BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 1837 (Gaines) Hearing Date: June 30, 2010
As Amended: May 20, 2010
Fiscal: No
Urgency: No
VOTES: Asm. Floor(05/28/10)58-01/Pass
Asm. Ins. (04/21/10)10-02/Pass
SUMMARY Would permit a California domestic insurer to provide
designated administrative services to an affiliated non-admitted
insurer which is approved by the California Department of
Insurance for accepting surplus lines placements in California.
DIGEST
Existing law
1. Requires insurers that "transact" insurance in California
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 of matters subsequent to the
execution of, and arising out of, the insurance contract;
3. Authorizes licensed "surplus lines brokers", when a risk
cannot be placed with an admitted insurer, to place the
risk with an insurer that is not fully licensed in
California, subject to rules and financial requirements
designed to strengthen the public's confidence when dealing
with such entities;
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
AB 1837 (Gaines), Page 2
insurers;
5. 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;
6. Requires that, before selling insurance in California, the
nonadmitted insurer must apply to be placed on the list of
eligible surplus lines insurers (LESLI list), and the
Insurance Commissioner must approve the application based on
statutory criteria before placing the nonadmitted insurer on
the list;
7. Imposes various duties on surplus lines broker to ensure
compliance with the Surplus Lines law;
8. Recognizes the role of the Surplus Lines Association (SLA),
a nongovernmental entity, as an administrative agent of the
Commissioner 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 essentially 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.
This bill
1. Would authorize a nonadmitted insurer that is affiliated
with a California domestic insurer to have common directors,
provided that the directors do not perform management
functions for the nonadmitted affiliate, and provided that
the common directors do not constitute a majority of the
nonadmitted affiliate's board.
AB 1837 (Gaines), Page 3
2. Would authorize a California domiciled insurer to provide
the following administrative services to its nonadmitted
affiliate:
a. Computer operations, as specified, that are
unrelated to the underwriting process;
b. Clerical and administrative staffing support,
provided that the staff providing these services to not
have contact or interaction with policyholders of the
nonadmitted affiliate;
c. Human resources, provided that hiring and firing
decisions, employee discipline, and compensation
decisions are handled directly by the nonadmitted
affiliate;
d. Claims adjusting, as described in a specified
Insurance Code section, provided that the notices,
decisions, and payments are made directly by the
nonadmitted insurer; and,
e. Investing services, provided that decisions on
investment goals, risk assumptions, diversification and
liquidity needs are made directly by the nonadmitted
affiliate.
3.Would state that nothing in the above provisions permits the
nonadmitted insurer to conduct activity that constitutes the
"transaction" of insurance, or a violation of specified
sections of the Insurance Code.
COMMENTS
1. Purpose of the bill To permit a California domestic insurer
to provide designated administrative services to an
affiliated non-admitted insurer which is approved by the
California Department of Insurance for accepting surplus
lines placements in California.
2. The approach adopted in this bill as of the May 20th amended
version is in large part consistent with the approach
authorized under the laws governing admitted and nonadmitted
insurer operations in the key regulatory state of New York.
On many matters of insurance regulation, the policies of New
AB 1837 (Gaines), Page 4
York are seen as setting a touchstone of validity. The
approach embodied in AB 1837, and concurred in by the
California Department of Insurance, is generally consistent
with a New York State Office of General Counsel opinion
letter dated on November 29, 2007 and issued on behalf of
the New York State Insurance Department.
3. The bill (Page 15, Line 38 to Page 16, line 2) contains
language to preclude the two entities to have interlocking
directorates of a type where the same persons are actively
managing both entities.
4. Background According to the author and the sponsor, the
Pacific Association of Domestic Insurance Companies (PADIC),
since foreign insurers and their non-admitted insurer
affiliates reside outside of California, administrative
services for the non-admitted insurer can be provided by or
shared with the admitted insurer in its home state to save
costs. However, this is not the case for many California
domestic insurers. If domestic insurers wish to write
business on a non-admitted basis, they are required by the
Department of Insurance to offer coverage through a separate
company located out of the state which cannot be supported
administratively by the California domestic insurer.
5. According to PADIC, AB 1837 recognizes that the non-admitted
regulatory process is fundamentally unfair to small and
medium size domestics. As stated by PADIC, the solution to
this problem is to permit California domestic insurers to
provide certain administrative services to their DOI
approved affiliated non-admitted insurer. PADIC argues the
services being considered by AB 1837 would not constitute
transacting insurance but would permit the California
domiciled insurer to protect California jobs by providing
administrative services that do not include any direct
contact with the policyholder or claimants to the
non-admitted insurer.
6. As explained above, the general rule in California and
elsewhere is that an insurance company must be licensed
(admitted) to do business in the state. This requirement
empowers the Insurance Commissioner to regulate company
solvency, a vital consumer function. In California, a
further dimension of this oversight is that admitted
property-casualty insurers are subject to rate regulation
law under Proposition 103 of 1988.
AB 1837 (Gaines), Page 5
7. 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.
8. Shared Investment Plan Execution Function Surplus lines
insurers are not subject to protection under the California
Insurance Guaranty Act, so that their basic financial
"promise" and what backs it up is based upon their capital
and surplus. This bill will allow an affiliated admitted
company to administer the investment management program of
the surplus lines company pursuant to Subdivision (o)(E) of
Section 1765.1. The surplus lines company could, as a
matter of common business practice, retain a third party
investment manager to administer its investment strategy.
This bill will permit it to use the services of its
affiliated admitted company to perform this function.
A possible objection to this arrangement is that if there
are significant market losses, a surplus line company
insured faceing a significant loss might attempt to "pierce
the corporate veil" and pull in the admitted company's
assets to cover their surplus lines losses, asserting
"culpability" exists since the admitted affiliate company
was managing both investment portfolios. While this
possibility does exist, it would appear to be highly remote.
Furthermore, if an affiliated entity is administering the
investments rather than a 3rd party, the affiliated entity
actually has a greater stake in the investment program's
success, i.e. more "skin-in-the-gam"e.
For this reason the authority for a California admitted
affiliate of a surplus lines company, where 1) the boards
are independent of one another and 2) the investment program
for the surplus lines company is directed by the surplus
lines company, appears to be reasonable.
AB 1837 (Gaines), Page 6
9. Questions None
10. Suggested Amendments None are suggested in committee but the
measure will need to amended on advice of Legislative
Counsel to eliminate a conflict with AB 1708 (Villines).
11. Prior and Related Legislation AB 1708 (Villines) is pending
on the Senate Floor and will raise the required capital and
surplus of this type of nonadmitted insurer from 15 to 45
million dollars.
POSITIONS
Support
Pacific Association of Domestic Insurance Companies (PADIC)
(Sponsor)
Oppose
None
Consultant: Kenneth Cooley (916) 651-4102