BILL ANALYSIS
AB 2002
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Date of Hearing: April 7, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 2002 (Huffman) - As Introduced: February 17, 2010
SUBJECT : Insurers: Reserve Requirements
SUMMARY : Repeals an outdated mandate that insurers calculate
reserves for certain liability lines of insurance based on a
statutory 60% formula. Specifically, this bill :
1)Repeals the requirements that reserves for each of the three
previous years for lines of insurance described on insurers'
annual statements as "liability other than automobile bodily
injury" and "automobile bodily injury" be not less than 60% of
the earned premiums for each of those three years.
2)Repeals the statute that mandates that the regulations adopted
by the Insurance Commissioner (IC) governing reserves
generally include a reserve requirement consistent with the
above rule.
EXISTING LAW :
1)Provides that reserves for each of the three previous years
for lines of insurance described on insurers' annual
statements as "liability other than automobile bodily injury"
and "automobile bodily injury" be not less than 60% of the
earned premiums for each of those three years, and that the
Insurance Commissioner's regulations reflect this rule for
these lines of insurance.
2)Grants the IC a broad range of powers to regulate the solvency
of insurance companies doing business in California, including
the right to examine any insurer's books and records, to
evaluate the quality of its investments, to evaluate the type
of insurance risk it has assumed, and to evaluate the
reinsurance it has purchased, among other tools.
3)Establishes a financial analysis tool called "risk-based
capital" (RBC) which involves an analysis of each insurer's
risk profile, including its underwriting risks, its investment
risks, its credit risks, and other factors designed to
evaluate the ability of the insurer to meet its obligations.
AB 2002
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Depending on an insurer's RBC "score," an escalating level of
regulatory intervention is authorized.
4)Requires insurers generally to comply with the Accounting
Practices and Procedures Manual (APPM) adopted by the National
Association of Insurance Commissioners (NAIC), unless a
specific statute overrides this rule. The 60% reserve rule,
which predates both the RBC law and the NAIC APPM law,
operates in California as an exception to this requirement.
FISCAL EFFECT : None.
COMMENTS :
1)Purpose . According to the author, this bill is intended to
eliminate an outmoded and unnecessary rule that has the effect
of causing insurers to allocate capital in an inefficient
manner, which can lead to restricted capacity to write
insurance in California if unneeded mandatory reserves
obligate the insurer to set funds aside that could otherwise
be used to support expanded writing.
2)Past Legislation . In 2007, SB 316 (Yee), Statutes 2007,
chapter 431, repealed a similar "65% reserve rule" applicable
to workers' compensation insurers. SB 316 was passed
unanimously by both the Assembly and Senate.
3)Outdated Requirement . Committee staff have reviewed with
Department of Insurance the basis and value of this rule in
addition to the RBC and other solvency tools possessed by the
Insurance Commissioner. Committee staff have been satisfied
that this is an appropriate repeal of an unnecessary law.
REGISTERED SUPPORT / OPPOSITION :
Support
Fireman's Fund Insurance Company
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086