BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1837|
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THIRD READING
Bill No: AB 1837
Author: Gaines (R)
Amended: 8/10/10 in Senate
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 10-0, 6/30/10
AYES: Calderon, Cogdill, Correa, Florez, Kehoe, Liu,
Lowenthal, Padilla, Price, Runner
NO VOTE RECORDED: Cox
ASSEMBLY FLOOR : 58-1, 5/28/10 - See last page for vote
SUBJECT : Insurance transactions: nonadmitted insurers
SOURCE : Pacific Association of Domestic Insurance
Companies
DIGEST : This bill permits a California domestic insurer
to provide designated administrative services to an
affiliated non-admitted insurer which is approved by the
Department of Insurance for accepting surplus lines
placements in California.
Senate Floor Amendments of 8/10/10 add double-jointing
language with
AB 1708 (Villines).
ANALYSIS :
Existing law
CONTINUED
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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 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
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(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 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. Authorizes 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.
2. Authorizes 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.
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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.
E. Investing services, provided that decisions on
investment goals, risk assumptions, diversification
and liquidity needs are made directly by the
nonadmitted affiliate.
3. States 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.
Background
According to the author's office and the Pacific
Association of Domestic Insurance Companies (PADIC) the
sponsor, 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 (DOI) to offer
coverage through a separate company located out of the
state which cannot be supported administratively by the
California domestic insurer.
According to PADIC, this bill 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 this bill does not
constitute transacting insurance but permits 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.
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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.
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.
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 allows 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 permits 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 facing 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
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 7/28/10)
Pacific Association of Domestic Insurance Companies
(source)
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Block,
Blumenfield, Bradford, Buchanan, Caballero, Conway, Cook,
Coto, Davis, DeVore, Eng, Evans, Feuer, Fletcher,
Fuentes, Fuller, Gaines, Galgiani, Garrick, Gilmore,
Hagman, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman,
Jones, Knight, Lieu, Logue, Bonnie Lowenthal, Ma,
Mendoza, Miller, Monning, Nava, Nestande, Niello,
Nielsen, Norby, V. Manuel Perez, Portantino, Ruskin,
Saldana, Solorio, Swanson, Torlakson, Torres, Torrico,
Tran, Villines, John A. Perez
NOES: Yamada
NO VOTE RECORDED: Bass, Bill Berryhill, Tom Berryhill,
Blakeslee, Brownley, Charles Calderon, Carter, Chesbro,
De La Torre, De Leon, Emmerson, Fong, Furutani, Hall,
Jeffries, Salas, Silva, Skinner, Smyth, Audra Strickland,
Vacancy
JJA:do 8/11/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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