BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 480|
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THIRD READING
Bill No: AB 480
Author: Solorio (D)
Amended: 8/21/12 in Senate
Vote: 21
SENATE INSURANCE COMMITTEE : 7-0, 6/22/11
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Price,
Wyland
NO VOTE RECORDED: Lieu, Lowenthal
SENATE ENVIRONMENTAL QUALITY COMMITTEE : 5-0, 5/14/12
AYES: Simitian, Blakeslee, Kehoe, Lowenthal, Pavley
NO VOTE RECORDED: Strickland, Hancock
SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/16/12
AYES: Kehoe, Walters, Alquist, Dutton, Lieu, Price,
Steinberg
ASSEMBLY FLOOR : 70-0, 5/12/11 (Consent) - See last page
for vote
SUBJECT : Insurance: solid waste facilities
SOURCE : Waste Management
DIGEST : This bill clarifies that a captive insurer
meeting the statutory criteria of the Public Resources Code
(PRC) as a postclosure financial assurance mechanism is
recognized as valid insurance under California's Insurance
Code. Until January 1, 2018, this bill also adds as a
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requirement for approval of a solid waste facility operator
meeting its financial assurance obligations by establishing
an insurance carrier that the insurance mechanism not
provide in excess of 50% of the financial assurance
obligation that the solid waste facility operator is
required to meet in the state.
ANALYSIS :
Existing law:
California Insurance Code (CIC)
1. Generally requires insurance coverage provided to
businesses and individuals in California to be obtained
from an admitted, or California-licensed insurer, or
from a non-admitted insurer operating under the surplus
lines law.
2. California's 1992 adoption of Article 4.8 of Chapter 2
of Part 2 of Division 1 of the CIC, (the Business
Transacted with Producer Controlled Insurer Act of
1992), provides statutory recognition of "captive
insurers". They are defined in that Act as "either
insurance companies which are owned by another
organization and whose exclusive purpose is to insure
risks of the parent organization and affiliated
companies, or in the case of groups and associations,
insurance organizations which are owned by the insureds
and whose exclusive purpose is to insure risks of member
organizations and group or association members and their
affiliates." (CIC Section 1216.1(e)(3))
PRC
Section 43601 requires evidence of financial ability be
provided sufficient to meet the closure and postclosure
maintenance costs of solid waste landfills when needed. It
provides that if this evidence is demonstrated by use of
insurance, the insurance mechanism may be approved if the
insurance carrier is established by a solid waste facility
operator to meet the financial assurance obligations of
that operator and the insurance meets all of the following
requirements:
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1. The insurance mechanism is in full compliance with the
insurance requirements of subdivision (d) of Section
258.74 of Title 40 of the Code of Federal Regulations.
2. The insurance carrier is domiciled in the United States
and licensed in its state of domicile to write that
insurance.
3. The insurance carrier only provides financial assurance
to the operator that established the insurance carrier
as a form of self-insurance and does not market, broker,
or provide insurance to other parties.
4. The insurance carrier maintains an A- or better rating
by A.M. Best Company, or an equivalent rating by any
other agency acceptable to the Department of Resources
Recycling and Recovery (CalRecycle).
5. If requested by CalRecycle, an independent financial
audit report evaluating the assets and liabilities of
the insurance carrier and confirming compliance with the
statutory and regulatory requirements of the state of
domicile and an independent actuarial opinion on the
independence and financial soundness of the insurance
carrier by an actuary in good standing with the Casualty
Actuarial Society or the American Academy of Actuaries
regarding the adequacy of the loss reserves maintained
by the insurance carrier shall be submitted to
CalRecycle upon application and annually thereafter.
This bill:
1. Requires an issuer of an insurance policy that meets all
of the requirements of PRC Section 43601(e)(2) to be
eligible to provide the insurance described in that
provision.
2. Prohibits an issuer of an insurance policy from being
required to be a California admitted insurer or be
required to provide the insurance through a surplus line
broker.
3. Specifies that an insurance mechanism pursuant to PRC
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Section 43601(e)(2) may not provide more than 50% of the
statewide insurance obligation of a solid waste facility
operator.
4. Repeals the above provisions as of January 1, 2018.
5. Requires CalRecycle to submit to the Legislature, on or
before January 1, 2017, a report on the use of the
mechanisms demonstrating financial ability to provide
for the cost of closure and postclosure maintenance,
including, among other things, any financial liability
the state may assume if the mechanisms permitted under
this bill and existing law fail.
6. Provides that the mechanisms allowed by this bill may
only be used if CalRecycle determines it has received
private funds to conduct the study required by item #5
above.
Comments
A captive insurance company is a form of Alternative Risk
Transfer (ART). ART mechanisms have grown as a key tool in
the typical risk manager's tool kit as an alternative to
traditional insurance. Under an ART program, a company's
risks are funded by means other than the purchase of
insurance through an agent broker from an admitted insurer.
Forms of ART that are commonly encountered vary widely -
they include surplus lines placement, self-insured trusts,
risk retention groups and captive insurance companies. The
ART market permits businesses to control costs associated
with insurance brokerage while allowing the business a
means to finance all or a portion of its risk.
Captive insurance companies are a distinct and recognized
form of ART, and as indicated above, they have been
recognized as a class of risk management under CIC since
1992. As described in CIC Section 1216.1:
"Captive insurers are either insurance companies which
are owned by another organization and whose exclusive
purpose is to insure risks of the parent organization and
affiliated companies, or in the case of groups and
associations, insurance organizations which are owned by
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the insureds and whose exclusive purpose is to insure
risks of member organizations and group or association
members and their affiliates."
Captive insurance is a regulated form of ART self-insurance
that has existed since the 1960's. They are a closely held
insurance company whose insurance business is primarily
supplied by and controlled by owners, and in which the
original insureds are the principal beneficiaries. The
insureds have direct involvement and influence over the
company's major operations, including underwriting, claims
and management policy and investments. There are currently
5,000 captives licensed worldwide that service their
parents' risk financing needs. U.S.-owned captives account
for about two-thirds of the 5,000 captives worldwide.
While captives can be domiciled and licensed in a wide
number of domiciles both in the U.S. and off-shore, almost
half of U.S. states and more than three dozen countries
have established legal frameworks to attract captive
insurance entities to domicile there.
Vermont, which began serving as a domiciliary state for
captive insurers upon its legislature's 1981 adoption of
Vermont's Special Insurer Act, is now recognized as the
largest captive insurance domicile in the U.S. and the
third largest in the world, with an excess of $25 billion
in gross written premium in 2010. Vermont is also home to
42 of the companies that make up the Fortune 100, and 18 of
the companies that make up the Dow 30 have Vermont
captives.
Purpose of this bill . According to the author's office,
existing CalRecycle regulations are inconsistent with state
statutes and effectively prohibit a solid waste company
from using captive insurance -- even when the insurer meets
all the prescribed statutory criteria set forth in PRC
Section 43601. The solid waste industry has invested and
continues to invest in a variety of recycling and diversion
programs. Many of these companies also operate landfills
as part of an integrated system to manage waste materials.
The capital costs associated with CalRecycle's newly
enacted post closure financial assurance regulation
requirements reduce the amount of available capital to
invest in these programs. By ensuring that lower cost
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capital authorized by law is not impeded by unnecessarily
restrictive regulations, companies that operate landfills
will be in a better position to increase investments in
recycling and comply with state recycling requirements.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
According to the Senate Appropriations Committee, unknown
one-time costs, possibly in the high tens of thousands or
hundreds of thousands of dollars, from the Integrated Waste
Management Account (special fund) beginning in 2013-14 for
a study and possible audit on holders of captive insurance.
SUPPORT : (Verified 8/20/12)
Waste Management (source)
ARGUMENTS IN SUPPORT : According to Waste Management,
this bill's sponsor:
Waste Management has operated a single-parent captive
insurance company, National Guaranty Insurance Company
(NGIC) licensed in the state of Vermont, since 1989.
NGIC has an A- A.M. Best Company rating.
The use of a single-parent captive insurance company
permits diversification of risk-financing, promotes
superior risk management and claims management, and
facilitates access to reinsurance markets.
As importantly, the use of a single-parent captive
insurance company permits the insured company to avoid
the volatility of the commercial marketplace where
coverage can become unavailable or very expensive
unpredictably and rapidly.
The use of captive insurance in a diversified
risk-management portfolio is a commonly-employed and
widely accepted technique. AB 480 provides important
clarification in this regard.
ASSEMBLY FLOOR : 70-0, 5/12/11
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AYES: Achadjian, Allen, Ammiano, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter, Chesbro, Cook, Davis, Dickinson, Donnelly, Eng,
Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines,
Galgiani, Gatto, Gordon, Grove, Hagman, Halderman, Hall,
Harkey, Hayashi, Hill, Huber, Hueso, Huffman, Jeffries,
Jones, Knight, Lara, Logue, Ma, Mansoor, Mendoza, Miller,
Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan,
Perea, V. Manuel P�rez, Silva, Skinner, Smyth, Solorio,
Swanson, Valadao, Wagner, Wieckowski, Williams, Yamada,
John A. P�rez
NO VOTE RECORDED: Alejo, Cedillo, Conway, Garrick, Gorell,
Roger Hern�ndez, Bonnie Lowenthal, Mitchell, Portantino,
Torres
JJA:k 8/21/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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