BILL ANALYSIS
AB 1837
Page 1
Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 1837 (Gaines) - As Amended: April 5, 2010
SUBJECT : Unlicensed insurers: transaction of insurance
SUMMARY : Authorizes a nonadmitted (unlicensed) insurer that is
affiliated with a domestic admitted insurer to receive
administrative services performed in California by the domestic
admitted affiliate. Specifically, this bill :
1)Authorizes a nonadmitted insurer that is affiliated with a
California domestic insurer to receive (undefined)
administrative services rendered in California by its domestic
affiliate.
2)Requires the nonadmitted insurer to provide the Insurance
Commissioner (IC) with a description of the administrative
services to be rendered in California by the domestic
affiliate.
3)Provides that none of these administrative services may
constitute the transaction of insurance, nor constitute a
violation of the statute that prohibits a surplus lines broker
from acting as an agent of or advertising in the state for a
nonadmitted insurer.
4)Authorizes a nonadmitted insurer and its domestic affiliate to
have common officers and directors, provided that the
nonadmitted insurer maintains a resident operating manager in
its home state who is responsible for and carries out all
management functions in its home state.
EXISTING LAW :
1)Requires insurers that "transact" insurance in California to
be "admitted" to transact in the state. "Admitted" is the
Insurance Code terminology for being licensed to transact
insurance in this state.
2)Provides that "transact" as it applies to insurance includes
solicitation, negotiations preliminary to the execution of an
insurance contract, execution of the contract, and transaction
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of matters subsequent to the execution of, and arising out of,
the insurance contract.
3)Authorizes "nonadmitted" insurers to sell insurance to
Californians on a limited basis, through specially licensed
"surplus lines brokers."
4)Provides broadly that nonadmitted insurers may sell insurance
to Californians when the insurance is needed by the
policyholder, but generally not available from admitted
insurers.
5)Requires that, before selling insurance on a nonadmitted basis
in California, the nonadmitted insurer must apply to be placed
on the list of eligible surplus lines insurers (LESLI list),
and the Insurance Commissioner (IC) must approve the
application based on statutory criteria before placing the
nonadmitted insurer on the list.
6)Prohibits in virtually all circumstances a nonadmitted insurer
from selling insurance in California except though a surplus
lines broker, who reaches out and places the California
insurance with the nonadmitted insurer outside of the state.
In this sense, the nonadmitted insurer is not "transacting"
insurance in California.
7)Places a series of duties on the surplus lines broker to
ensure that these requirements are met.
8)Recognizes the role of the Surplus Lines Association (SLA), a
nongovernmental entity, as an administrative agent of the IC
for carrying out certain functions, including a role in tax
collection and a role in pre-screening applicants for
placement on the LESLI list.
9)Establishes the California Insurance Guarantee Association
(CIGA) as the guarantor for the payment of covered claims in
the event an admitted insurer becomes insolvent. There is no
comparable entity for nonadmitted insurers.
10)Defines a "domestic" insurer as one that is organized under
the laws of California.
11)Defines "nonadmitted" as an entity that is not entitled to
transact the insurance business in California.
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FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . According to the author and the sponsor, the Pacific
Association of Domestic Insurance Companies (PADIC),
California domestic insurers face a competitive disadvantage
in comparison to non-domestic admitted insurers with respect
to the operations of affiliated nonadmitted insurers.
Specifically, the author and PADIC argue that a non-domestic
admitted insurer can share a range of services and cost-saving
activities with a nonadmitted affiliate that is selling
insurance in California, but a domestic insurer cannot provide
those same services to its nonadmitted affiliate without
violating the laws that bar a nonadmitted insurer from
transacting insurance in the state. The bill is intended to
level this playing field among nonadmitted insurers.
2)Why have nonadmitted insurance ? The general rule in
California, as in every state, is that an insurance company
must be licensed (admitted) in order to do business in the
state. There are sound reasons for this rule, notably the
ability of the IC to ensure the solvency of these companies to
ensure they can keep their promises to pay future benefits to
Californians, and to ensure that the insurers treat
policyholders and claimants in a fair and reasonable manner.
In addition, in California admitted property-casualty insurers
are subject to a rate regulation law that was enacted by the
voters (Proposition 103 of 1988).
However, despite these sound reasons to require all insurers to
be admitted, the law recognizes that there are reasons to
allow the sale of insurance by nonadmitted insurers. If there
is an insurance need by a California resident, and that need
is not being filled by admitted insurers, it is logical that
the law allow that need to be filled. Thus, for unusual
risks, or for very large risks, the nonadmitted market plays a
crucial role in providing commercial insurance in California.
There is a small amount of personal homeowners insurance sold
by nonadmitted insurers in California, but virtually all
nonadmitted insurance is in the commercial lines.
3)Problems with nonadmitted insurance . In the 1980s and early
1990s, the surplus lines market was far less regulated than it
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is today. As a result, extremely poorly capitalized insurers
would start writing business to unsuspecting consumers, and
all too frequently these insurers would default on their
obligations. The automobile insurance crisis was at the point
where hundreds of thousands of Californians were purchasing
basic automobile insurance from nonadmitted insurers. At that
time, the law did not require nonadmitted insurers to apply
for and be placed on an eligibility list. Indeed, there were
not even financial filing requirements. The DOI attempted to
deal with this problem by adopting a regulation that mandated
a contemporaneous financial filing at the time when a
nonadmitted insurer first sold a policy to a Californian.
However, even this approach proved inadequate, as the courts
made it extremely difficult for DOI to shut down financially
unsound nonadmitted insurers, because these insurers had
established a "property right" in the business that they were
conducting.
The Legislature responded to this problem by enacting laws that
in most circumstances prohibit private passenger automobile
insurance to be sold by nonadmitted insurers, and by creating
the LESLI list to ensure no nonadmitted insurer could
establish the foothold "property interest" unless the IC had
affirmatively approved the nonadmitted insurer's status as
financially sound. These changes have improved the market,
but also highlight the fact that selling insurance on a
nonadmitted basis is a privilege granted by the state, to be
authorized only where there is a clear need to fill a void.
Without a need to fill a void, insurance should be sold by
licensed companies only.
4)Support . PADIC writes in support that the bill recognizes
that the nonadmitted regulatory process is fundamentally
unfair to small and medium sized domestic insurers due to the
ability of nonadmitted affiliates of nondomestic insurers to
save costs more effectively with respect to competing for
California business. PADIC also makes the case that
California should be encouraging insurers to locate their
primary offices within the state, and that this bill will
enhance the ability of insurers that do locate here to better
compete.
5)Competitive disadvantage ? Proponents suggest that nonadmitted
affiliates of a domestic insurer are at a competitive
disadvantage with nonadmitted affiliates of nondomestic
insurers. In a certain sense, the observation is valid.
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However, it misses the mark at two levels. First, a
nonadmitted affiliate of a United States based insurer will
always have one state where there is this appearance of
disadvantage - the state where its affiliate is domesticated.
Thus, just as a nonadmitted affiliate of a California domestic
faces issues when selling insurance in California, a
nonadmitted affiliate of a Nevada domestic faces issues when
selling insurance in Nevada, and the California-affiliated
nonadmitted has a competitive advantage over that insurer in
Nevada. Second, the notion of level playing field competition
in the context of nonadmitted insurance in the absence of any
showing of a market void ignores the fact that, under
California law, if a company wants to compete and exercise its
rights under the law, it should become admitted.
6)Would a nonadmitted insurer under the bill be a real company ?
A nonadmitted insurer that is selling insurance in California
should be a real company, with its own assets, offices,
management and staff. Under the proposal currently in the
bill, it could be argued that a California domestic insurer
could establish a nonadmitted affiliate and operate it out of
California, contrary to the principles of current law. While
the bill does require there to be a resident operating
manager, it authorizes every senior management officer, from
CEO, to CFO, to General Counsel, to Vice-President of
Underwriting or Vice President of Investments, to operate out
of its California offices. This could render the distinction
between admitted and nonadmitted insurers virtually
nonexistent, and encourage other insurers to attempt to avoid
the requirements in the law that require obtaining a license
to transact insurance in California.
7)Discussions between DOI and sponsors . DOI and the sponsors
have been discussing alternatives to the current language in
the bill. The discussions have focused on identifying
specific activities that are unrelated to the transaction of
insurance, but would be potential cost-saving services in
operating a business. PADIC has proposed a list of activities
and operations that it argues would not inappropriately
constitute transacting insurance in California. DOI believes
the listing to be far too broad. PADIC's proposal includes
authorizing common officers and directors, as provided in the
bill, and would further allow the following activities to be
performed in California by the domestic affiliate: computer
operations, clerical and staffing support, human resources,
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arranging or placing treaty reinsurance, managing investments,
and claims adjusting, provided that notices, decisions, and
payments be from the nonadmitted affiliate. As a condition of
moving the bill forward, absent an agreement between DOI and
the sponsors, it is recommended that the bill be amended as
follows:
a) Delete reference to common officers between the domestic
and the nonadmitted affiliate.
b) Delete the reference (page 2, line 37-38) that
authorizes the nonadmitted affiliate to "receive
administrative services rendered in California" and replace
that phrase with a listing of the most acceptable of the
proposed services. These would be computer operations that
are unrelated to the underwriting process, clerical and
staffing support, human resources, and claims adjusting,
provided that notices, decisions and payments be from the
nonadmitted affiliate, and further provided that the claims
adjusting services be pursuant to a written contract
executed between the domestic and the nonadmitted affiliate
and filed with the IC. The purpose of filing the contract
is to allow the IC to ensure that an inappropriate
delegation of management discretion is not transferred from
the nonadmitted insurer to its domestic affiliate.
REGISTERED SUPPORT / OPPOSITION :
Support
Pacific Association of Domestic Insurance Companies
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086