BILL ANALYSIS
AB 2404
Page 1
Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 2404 (Hill) - As Amended: April 14, 2010
SUBJECT : Insurance: premium refunds: market conduct
examinations
SUMMARY : Requires insurance policies that will refund premiums
on other than a pro rata basis to disclose that fact in writing,
and authorizes the Insurance Commissioner (IC) to forgo a market
conduct examination of an insurer up to an additional five years
if certain information is obtained. Specifically, this bill :
1)Requires any insurance policy that includes a provision to
refund premium other than on a pro rata basis, including the
assessment of cancellation fees, to separately disclose that
fact in writing. The writing shall include a description of
the cancellation process and the actual fees or penalties to
be applied.
2)Requires the disclosure that is noted in item #1 above to be
provided prior to, or concurrent with, the application and
prior to each renewal.
3)Provides that if an application is made by telephone, the
disclosure shall be mailed to the applicant or insured person
within three business days.
4)Permits the disclosure to be made electronically.
5)Specifies that the provisions of this bill that are noted in
items #1 to #4 above do not apply to cancellations that
involve a financed insurance policy or when the insured person
discontinues payments to the lender.
6)Authorizes the IC to forgo a market conduct examination for up
to an additional five years if information derived from a
market analysis process that considers criteria, such as prior
examination results, consumer complaint data, market share,
actions taken by other states, and information from other
sources, does not indicate that an examination is warranted.
EXISTING LAW :
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1)Provides that an insured person is entitled to a return of his
or her premium if the policy is canceled, rejected,
surrendered, or rescinded, unless the insurance contract
specifies otherwise.
2)Prohibits any contract for individual automobile liability or
homeowners' multi-peril insurance from containing a provision
which mandates that the premium for the policy shall be fully
earned upon the happening of any contingency except the
expiration of the policy itself.
3)Provides that the Insurance Commissioner (IC), whenever he or
she deems it necessary, shall examine the business and affairs
of an insurer, or when requested by petition by 25
shareholders, policyholders, or creditors.
4)Requires the IC to conduct an examination of every insurer
admitted in this state at least once every five years. In
connection with this examination, the IC may examine or
investigate any person or the business of any person, insofar
as the examination or investigation is necessary or material
to the examination of the insurer.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose. The purposes of this bill are: (1) to require the
disclosure of any cancellation assessments or fees prior
insurance policy inception or renewal, and (2) allow a waiver
of the requirement that all insurers be examined in a market
conduct exam every five years, provided the insurer meets
certain criteria.
2)Background. Current law requires the disclosure of the
cancellation fees within the terms of the policy. Current law
requires the Department of Insurance (DOI) to conduct market
examinations of licensed insurers at least once every five
years. This requirement is the same regardless of a company's
premium volume, number of consumer complaints, or the findings
of previous market conduct examinations.
3)Arguments in Support. The author and DOI, the bill's sponsor,
state that based on the number of consumers contacting DOI
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annually to complain abut unknown penalties/fees for canceling
a policy, the existing disclosure method for some lines of
insurance appears inadequate. This bill requires a written
disclosure regarding cancellation fees or short-rate penalties
to be provided to the applicant or insured prior to policy
inception and prior to each renewal.
The author and sponsor state that budget reductions and spending
authority limitations mean that departmental resources are
limited. On-site market conduct exams serve an important
purpose, and help protect consumers. With limited resources,
consumers would be better protected if resources were directed
to the state's largest insurers, and places where consumer
complaints exist. A risk-based approach to the examination
process would enhance DOI's regulatory oversight activities by
enabling DOI to focus limited staff resources on problematic
insurers and those that have the highest market shares. The
bill would not affect DOI's authority to conduct a market
conduct exam at any time the Department has reason to believe
any insurer is engaging in unlawful behavior.
4)Electronic disclosure can be clarified. The bill specifies
that if an application is made by telephone, then the
disclosure shall be mailed to the applicant or insured within
three business days. The bill also states that the disclosure
may be made electronically pursuant to a provision of existing
law. As the bill is written, it is not clear whether a person
who applies for insurance by telephone must both receive a
mailed form of the disclosure as well as an electronic version
of this same disclosure. It is recommended that the bill be
amended to clarify this point. One option to accomplish this
is to amend page 3, lines 16 - 17 of the bill to state: "(3)
The disclosure may be made electronically pursuant to Section
38.5 in lieu of being mailed ."
5)Notice provisions. It is understood that several insurers
have a concern with Section 1 of the bill concerning the
notice requirements associated with the cancellation of an
insurance policy. The DOI and the insurers are continuing to
discuss clarifying language as the bill moves through the
process.
6)Clarifying amendment regarding market conduct examinations.
The bill would allow the IC to forgo conducting a market
conduct examination of insurers for up to an additional five
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years if certain information is obtained. The bill would
allow this time extension "if information derived from a
market analysis process that considers criteria, such as prior
examination results, consumer complaint data, market share,
actions taken by other states, and information from other
sources, does not indicate that an examination is warranted."
The Department of Insurance (DOI) recognizes that language
does not provide sufficient guidance on when an extension may
be granted, and is recommending a clarifying amendment.
Specifically, on page 4 of the bill, delete lines 35 -39, and
on page 5, delete lines 1 - 2, and insert:
(e) The commissioner may forgo a market conduct
examination, otherwise required by this article, for up to
an additional three years if information derived from a
market analysis indicates all of the following:
(1) the prior examination of the insurer resulted
in no significant negative finding;
(2) the number of consumer complaints received by
the insurer is in the lowest quartile of complaints,
on a ratio basis, for insurers in that line of
business;
(3) the insurer's California written premium is
less than $10 million per annum, and
(4) the market analysis identifies no other issues
of significant concern.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Insurance (Sponsor)
Opposition
None received.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086