              additional lines of authority to the California resident  
              license provided that the individual was previously licensed  
              in good standing for the requested additional lines of  
              authority, and the application is received within 12 months  
              of the cancellation of the applicant's previous resident  
              license in another state.

           9.  Termination of Portable Electronics Insurance Policies.  
              Would authorize an insurer to terminate or otherwise change  
              the terms and conditions of a policy of portable electronics  
              insurance, as provided. 
          
           10. Underwritten Title Companies.  Authorize underwritten title  
              companies to apply to withdraw from the California insurance  
              market.  
          
           11. Miscellaneous.  Would make technical, conforming, and  
              clarifying changes, and removes obsolete provisions. 
          

          COMMENTS
           
           1.  Purpose of the bill  .  According to the bill's sponsor, the  
              California Department of Insurance (CDI), this bill remedies  
              several issues identified and vetted by CDI to clarify and  
              cleanup various Insurance code sections, including several  
              for alignment with the National Association of Insurance  
              Commissioners (NAIC) model laws.





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            2.  Background  


              A.    Risk Retention Groups.   In the 1980s Congress  
                established and broadened the ability of employers to band  
                together to form a risk retention group (RRG) in response  
                to severe shortages of certain commercial insurance.  RRGs  
                are multi-owner entities, similar to a captive insurance  
                or group self-insurance program, that provide most types  
                of commercial insurance coverage.  Corporations, public  
                entities, or any limited liability association may form an  
                RRG and federal law provides a structure for RRGs to  
                operate across state lines (subject to state regulation).  
                The National Association of Insurance Commissioners (NAIC)  
                promulgates model laws to assist states in developing  
                effective and consistent national standards. The NAIC  
                updated its model laws relating to RRGs in response to  
                recommendations by the U.S. Government Accountability  
                Office. 


                 i.       Corporate Governance Requirements.  Existing law  
                   lacks specific requirements for corporate governance of  
                   RRGs. This bill amends Section 131 by adding corporate  
                   governance standards to conform to NAIC standards. 


                 ii.      Producer Controlled Insurers.  Most producer  
                   controlled insurers must comply with the Business  
                   Transacted with Producer Controlled Insurers Act  
                   (Sections 1216 et seq.), but RRGs are currently  
                   exempted.  The act protects consumers from insurer  
                   insolvencies where insurance producers (such as a fire  
                   and casualty licensees) have substantial control over  
                   the operations of the insurer and subjects producers to  
                   civil liability for material noncompliance if the  
                   insurer or a policy holder suffers a loss or damage.   
                   Revisions to the NAIC model law repealed the exemption  
                   for RRGs; this bill amends Section 1216.1 consistent  
                   with the NAIC revisions. 


              A.    Motor Vehicle Insurance Cancelation Notices.  This  
                bill amends Section 662 and repeals Section 668.5 to  
                eliminate a complex treatment of cancellation notices for  




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                private passenger auto policies less than 60 days old. 


              B.    Risk-based Capital Report.  This bill amends Section  
                739 and 739.3 relating to Risk-based Capital (RBC)  
                reports.  RBC represents the value of capital that an  
                insurer should set aside to cover the risks it has  
                assumed.  An insurer must submit annually an RBC report  
                demonstrating that it holds sufficient capital to pay  
                potential claims.  


                 i.       This bill corrects the definition in Section 739  
                   of "Adjusted RBC Report" by adding missing a reference  
                   to the formula for life and health insurers. 


                 ii.      Current law determines whether an insurer has a  
                   Company Action Level Event, a situation requiring the  
                   insurer to provide specified financial-related  
                   information to the Commissioner.  "Trend tests" are  
                   criteria used to determine if additional information to  
                   the Commissioner is required from both life and  
                   property and casualty (P&C) insurers. This bill  
                   corrects inadvertent omissions to Section 739.3(a)(2)  
                   and (3) that excluded P&C insurer's trend test. The  
                   correction will also bring California insurance law  
                   consistent with NAIC Model language to maintain  
                   California's NAIC accreditation status. 


              A.    Clean-up to Section 1011(c). AB 2303 (Committee on  
                Insurance), Chapter 786, Statutes of 2012, renumbered  
                subsection 1011 (c) to 1011 (a)(3). The re-designated  
                subsection requires insurers to make a regulatory filing  
                in connection with certain transactions which is commonly  
                referred to as a "1011 (c) filing". This bill changes the  
                designation system in this subsection and related  
                conformity changes in other sections to maintain the  
                integrity of the established "1011 (c) filing" convention.  
                


              B.    Licensees not Authorized to Sell Disability Insurance.  
                This bill amends two sections consistent with the  
                requirement that persons who transact disability insurance  




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                must be licensed as an accident and health agent or life  
                and accident health agent.  


                 i.       Definition of "Insurance Solicitor."  This bill  
                   amends the definition of "insurance solicitor" in  
                   Section 1624 to align with the definition provided in  
                   Section 34 (as amended by Chapter 786, Statutes of  
                   2012). 


                 ii.   Remove Obsolete P&C Reference from Section  
                   10785(h).  This bill removes references to P&C  
                   broker-agents from language in Section 10785 related to  
                   the compensation of agents or broker-agents relative to  
                   the enrollment of individuals in an individual health  
                   benefit plan.  


              A.    License Exam Waiver for Licensees Moving to  
                California.  Under current law, nonresident licensees have  
                90 days from the date they cancel their resident license  
                from the state they left to apply for a California  
                resident license and be eligible for a license exam  
                waiver.  This bill would retain the 90-day period for the  
                first California resident license application, but would  
                amend Section 1675 to allow individuals 12 months to  
                receive an exam waiver for additional lines of authority  
                for which they were previously licensed in another state.   
                This proposal is consistent with the provisions of the  
                NAIC's Producer Licensing Model Act. 


              B.    Continuing Education (CE)


                  i.        Ethics. The NAIC's Uniform Licensing Standards  
                    sets the CE requirement for insurance agents and  
                    brokers at 24 hours every two-year license term with  
                    three of the 24 hours covering ethics.  This standard  
                    covers the major lines of license authority (i.e.,  
                    P&C, life, accident/health and personal lines).   
                    Current law conforms to the 24-hour CE requirement,  
                    but not the 3-hour ethics requirement.  This bill  
                    amends Sections 1749.3, 1749.31, 1749.32, and 1749.33  
                    to add the ethics component. 




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                  ii.Annuity Training Requirement for Life Insurance  
                    Agents.  Life insurance agents must complete 8 hours  
                    of training before selling annuity products and 4  
                    hours of CE in annuities prior to each license  
                    renewal. The 8-hour course is intended for life  
                    insurance agents who have never sold annuities and the  
                    4-hour courses are intended for agents with some  
                    knowledge in annuities and provides more in-depth  
                    subject matter. However, some life agents continue to  
                    take the initial 8-hour course to meet the CE  
                    requirements in lieu of the more advanced curriculums  
                    of the 4-hour courses. This bill amends Section 1749.8  
                    and prohibits life insurance agents from repeating the  
                    initial 8-hour course for the purpose of satisfying  
                    the 4-hour CE requirement. 


                  iii.Persons Licensed as P&C Broker-Agent and Insurance  
                    Adjuster.  Agents and brokers are required to complete  
                    24 hours of CE on a biennial basis as a condition of  
                    license renewal whether licensed for only one line of  
                    authority or multiple lines of authority.  Insurance  
                    adjusters are also required to complete 24 hours of  
                    CE.  This bill amends Section 14090.1 to allow  
                    individuals licensed both as a P&C broker-agent and an  
                    insurance adjuster to apply the same 24-hours of  
                    education for both CE licensing renewal requirements. 


              A.    Authority to Transact Variable Contracts.  As a  
                condition for a life agent to be granted variable contract  
                authority in California, he or she must be registered with  
                the U.S. Securities Exchange Commissioner (SEC) to sell  
                securities or be registered to sell securities in  
                accordance with the rules of the Financial Industry  
                Regulatory Authority (FINRA).  This bill amends Section  
                1758.3 and clarifies the requirements for a licensee to be  
                authorized to sell variable contracts in California  
                specifically.  


              B.    Termination of Portable Electronics Insurance.  AB  
                2856 (Chavez), Chapter 437, Statutes of 2002, established  
                a regulatory framework for offering portable electronics  




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                insurance.  Existing law does not provide rules governing  
                the termination or modification of a policy of portable  
                electronics insurance.  This bill would add Section  
                1758.681 and set forth specific notice requirements  
                applicable to portable electronics insurance when terms  
                and conditions are modified or a policy is terminated. 


              C.    Repeal Obsolete Mandated Report Requirement.  Section  
                1872.87 requires CDI and the Department of Motor Vehicles  
                (DMV) to issue a report to the Governor and Joint  
                Legislative Budget Committee by October 1, 2008, on the  
                feasibility of transferring collection of the auto fraud  
                assessments to DMV.  According to CDI, the report was  
                issued.  This bill strikes that requirement. 


              D.    Clean-up to Section 10234.93.  This proposed amendment  
                would make non-substantive technical or stylistic changes.  
                


              E.    Underwritten Title Companies.  An underwritten title  
                company (UTC) sells title insurance issued by a title  
                insurer, but is not an insurer itself.  Current law  
                provides a process by which insurers can voluntarily  
                withdraw from the California market, but not for a UTC;  
                rather, CDI must order the UTC to cease and desist, which  
                is administratively burdensome to both the UTC and CDI.   
                This bill adds Sections 12389.7 and amends 12414.24 to  
                apply the market withdrawal process for insurers (Section  
                1070 et seq.) to UTCs.  CDI states that providing UTCs  
                with a statutory framework to withdraw from the market  
                would facilitate their cessation of business process,  
                provide operational efficiencies, and eliminate  
                unnecessary administrative bureaucracy. 



            3.  Arguments in Support  
              
              Included in the background information when available.



            4.  Arguments in Opposition   




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              None received.
           


           5.  Suggested Amendments  .  The author has offered the following  
              amendments for consideration by the committee (Legislative  
              Counsel amendments are attached).


              A.    California Automobile Assigned Risk Plan (CAARP) and  
                California Low Cost Automobile Insurance Program (CLCA).   
                The California Automobile Assigned Risk Plan (CAARP) and  
                California Low Cost Automobile Insurance Program (CLCA)  
                are intended to provide automobile liability insurance to  
                those who "in good faith" are entitled to but are unable  
                to obtain insurance through ordinary methods. CAARP is not  
                an insurer, but a processing center that puts consumers in  
                touch with an insurance company which will insure them.   
                Applicants to the plan are divided among these insurance  
                companies in proportion to the amount of automobile  
                insurance business each company writes in the state. For  
                example, a company which insures 10 percent of the cars in  
                California's regular market insures 10 percent of the  
                applicants to the assigned risk plan.  


                Section 11629.7 et seq. establishes the California Low  
                Cost Automobile Insurance Program (CLCA) and places it  
                within CAARP.  CLCA provides eligible, low-income  
                                                  consumers with affordable liability insurance protection.


                The proposed amendments would add a new section to the  
                bill that would streamline the rulemaking process for  
                changes to the California Automobile Assigned Risk Plan  
                (CAARP) and California Low Cost Automobile Insurance  
                Program (CLCA).  The Plan of Operations, which provides  
                the technical and administrative activities to carry out  
                the programs, was adopted by reference in the California  
                Code of Regulation.  Under current law any change, with  
                the exception of rate determinations, must go through the  
                full rulemaking process.  Proposed amendments would permit  
                the Insurance Commissioner to approve changes to the Plan  
                without having to go through the full rulemaking process,  
                but only if the changes are approved by an advisory  




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                committee and after a public hearing that is noticed at  
                least 45 days in advance.  If, before or during the  
                hearing, the Commissioner receives comments raising  
                fundamental issues related to the validity of the proposed  
                plan amendments, as provided in Government Code Section  
                11349, then adoption of the plan would be subject to the  
                full rulemaking process.  

              B.    Portable Electronics Insurance.  Proposed amendments  
                would clarify that a portable electronics insurance policy  
                remain subject to the aggregate limit of liability whether  
                or not a termination notice was sent.  Additionally, the  
                amendments would provide that enrollment would continue  
                for 30 days from the date the termination notice is sent,  
                unless a new policy is in effect.  
                 

           POSITIONS
           
          Support
           
          Department of Insurance (Sponsor)
           
          Oppose
               
          None received.


          Consultant:   Hugh Slayden, (916) 651-4773