BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 315|
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THIRD READING
Bill No: AB 315
Author: Solorio (D)
Amended: 5/5/11 in Assembly
Vote: 27 - Urgency
SENATE INSURANCE COMMITTEE : 9-0, 6/8/11
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Lieu,
Lowenthal, Price, Wyland
SENATE APPROPRIATIONS COMMITTEE : 8-0, 6/27/11
AYES: Kehoe, Walters, Alquist, Emmerson, Lieu, Pavley,
Price, Steinberg
NO VOTE RECORDED: Runner
ASSEMBLY FLOOR : 78-0, 5/19/11 - See last page for vote
SUBJECT : Surplus line brokers
SOURCE : Department of Insurance
DIGEST : This bill conforms California law applicable to
surplus line insurance to mandatory changes included in the
federal Nonadmitted and Reinsurance Reform Act provisions
of last year's Dodd-Frank Wall Street Reform and Consumer
Protection Act.
ANALYSIS :
Existing California law:
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1. Requires insurers wishing to "transact insurance" in
California to be "admitted" (or licensed) by the
Department of Insurance (DOI) for that purpose.
2. Provides, as a key element of licensing, financial
oversight in the form of solvency monitoring activities.
The primary focus of financial analysis at the DOI is
on licensed multi-state insurers and licensed
California-domiciled companies.
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. Requires that such nonadmitted insurers must apply for
placement on the DOI's "List of Eligible Surplus Lines
Insurers" (LESLI List), and they cannot be added until
the Insurance Commissioner approves the application as
meeting statutory requirements.
5. Requires insurance exchanges, which are a class of
state-regulated entity which can accept surplus lines
risks, to maintain capital and surplus in the same
amount as a surplus line company.
6. Prohibits, for most purposes, 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.
7. Imposes various duties on surplus lines broker to ensure
compliance with the Surplus Lines law.
Existing federal law:
1. The federal Nonadmitted and Reinsurance Reform Act
(NRRA) adopted as Subtitle B of Title V in the
Dodd-Frank Wall Street Reform and Consumer Protection
Act (Act) last year becomes effective on July 21, 2011.
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The NRRA includes provisions preempting state laws
applying to nonadmitted insurance other than laws from
the policyholder's home state as of July 21, 2011.
2. The NRRA grants the home state of a policyholder the
exclusive authority to require payment of premium taxes
and placement regulation by nonadmitted insurers. The
Act establishes a uniform mechanism for payment and
allocation of nonadmitted insurance and regulation of
surplus lines brokers.
3. The NRRA revises the process for exempt commercial
purchasers to obtain insurance from surplus lines
carriers and defines "exempt commercial purchaser" as
any person that, at the time of placement, satisfies the
following requirements:
A. Employs or retains a qualified risk manager to
negotiate insurance coverage;
B. Has paid aggregate nationwide commercial property
and casualty insurance premiums in excess of $100,000
in the immediately preceding 12 months; and
C. The person meets at least one of the following
criteria:
Possesses a net worth in excess of $20
million (as adjusted in accordance with the Act's
requirements);
Generates annual revenues in excess of $50
million (as adjusted in accordance with the Act's
requirements);
Employs more than 500 full-time or
full-time equivalent employees per individual
insured or is a member of an affiliated group
employing more than 1,000 employees in the
aggregate;
Is a not-for-profit organization or public
entity generating annual budgeted expenditures in
excess of $30 million (as adjusted in accordance
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with the Act's requirements); or
Is a municipality with a population in
excess of 50,000 persons.
The NRRA provides if the commercial purchaser satisfies
these requirements, then the surplus lines broker will be
exempt from state law requirements to determine whether the
amount or type of coverage sought is available from
admitted insurers.
This bill:
1. Achieves conformity with the NRRA by repealing the
requirement that, in most circumstances, prohibits
placement of insurance with a nonadmitted insurer unless
that insurer is on the LESLI List.
2. Repeals the 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 financial requirements that nonadmitted
insurers 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/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
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admitted market prior to placement of insurance with a
nonadmitted insurer.
7. Imposes on a surplus line broker the duty to ascertain
if an 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
NRRA rules.
9. Reformulates the surplus line broker licensing law to
conform to the NRRA.
10.Makes numerous technical and conforming amendments.
Background and Discussion .
The newly adopted federal law (NRRA) prohibits states from
having mandatory listing requirements like California's
current LESLI List, but does not prohibit state
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 and they are allowed under the
NRRA if voluntary.
Accordingly, this 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.
Comments
Purpose of the bill . This bill's purpose is to conform
California's Surplus Lines law to the provisions of the
NRRA adopted as Subtitle B of Title V in the Act which
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President Obama signed into law on July 21st, 2010.
That federal act included provisions to add uniformity and
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, and, unless conforming law
is enacted by July 21, 2011, California's authority to
collect the surplus line tax would also be limited.
States have until July 21, 2011 to conform their laws to
the NRRA. After that date, its preemption provisions kick
in.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13
2013-14 Fund
Admin expenses ----------minor, absorbable----------
Special*
Gross premium tax Unknown, potentially several
million General
revenue gain or loss
*Insurance Fund
SUPPORT : (Verified 6/27/11)
Department of Insurance (source)
California Insurance Wholesalers Association
Insurance Brokers and Agents of the West
National Association of Professional Surplus Line Offices
ARGUMENTS IN SUPPORT : The DOI, this bill's sponsor,
states "AB 315 incorporates into California law applicable
provisions of recently enacted federal law that revamped
the business and taxation practices of surplus lines
insurance." The reason for this bill's urgency clause is
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addressed as follows:
"Enactment of AB 315 by July 21, 2011, is integral for
the smooth transition of California's surplus lines
market to the new federal requirements. Failing to meet
this deadline could result in market disruption and the
potential for loss of business even in the admitted
market."
In additional commentary, the DOI states:
"A surplus lines insurer, also known as a non-admitted
insurer, is not licensed in California, but is licensed
in another state or country. Under current state law,
surplus lines brokers may place coverage with a surplus
lines insurer if insurance for the risk is not available
from an admitted insurer and other specified criteria are
satisfied. Surplus lines premium tax imposed on the
insured is collected by the CDI from the broker placing
the coverage, and remitted to the state's General Fund.
An insured also may directly obtain coverage from a
surplus lines insurer under specified conditions, and in
these cases the insured remits the premium tax directly
to the Franchise Tax Board. For multi-state policies,
California collects premium tax associated with only its
allocated portion of the policy risks.
"Last year, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act
(Act). In addition to making extensive changes in the
financial markets, the Act provides:
Exclusive rights to the home state of the insured
for regulation of surplus lines insurance placements
and broker license requirements;
Specifies that the home state of the insured has
sole authority to collect surplus lines premium taxes;
and,
Permits states to enter into tax sharing
arrangements to allocate taxes on multi-state surplus
lines policies.
California, as well as the other states, has until July
21, 2011, to enact the applicable provisions of the Act
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to avert federal preemption. AB 315 incorporates
applicable provisions of the Dodd-Frank Act into
California law."
ASSEMBLY FLOOR : 78-0, 5/19/11
AYES: Achadjian, Allen, Ammiano, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson,
Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani,
Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove,
Hagman, Halderman, Hall, Harkey, Hayashi, Roger
Hern�ndez, Hill, Huber, Hueso, Huffman, Jeffries, Jones,
Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor,
Mendoza, Miller, Mitchell, Monning, Morrell, Nestande,
Nielsen, Norby, Olsen, Pan, Perea, V. Manuel P�rez,
Portantino, Silva, Skinner, Smyth, Solorio, Swanson,
Torres, Valadao, Wagner, Wieckowski, Williams, Yamada,
John A. P�rez
NO VOTE RECORDED: Alejo, Gorell
JJA:kc 6/28/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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