BILL ANALYSIS �
AB 315
Page 1
Date of Hearing: March 30, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 315 (Solorio) - As Introduced: February 9, 2011
And As Proposed To Be Amended
SUBJECT : Surplus Lines Insurance
SUMMARY : Conforms California surplus line insurance regulatory
and tax laws to the recently enacted federal financial reform
law. Specifically, this bill :
1)Repeals the requirement that, in most circumstances, prohibits
placement of insurance with a nonadmitted insurer unless that
insurer is on the List of Eligible Surplus Lines Insurers
(LESLI List).
2)Repeals the substantive criteria necessary for an insurer to
be placed on the LESLI List, but readopts similar criteria for
placement on a voluntary list of acceptable insurers.
3)Establishes the financial requirements that an insurer not on
the voluntary list must meet in order for a surplus line
broker to place insurance with that insurer.
4)Defines a "home state insured" as an insured or applicant that
has its principal place of business in the state, or, if an
individual, has his or her principal place of residence in
this state.
5)Defines "commercial insured" as a company that pays over
$100,000 in annual property/casualty insurance premium, has a
qualified risk manager on staff, and has one of the following
attributes: a net worth of over $20,000,000, annual revenues
of over $50,000,000, is a non-profit or municipality with an
annual budget of over $30,000,000, is a municipality of over
50,000 residents, or has over 500 full-time employees.
6)Exempts a commercial insured from the requirement that a
surplus line broker must make a diligent search of the
admitted market prior to placement of insurance with a
nonadmitted insurer.
7)Imposes on a surplus line broker the duty to ascertain if an
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insured is a home state insured, and requires the surplus line
broker to collect the surplus line tax from the home state
insured.
8)Conforms the statutory notice requirements to the new rules
required by federal law.
9)Reformulates the surplus line broker licensing provisions to
conform to the new federal law.
10)Makes numerous technical and conforming amendments.
11)Provides that the bill is an urgency statute, to take effect
immediately.
EXISTING LAW :
1)Requires generally that insurance in California be sold by
"admitted" (licensed) insurance companies, but allows, where
admitted companies cannot fulfill an insurance need of a
California resident or company, nonadmitted insurance to be
purchased through a specially licensed surplus line broker.
2)Requires generally that a nonadmitted insurer meet detailed
financial requirements, and be on the LESLI List before a
surplus line broker may place a policy with that insurer.
3)Requires the surplus line broker to collect the surplus line
tax, which is 3% of the gross premium on the policy, and remit
that amount to the state.
4)Provides, as a matter of federal law, that a state may not
collect its surplus line tax after July 21, 2011, unless
federal conformity legislation is enacted.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . AB 315 is intended to conform California law to the
Nonadmitted and Reinsurance Reform Act ("NRRA") that is part
of the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, enacted last year by the federal government.
That federal act included provisions to add uniformity and
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simplicity to the states' regulatory laws governing the
placement of surplus line insurance, and collection of the
surplus line tax. It pre-empts certain regulatory
requirements of California law, but more importantly, unless
conforming law is enacted by July 21 of this year,
California's authority to collect the surplus line tax would
also be pre-empted.
2)The Bill Is Not As Complicated As It Appears . The bill
contains 14 pages of strikeout, and 16 pages of new text, in
addition to amendments to numerous Insurance Code sections
with technical conforming changes (mostly striking references
to the LESLI List, and inserting references to "home state
insured"). But the principles are not as complex as the
language may appear.
The federal law prohibits states from having mandatory listing
requirements like the LESLI List, but does not prohibit
establishment of financial solvency requirements. The surplus
line community, however, enjoys the convenience of a
formalized list of insurers that are known to be in compliance
and acceptable. But under the federal law, a list must be
voluntary. As a result, the bill repeals the LESLI list and
its detailed financial requirements, but then re-enacts very
similar detailed financial requirements twice - once as
elements of the criteria to be placed on the voluntary list,
and a second time to govern the criteria of insurers that are
not interested in complying with the voluntary listing
regulatory requirements. The financial standards, which were
increased with industry support to ensure policyholder
protection as recently as last Session, remain in place
essentially in the same form and amount as before.
3)Proposed Amendments Deleting Interstate Compact Language . The
most important amendment to be adopted at the hearing of this
bill is the deletion of Sections 27 and 34, which delegate the
authority to select an interstate tax collection compact to
the Executive Branch. Putting aside Constitutional issues
relating to the delegation of Legislative authority, there are
a number of policy considerations that have not yet been
resolved, and are unlikely to remain unresolved by the time
this bill needs to be chaptered.
a. Need for a compact . The surplus line tax produces
revenue of approximately $140 million annually.
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Approximately 5% of this is related to "multi-state
risks," which are policies issued to a policyholder in
California, but which cover risks in California and at
least one other state. In theory, a surplus line broker
would compute how much of the premium is attributable to
each state, and remit taxes accordingly. Dodd/Frank,
however, provides that the tax should be collected fully
by the state of the "home state insured" unless there is
a permissive interstate compact that provides for the
apportionment of the small amount associated with
multi-state risks.
b. Competing compact proposals . The National
Association of Insurance Commissioners (NAIC) has a
compact proposal, known as the Nonadmitted Insurance
Multistate Agreement or (NIMA). The National Conference
of Insurance Legislators (NCOIL) has an alternative
proposal known as the Surplus Lines Insurance Multi-State
Compliance Compact (SLIMPACT). Neither of these
proposals have been fully fleshed out to the point that a
sound policy debate could occur on the relative merits of
each proposal. In general, regulators and tax collectors
prefer the NIMA approach, and, thus far, surplus line
brokers have preferred the SLIMPACT approach. However,
there is increasing concern that any compact would be
unreasonably burdensome in light of the minor amount of
revenue involved, and the fact that this sort of
apportionment is not done for the admitted insurance
premium tax where multi-state risks are involved.
c. No compact at all ? The federal statute authorizes,
but does not require, that states enter into a compact.
In the absence of a compact, federal law provides that
each state retains the tax paid by its "home state
insureds" regardless of the existence of a minor
component of that premium tax that is attributable to
out-of-state operations. This is one of the tax
simplifications that both the surplus line industry and
its customers sought with the federal legislation.
However, there is no incentive for a "donor" state - a
state that would lose money collected from its home state
insureds if it allocated some of the revenue to other
states via an interstate compact - to ever join the
compact. Conversely, only "recipient" states - those
that would gain revenue - would have an incentive to join
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a compact. Thus, absent a federal mandate, there is a
strong likelihood that there will not be a functioning
compact. And in the short term, prior to July 21, when
this bill must be enacted, it is highly unlikely that a
consensus around a single functional compact can be
developed nationally. However, the author has expressed
the desire to entertain compact language in the event
that consensus can be developed.
4)Proposed Technical Amendments . In addition to the deletion of
the compacting language, the author will be offering a series
of technical amendments that have been worked out between the
Department of Insurance (DOI) and other interested parties,
and corrections proposed by Legislative Counsel.
5)Additional Amendments . It is anticipated that the bill will
require additional amendments, such as adoption of a
definition of "qualified risk manager," and other technical
implementation matters that are being discussed by DOI and
other interested parties. The expectation is that these
amendments will be adopted before the bill passes out of the
Assembly, so that Senate amendments will not be necessary and
cause additional delays in meeting the July 21 deadline.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Insurance (Sponsor)
California Insurance Wholesalers Association (CIWA)
Insurance Brokers and Agents of the West (IBA West)
National Association of Professional Surplus Line Offices
(NAPSLO)
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086