BILL ANALYSIS Ó 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 AB 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 AB 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. AB 1391 (Committee on Insurance), Page 4 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. AB 1391 (Committee on Insurance), Page 5 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. AB 1391 (Committee on Insurance), Page 6 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 AB 1391 (Committee on Insurance), Page 7 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 AB 1391 (Committee on Insurance), Page 8 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. AB 1391 (Committee on Insurance), Page 9 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 AB 1391 (Committee on Insurance), Page 10 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 AB 1391 (Committee on Insurance), Page 11 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 AB 1391 (Committee on Insurance), Page 12 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