BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
AB 2734 (Assembly Insurance Committee) Hearing Date: June 25,
2014
As Amended: June 16, 2014
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor (05/15/14)78-0/Pass
Asm. Appr. (05/07/14)17-0/Pass
Asm. Rev. & Tax (04/28/14)09-0/Pass
Asm. Ins. (04/02/14)12-0/Pass
SUMMARY Contains numerous technical and noncontroversial
provisions related to insurance law.
DIGEST
Existing law
1. Requires major insurers to report data biennially to the
Insurance Commissioner (IC) relating to their contracting
with women, minority, and disabled-veteran owned businesses,
as specified;
2. Defines a "surplus lines broker" as a person licensed to
place insurance with non-admitted insurers, covering risks
other than aircraft and certain marine and transportation
risks;
3. Requires every surplus line broker to pay a tax of 3% of
the gross premiums charged, less return premiums upon
business done under the authority of his or her license
during the preceding calendar year, as specified;
4. Requires every surplus line broker whose annual tax for the
preceding calendar year was $5,000 or more to make monthly
installment payments on account of the annual tax on business
done during the calendar year;
5. Authorizes the IC to relieve a surplus line broker of his or
AB
2734 (Assembly Ins. Committee), Page 2
her obligation to make monthly payments if the broker
establishes to the IC's satisfaction that he or she has ceased
to transact business in this state, or that his or her annual
tax for the current year will be less than $5,000;
6. Imposes an annual tax on each insurer doing business in this
state. The tax rate applied to the basis of the annual tax is
2.35%. The tax imposed on insurers is in lieu of all other
taxes and licenses, except as specified;
7. Authorizes the IC to relieve an insurer of its obligation to
make prepayments if the insurer establishes to the
Commissioner's satisfaction that either the insurer has ceased
to transact insurance in this state, or that the insurer's
annual tax for the current year will be less than $5,000;
8. Exempts a nonprofit cooperative assessment association from the
requirements of the Insurance Code, provided that the
association limits the financial protection benefits it provides
to its members to wage loss benefits;
9. Prohibits insurers that write private passenger automobile
insurance from discriminating against applicants for, or
cancelling, insurance based on specified factors, including
geographic area, or from using geographic area, in and of
itself, as the basis of charging a higher premium;
10. Requires automobile insurers to submit annual reports to the IC
on loss experience, as specified, for the geographic, as
defined, including statistical data by zip code area;
11. Specifies that the IC may not take action on an application to
become a certified reinsurer, as specified, until at least 90
days after posting the application for public comment on the
California Department of Insurance (CDI) website;
12. Generally allows insurers to cede risk through placing of
reinsurance, and requires reinsurers to provide security for the
payment of their reinsurance obligations;
13. Provides that if an assuming insurer has permanently
discontinued underwriting new business secured by a trust for at
least three full years, the commissioner may authorize a
reduction in the required trusteed surplus, as specified, but
not less than 50% of the assuming insurer's liabilities
attributable to reinsurance.
AB
2734 (Assembly Ins. Committee), Page 3
This bill
1. In the biennial report relating to contracting with women,
minority, and disabled-veteran owned businesses, would
clarify that required information on contracting with
California businesses would be determined by a headquarters
address in California, rather than having a majority of its
workforce in California;
2. Would raise, from $5,000 to $20,000, the annual tax
threshold that triggers an obligation on the part of a
surplus line broker to make monthly installment payments;
3. Would raise, from $5,000 to $20,000, the annual tax
threshold that triggers an obligation on the part of
insurers transacting insurance in this state to make
prepayments of the annual tax for the current calendar year;
4. Would allow the Locomotive Engineers and Conductors Mutual
Protective Association (LECMPA), a nonprofit cooperative
assessment association, to provide its members with limited
accidental death benefits, in addition to the loss of wages
benefit currently authorized, would prohibit these
associations from membership in an insurance guarantee
association, and would require a specified notice on each
policy issued by the association;
5. Would allow automobile insurers to submit the report on
loss experience for geographic areas biennially instead of
annually, and require statewide summary data be submitted
annually;
6. Would reduce from 90 days to 30 days the period after which
the IC may take action on an application to become a
certified reinsurer;
7. Would allow the IC to reduce the required trusteed surplus
for reinsurers who have ceased writing new business for
three years, under certain circumstances, to not less than
30% of the reinsurer's liabilities attributable to
reinsurance, as specified;
8. Makes other minor technical changes to the Insurance,
Revenue and Taxation and Vehicle Codes.
AB
2734 (Assembly Ins. Committee), Page 4
COMMENTS
1. Purpose of the bill This is the CDI annual "omnibus" bill
to make noncontroversial statutory, technical and clarifying
changes to the insurance law.
2. Background
AB 53 (Solorio, Ch. 414, Statutes of 2012) required major
California insurers to submit a biennial report to the IC
regarding the implementation of their efforts to increase
procurement from women, minority, and disabled veteran
business enterprises. In its first year of implementation in
2013, many insurance companies were unable to properly
determine if a supplier was a "California business" because
insurance companies and organizations that certify diverse
suppliers do not track the location of vendor employees.
This bill would include a clearer definition-"headquarters
address"-agreed to between the CDI and stakeholders.
According to the CDI, there are very few insurance taxpayers
that fall below the $20,000 quarterly filing threshold
proposed by the bill, and the administrative costs
associated with retaining the $5000 standard does not
justify keeping the standard that low.
The Insurance Code requires any entity that sells
"insurance" in California to be "admitted" (licensed) to
transact insurance in the state, subject to a number of
exceptions. Among these exceptions are membership-type
mutual benefits societies of various forms. The premise of
these exemptions is that the organizations have their
members' interests as their primary function, and do not
need a regulatory structure to ensure proper behavior toward
those members. The exemption statute that governs
Locomotive Engineers and Conductors Mutual Protective
Association limits the benefits it may offer for California
members to wage loss benefits, despite the fact that 48
other states allow accidental death benefits. There is no
controversy about expanding the scope of benefits that can
be paid by LECMPA, but the statute must be amended to
authorize it.
The CDI engages in a substantial amount of statistical
AB
2734 (Assembly Ins. Committee), Page 5
analysis on a broad range of issues. The department's view
is that the Private Passenger Auto Liability Data Call and
Private Passenger Auto Damage Data Call requirement for
annual submissions is unnecessarily burdensome on both the
CDI and the insurers. The same analytical results can be
achieved if the data were filed on an every-other-year
basis.
The proposed changes to the Credit for Reinsurance Law make
California's law more consistent with the National
Association of Insurance Commissioners (NAIC) Credit for
Reinsurance Model Law and Regulations. This proposal would
change California's 90 day notice period for certified
reinsurer applications to the 30 day notice period provided
for in the Model. This bill would also allow the IC to
consider the reduction of the minimum required for trusteed
surplus to no less than 30% of a reinsurer's liabilities
covering U.S. ceding insurers when a reinsurer has ceased
writing new business for three years. Currently, California
law states that the minimum required trusteed surplus cannot
be reduced to an amount less than 50%. The variations in
California's law can unnecessarily complicate multi-state
review.
3. Support . The California Department of Insurance sponsored
AB 2734 because it remedies several issues needing
clarification and clean-up in the Insurance Code.
4. Opposition None received
5. Prior and Related Legislation
AB 53 (Solorio, Ch. 414, Statutes of 2012) Required each
admitted insurer with premiums written equal to or in excess
of $100,000,000 to submit to the IC, by July 1, 2013, a
report on its minority, women, and disabled veteran-owned
business procurement efforts, and then requires, among other
things, that commencing July 1, 2015, each eligible admitted
insurer biennially update its supplier diversity report.
SB 1216 (Lowenthal, Ch. 277, Statutes of 2012) conformed
California law to the NAIC Credit for Reinsurance Model Law.
POSITIONS
AB
2734 (Assembly Ins. Committee), Page 6
Support
California Department of Insurance (sponsor)
Oppose
None received
Consultant: Erin Ryan (916) 651-4110