BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2002|
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CONSENT
Bill No: AB 2002
Author: Huffman (D)
Amended: As introduced
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-0, 6/16/10
AYES: Calderon, Cogdill, Florez, Kehoe, Liu, Lowenthal,
Padilla, Price, Runner
NO VOTE RECORDED: Correa, Cox
ASSEMBLY FLOOR : 70-0, 4/15/10 (Consent) - See last page
for vote
SUBJECT : Reserve requirements
SOURCE : Firemans Fund Insurance Company
DIGEST : This bill provides for across-the-board
application of risk-based capital financial oversight to
insurers operating in California by repealing a
pre-risk-based capital statute that mandates a statutory
minimum level of capital reserving for certain non-auto and
automobile bodily injury liability insurers as an exception
to the reserving practices and law which would otherwise
apply.
ANALYSIS :
Existing law:
CONTINUED
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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 percent 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 Insurance Commissioner 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 formulated under
the guidance of the National Association of Insurance
Commissioners (NAIC) 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. 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 NAIC, unless a specific statute overrides
this rule. The 60 percent reserve rule, which predates
both the RBC law and the NAIC APPM law, operates in
California as an exception to this requirement.
This bill repeals a 41-year-old pre-RBC statute specifying
a mandatory fixed reserve level for seven lines of
liability insurance in favor of adherence to the NAIC's
current RBC approach to solvency monitoring and regulation.
Background
The NAIC established the RBC framework to provide a
methodology by which insurance regulators could identify
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weakly capitalized companies. The RBC system is a
regulatory tool which permits regulatory action based on
RBC ratios, which are not designed to compare capital
strength of companies. In general, RBC-based minimum
capital requirements are expected to be sufficient to
protect insurer solvency 95 percent of the time.
Prior Legislation
SB 316 (Yee), Chapter 431, Statutes 2007, repealed a
similar "65% reserve rule" applicable to workers'
compensation insurers. The bill was passed unanimously by
both the Assembly and Senate.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/17/10)
Fireman's Fund Insurance Company (source)
ARGUMENTS IN SUPPORT : The bill's sponsor, the Fireman's
Fund Insurance Company, notes it has made its home in
California for 147 years and is the state's second largest
domestic insurer with nearly 2,000 employees in the state.
The Fireman's Fund states:
"Section 11558, while useful decades ago, no longer
serves its intended purpose; allocation of financial
reserves necessary to pay claims for specific lines of
liability insurance. Unlike California, other state
insurance regulatory laws do not use minimum reserves of
the type found in Section 11558. Instead, Risk Based
Capital (RBC) standards which are far more comprehensive
are now used by state regulators and the National
Association of Insurance Commissioners to track and
ensure that insurers are able to pay their claims. Use
of consistent, national RBC standards allows regulators
in all states to apply consistent financial strength
tests to insurers.
"Not only is Section 11558 inconsistent with the
standards used all other states, but it is inconsistent
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with the RBC standards applied by the CDI for evaluation
of all other insurance lines of business within Fireman's
Fund own operations. This puts California domiciled
insurers at a disadvantage relative to insurers from
outside of the state to whom Section 11558 does not
apply.
"The changes proposed by AB 2002 will foster consistency
in financial oversight for California based insurers,
while not impacting the financial oversight provided
under California's RBC rules."
ASSEMBLY FLOOR :
AYES: Ammiano, Anderson, Arambula, Bass, Beall, Bill
Berryhill, Tom Berryhill, Blakeslee, Blumenfield,
Bradford, Brownley, Buchanan, Caballero, Charles
Calderon, Carter, Chesbro, Conway, Cook, Coto, Davis, De
La Torre, De Leon, Emmerson, Eng, Feuer, Fletcher, Fong,
Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,
Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill,
Huber, Huffman, Jeffries, Knight, Lieu, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande,
Niello, Nielsen, V. Manuel Perez, Portantino, Salas,
Saldana, Silva, Skinner, Smyth, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Villines, Yamada,
John A. Perez
NO VOTE RECORDED: Adams, Block, DeVore, Evans, Jones,
Norby, Ruskin, Torrico, Tran, Vacancy
JJA:mw 6/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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