BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 1216 (Lowenthal) Hearing Date: April 25, 2012
As Amended:April 17, 2012
Fiscal: Yes
Urgency: No
SUMMARY: Would conform California law to the National
Association of Insurance Commissioner's Credit for Reinsurance
Model Law.
DIGEST
Existing law
1. Prohibits the transaction of any class of insurance in this
state without first being admitted for that class of
insurance, and admission is secured by procuring a
certificate of authority from the Insurance Commissioner.
Before granting a certificate of authority to any applicant,
the commissioner is required to consider the qualifications
of the applicant, including, but not limited to, capital and
surplus and lawfulness and quality of investments;
2. Requires insurers doing business in this state to annually
make and file with the commissioner financial statements;
3. Requires that credit for reinsurance as an asset or
deduction from liability be allowed a domestic ceding insurer
only if the reinsurance contract includes certain provisions,
including, in the event of insolvency and the appointment of
a conservator, liquidator, or statutory successor of the
ceding company, that the reinsurance will be payable, as
specified, without diminution because of the insolvency;
4. Allows credit for reinsurance when the reinsurance is ceded
to an assuming insurer that is accredited as a reinsurer in
this state, except as specified;
5. Describes an accredited reinsurer for purposes of this
provision as one that, among other criteria, maintains a
SB 1216 (Lowenthal), Page 2
surplus as regards to policyholders in an amount that is
either not less than $20,000,000, and whose accreditation has
not been denied by the commissioner within the last 90 days,
or maintains a surplus that is less than $20,000,000 and
whose accreditation has been approved by the commissioner;
6. Provides that credit is allowed when reinsurance is ceded to
an assuming insurer that maintains a trust fund, as
specified;
7. Provides that credit for reinsurance as an asset or a
deduction from liability is allowed a foreign ceding insurer,
with exceptions, to the extent the credit has been allowed by
the ceding insurer's state of domicile if the state of
domicile is accredited by the National Association of
Insurance Commissioners (NAIC), or the credit or deduction
from liability would be allowed if the foreign ceding insurer
were domiciled in this state.
8. Credit for reinsurance as an asset or a deduction from
liability may be disallowed if the commissioner finds that
the financial condition of the reinsurer, or the collateral
or other security provided by the reinsurer, does not satisfy
the credit for reinsurance requirements applicable to a
ceding insurer domiciled in this state.
This bill
1. Would authorize the commissioner to designate an insurer as
a professional reinsurer when an insurer admitted and
domiciled in this state, or an insurer applying to become
admitted and domiciled in this state, is determined by the
commissioner to be qualified, as specified, which includes,
but is not limited to, the commissioner determining that the
insurer is principally engaged in the business of
reinsurance, that the insurer does not conduct significant
amounts of direct insurance as a percentage of its net
premiums, and is not engaged, on an ongoing basis, in the
business of soliciting direct insurance;
2. Would revise the requirement that credit for reinsurance as
an asset or deduction from liability be allowed a domestic
ceding insurer only if the reinsurance contract includes
certain provisions to additionally apply in the event of a
change in status of the ceding company, as specified
SB 1216 (Lowenthal), Page 3
including when the commissioner finds that the conditions for
the appointment of a conservator, liquidator, or statutory
successor has occurred with respect to the ceding company;
3. Would require a ceding insurer to take steps to manage its
reinsurance recoverables proportionate to its own book of
business and to diversify its reinsurance program;
4. Would require a domestic ceding insurer to notify the
commissioner within 30 days after reinsurance recoverables
from any single assuming insurer, or group of affiliated
assuming insurers, exceed 50% of the domestic ceding
insurer's last reported surplus to policyholders, or after it
is determined that the reinsurance recoverables are likely to
exceed that limit, as specified;
5. Would require a domestic ceding insurer to notify the
commissioner within 30 days after ceding to any single
assuming insurer, or group of affiliated assuming insurers,
more than 20% of the ceding insurer's gross written premium
in the prior calendar year, or after it has determined that
the reinsurance ceded is likely to exceed this limit, as
specified;
6. Would require that the reinsurer demonstrate to the
satisfaction of the commissioner that it has adequate
financial capacity to meet its reinsurance obligations and is
otherwise qualified to assume reinsurance from domestic
insurers, and would delete the provision authorizing a
reinsurer whose accreditation has been approved to maintain a
surplus of less than $20,000,000;
7. Would provide that an assuming insurer who maintains a
surplus of not less than $20,000,000 and whose accreditation
has not been denied by the commissioner within the last 90
days shall be deemed to meet the requirement of adequate
financial capacity and would require that an assuming insurer
who is not deemed to meet this requirement obtain the
affirmative approval of the commissioner;
8. Would require that the approval of the commissioner be based
upon a finding that the assuming insurer has adequate
financial capacity to meet its reinsurance obligations and is
otherwise qualified to assume reinsurance from domestic
insurers;
SB 1216 (Lowenthal), Page 4
9. Would also enact, only until January 1, 2016, provisions
governing the certification and rating of assuming insurers
by the commissioner and specify additional circumstances
under which credit shall be allowed to a domestic insurer
when the reinsurance is ceded to an assuming insurer that has
been certified;
a. Would require, among other things, that the
assuming insurer be domiciled and licensed to transact
insurance or reinsurance in a qualified jurisdiction and
would require the commissioner to create and publish a
list of qualified jurisdictions, as specified;
b. Would also require the assuming insurer to
maintain minimum capital and surplus, or its equivalent,
in an amount determined by the commissioner, and to
maintain financial strength ratings from 2 or more ratings
agencies, as specified.
10. Would
impose various filing requirements on certified reinsurers,
including notification within 10 days of any regulatory
actions taken against the certified reinsurer and annual
audited financial statements;
11. Would
require the commissioner to assign a rating to each certified
reinsurer based on specified criteria, such as the certified
insurer's financial
strength rating from an acceptable rating agency and the
certified insurer's
reputation for prompt payment of claims;
12.Would also authorize the commissioner to suspend or revoke
an accredited or certified reinsurer's accreditation or
certification after notice and opportunity for hearing, as
specified;
13.Would require that credit for reinsurance not be denied a
foreign ceding insurer to the extent that credit is
recognized by the ceding insurer's domestic state regulator,
provided that the domestic state is accredited by the NAIC,
or the domestic state regulator has financial solvency
requirements similar to the requirements necessary for NAIC
accreditation.
SB 1216 (Lowenthal), Page 5
COMMENTS
1. Purpose of the bill. According to the Insurance Commissioner
("Comissioner"), SB 1216 ensures that California aligns with
federal law, is current with NAIC reinsurance-related changes
and that the Commissioner has the needed authority to carry
out the new reinsurance regulatory activities.
2. Background and Discussion
Legislative History. The National Association of Insurance
Commissioners (NAIC) adopted its revised Credit for
Reinsurance Model Law ("Model Law") on November 6, 2011. The
revisions are, in part, built around the Nonadmitted and
Reinsurance Reform Act, part of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 ("Dodd-Frank
Act").
The Dodd-Frank Act provides that even though a reinsurer may
sell in many states, only the state where the reinsurer is
domiciled (where it is incorporated or entered through, and
licensed) may regulate the financial solvency of a reinsurer.
However, it defines reinsurers as an insurer that is
principally engaged in the business of reinsurance (what SB
1216 refers to as professional reinsurers).
SB 1216 conforms California law to the Model Law, which in
turn incorporates the relevant mandates of the Dodd-Frank
Act. Reflecting the Model Law, SB 1216 embraces the
following principles:
a. Ensure the availability of legal forums in order
to effectively and fairly resolve disputes and enforce
judgments.
b. Provide sufficient means for regulators to obtain
information necessary to monitor an insurer's activities
and financial health.
c. Require reinsurers to demonstrate the integrity
and financial capacity to meet their obligations.
The Business of Reinsurance. An insurer assumes liability or
risk of loss by selling policies. California law limits the
aggregate amount of insurance an insurer can sell according
SB 1216 (Lowenthal), Page 6
to a cap defined, in part, by its available assets. The more
resources an insurer has, the more risk it can accept.
Reinsurance offers an insurer a way to subtract some
liability in that formula. Through a reinsurance agreement,
an insurer or ceding insurer may pass risk of loss or
liability to a third person known as the assuming insurer or
reinsurer. (Ins. Code � 620.) By passing along that risk,
the ceding insurer receives a credit against its liabilities;
this credit allows the ceding insurer to accept more risk.
(Legal liability to the policyholder for the original risk
remains with the insurer.)
Reinsurance agreements are only as good as the reinsurer's
financial condition and willingness to pay claims. Although
each state has its own insurance regulator, the NAIC has
worked to establish uniformity and cooperation among the
jurisdictions.
Credit for Reinsurance Under Existing Law. The inevitable
question becomes whether a reinsurance agreement is
sufficiently reliable to trigger credits against an insurer's
liabilities. Except for a few narrow alternatives, existing
law grants an insurer credit against liabilities for
reinsurance contracts according to the following formula:
Compliant Contract + Qualified Reinsurer = Credit Against
Insurer's Liabilities
Under existing law, a reinsurance contract must provide that
the reinsurer will indemnify the insurer and that in the
event of a ceding insurer's insolvency, the reinsurer will
make payments to specified persons. SB 1216 would also
require the same when the ceding insurer experiences "a
change in status" (any Regulatory Action Level Event defined
in Insurance Code section 739.4 or other event which permits
the appointment of a conservator, liquidator, or statutory
successor).
How a reinsurer qualifies to offer creditable reinsurance
depends on the reinsurer's jurisdiction of domicile. Foreign
insurers come from states or U.S. jurisdictions outside of
California. Non-U.S. domiciled insurers, sometimes referred
to as alien insurers are domiciled outside the U.S. and its
territories.
SB 1216 (Lowenthal), Page 7
Under existing law, an insurer may receive credit through one
of the following types of reinsurers.
a. California admitted insurers. Existing law permits an
insurer admitted in California to sell insurance to also
sell reinsurance.
b. Foreign insurers that have:
i. Established a qualified trust. Under existing
law, a reinsurer may qualify by setting aside
sufficient assets held in a trust ( "collateral") to
cover assumed liabilities. SB 1216 adds additional
protections to ensure that legal remedies are available
and enforceable and requires the trust agreement to
provide for specified procedures if the trust funds
prove inadequate or if the grantor becomes insolvent.
Additionally, the bill provides the Commissioner
authority to reduce the minimum amount of security held
in trust three years after the reinsurer has
permanently discontinued underwriting new business
secured by the trust.
ii. Received designation as a professional reinsurer.
Professional insurers deal almost exclusively in
reinsurance. Federal law requires that credit be
granted to domestic insurers for contracts with
reinsurers that are designated professional reinsurers
by other NAIC-compliant jurisdictions (that is,
California must grant credit when a reinsurer's state
of domicile has designated it a professional reinsurer
absent nonfinancial reasons to deny credit). SB 1216
would conform California to federal law by
incorporating the Dodd-Frank definition and permit a
professional reinsurer to refer to itself as a
professional reinsurer in its name, advertisements, and
solicitations.
iii.Received accreditation from California.
Accreditation by the Commissioner allows a reinsurer to
sell only reinsurance. This permits foreign insurer to
sell reinsurance without being subject to all of the
SB 1216 (Lowenthal), Page 8
laws applicable to domestic insurers (such as the
California Insurance Holding Company Act).
a. Non-U.S. domiciled insurers that have established a
qualified trust. SB 1216 would slightly revise the
qualifications applicable groups of incorporated and
individual unincorporated underwriters, and groups of
incorporated insurers under common administration (such as
a Lloyd's of London syndicate).
Credit for Reinsurance Agreements with Certified Reinsurers.
SB 1216 introduces a new category of reinsurers.
Certification rules would apply to contracts prospectively,
contracts entered into prior to certification may be subject
to the new rules if the contract is amended by mutual
agreement. If a certified reinsurer ceases to meet the
requirements for certification, the commissioner may suspend
or revoke the reinsurer's certification after a hearing based
on regulatory action by the reinsurer's domiciliary
jurisdiction or a finding that an emergency requires
immediate action.
Requirements for Certification. To obtain and maintain
certification, the reinsurer must:
a. Be domiciled and licensed to transact insurance in a
qualified jurisdiction (NAIC accredited states and
territories of the U.S. automatically qualify).
b. Maintain minimum capital and surplus, or equivalent,
in an amount determined by the Commissioner, but no less
than $250 million. (Special provisions allow pooling
agreements between incorporated and individual
unincorporated underwriters.)
c. Maintain financial strength ratings from two or more
rating agencies, such as Standard & Poor's, Moody's
Investors Services, Fitch Ratings, etc.
d. Submit to the authority of competent jurisdictions in
the U.S. and agree to provide security if it resists
SB 1216 (Lowenthal), Page 9
enforcement of final U.S. judgments.
e. Agree to comply with applicable filing requirements
determined by the Commissioner.
f. Comply with other requirements deemed relevant by the
Commissioner.
Adoption of Certification by Another Jurisdiction. If an
applicant for certification is certified as a reinsurer in
another NAIC accredited jurisdiction, the Commissioner may
defer to that determination and the rating assigned, but
changes by the original jurisdiction apply automatically. The
Commissioner may also withdraw recognition of portable
certification, with written notice, at any time and assign a
new rating. (Special rules apply to associations including
incorporated and individual unincorporated underwriters.)
Certification of Non-U.S. Domiciled Insurers. In order to
certify a non-U.S. domiciled insurer, the Commissioner must
publish a list of qualified jurisdictions that have proven to
be cooperative with the U.S. in resolving legal disputes and
enforcing judgments in a timely manner, and have demonstrated
effective regulation of financial stability of insurers. The
Commissioner must refer to the NAIC list of qualified
jurisdictions or similar list published by the U.S. Treasury
and may only qualify a jurisdiction not included on these
lists with a thoroughly documented justification.
Rating Certified Reinsurers and Corresponding Security
Requirements. The Commissioner will assign a rating to each
certified reinsurer, considering the financial strength
ratings of qualified rating agencies as translated to an NAIC
scale (Secure 1 - 5, and Vulnerable). For instance, the
ratings category "Secure - 2" corresponds to Standard &
Poor's rating of AA+, AA, or AA- and Moody's Investors
Service rating of Aa1, Aa2, or Aa3. The lowest rating by an
approved agency establishes the maximum rating of the
insurer. When assigning the certification rating, the
Commissioner may consider other factors such as a reinsurer's
business practices and reputation; whether any regulatory
actions have been taken against the applicant; report of an
independent auditor and audited financial statements, etc.
Practically speaking, the rating determines how much security
SB 1216 (Lowenthal), Page 10
a reinsurer must provide to obtain certification.
A certified reinsurer would be required to post security (or
collateral) by percentage of obligations assumed from U.S.
ceding insurers based upon the financial strength rating as
listed in the chart below.
Ratings security required
------------------
|Secure - 1: | 0%|
| | |
|------------+-----|
|Secure - 2: | 10%|
| | |
|------------+-----|
|Secure - 3: | 20%|
| | |
|------------+-----|
|Secure - 4: | 50%|
| | |
|------------+-----|
|Secure - 5: | 75%|
| | |
|------------+-----|
|Vulnerable |100% |
------------------
Rating and Collateral Adjustments. If a rating agency adjusts
the certified reinsurers financial strength rating, the
Commissioner would have the authority to adjust its
certification rating, triggering a different security
requirement. The impact on outstanding contracts would depend
on whether the reinsurer would be determined to be more or
less secure. Under certain circumstances, such as the
termination of certification or order of rehabilitation, the
Commissioner would require the reinsurer to post 100%
security so that the ceding insurer could continue to receive
credit.
Security must be held in a form acceptable to the
Commissioner or in a trust. Additionally, reinsurance
contracts based on certification of the assuming insurer must
carry a proper funding clause that requires the reinsurer to
maintain security sufficient to avoid the imposition of any
financial statement penalty on the ceding insurer - this
allows a ceding insurer to seek civil remedies if necessary
SB 1216 (Lowenthal), Page 11
rather than depend on a disciplinary action by the
Commissioner.
Retirement of Business. If a certified reinsurer ceases to
assume new business, it may apply for reduced security
requirements.
Temporary Reduction of Collateral Requirements After
Catastrophe. According to the Commissioner, SB 1216 provides
a system for certified non-U.S.-based reinsurers (or alien
reinsurers) to reduce collateral under specified conditions.
For instance, because catastrophes can cause a sudden drain
on the resources of a reinsurer, SB 1216 would provide
reinsurers up to one year to backfill collateral
requirements. The deferral period, however, is conditioned on
the reinsurer making timely payments (as determined by the
Commissioner) and is only applicable to certain lines of
insurance (mostly property, but including some multiple peril
policies such as homeowner's policies).
Disallowance of Credit. The Commissioner may disallow credit
based upon a finding that: (a) certification will not operate
as intended under a literal reading of certification
requirements; or (b) the reinsurer's financial condition or
the collateral required does not satisfy other minimum credit
requirements for certification.
Sunset Date. The section authorizing and defining
certification will be automatically repealed on January 1,
2016, unless extended or renewed.
1. Summary of Arguments in Support
a. According to the Commissioner, SB 1216 brings
California into conformity with the Dodd-Frank Act
regarding the definition of professional insurers and the
recognition that only the domiciled state of the ceding
insurer may determine the credit a ceding insurer may take
on its financial statements.
b. The Commissioner supports this bill because it adapts
California law to the current NAIC model. In particular,
the Commissioner points out key revisions by the NAIC
relating to certification of non-admitted reinsurers
allowing state regulators to certify a reinsurer or to
SB 1216 (Lowenthal), Page 12
recognize certification by another NAIC accredited state,
as well as the NAIC rating system permitting certified
non-U.S.-based reinsurers to reduce collateral under
specified conditions. The Commissioner notes that the
certification process is pivotal for a California domestic
ceding insurer to qualify for credit on its financial
statements.
c. The American Insurance Association (AIA) supports SB
1216 in part because it contains a requirement for
mandatory funding by the reinsurer. The AIA asserts that
the clause potentially allows the ceding insurer more
self-help options, including civil actions or termination
of the contract, rather than simply looking to the
Commissioner for assistance if a foreign insurer fails to
post adequate collateral to cover expected losses.
d. Allstate supports SB 1216 because it favors
modernizing reinsurance regulation in a balanced way that
addresses the financial soundness of ceding companies and
reinsurers, in order to help assure that the ceding
companies will be able to pay policyholder claims in the
event of a significant catastrophic loss.
1. Summary of Arguments in Opposition
None received (as of April 21, 2012)
2. Suggested Amendments
a. Amend page 16, lines 19-22, to read:
(d) An association, including incorporated and
individual unincorporated underwriters, may be a certified
reinsurer. In order to be eligible for certification, in
addition to satisfying requirements of subdivision (b) of
this section and subparagraphs subparagraph (B) and (C ) of
paragraph (4) of subdivision (d) of Section 922.4. 922.4,
the reinsurer shall meet all of the following
requirements:
b. Amend page 17, lines 35 to page 18, line 10, to read
(4) Annually, audited financial statements (audited
United States Generally Accepted Accounting Principles),
regulatory filings, and actuarial opinion (as filed with
SB 1216 (Lowenthal), Page 13
the certified reinsurer's supervisor) statements, (audited
United States Generally Accepted Accounting Principles
basis if available, audited International Financial
Reporting Standards basis statements are allowed but must
include an audited footnote reconciling equity and net
income to a United States Generally Accepted Accounting
Principles basis, or, with the written permission of the
commissioner, audited International Financial Reporting
Standards statements with reconciliation to United States
Generally Accepted Accounting Principles certified by an
officer of the company), regulatory filings, and actuarial
opinion (as filed with the certified reinsurer's
supervisor). Upon the initial certification, audited
financial statements for the last three years filed with
the certified reinsurer's supervisor.
c. Amend page, page 21, line 37 to 22, line 13, to
read:
(H) For certified reinsurers not domiciled in the
United States, audited financial statements on a United
States Generally Accepted Accounting Principles basis,
regulatory filings, and actuarial opinion (as filed with
the non-United States jurisdiction supervisor) statements,
(audited United States Generally Accepted Accounting
Principles basis if available, audited International
Financial Reporting Standards basis statements are allowed
but must include an audited footnote reconciling equity
and net income to a United States Generally Accepted
Accounting Principles basis, or, with the written
permission of the commissioner, audited International
Financial Reporting Standards statements with
reconciliation to United States Generally Accepted
Accounting Principles certified by an officer of the
company), regulatory filings, and actuarial opinion (as
filed with the non-United States jurisdiction supervisor).
Upon the initial application for certification, the
commissioner will consider audited financial statements
for the last three years filed with its non-United States
jurisdiction supervisor.
d. Amend page, page 21, lines 8-13, to read:
(vi) Ratings category "Vulnerable - 6 " corresponds to
A.M. Best Company rating B, B-, C++, C+, C, C-, D, E, or
F; Standard & Poor's rating BB+, BB, BB-, B+, B, B-, CCC,
SB 1216 (Lowenthal), Page 14
CC, C, D, or R; Moody's Investors Service rating Ba1, Ba2,
Ba3, B1, B2, B3, Caa, Ca, or C; and Fitch Ratings rating
BB+, BB, BB-, B+, B, B-, CCC+, CC, CCC-, or D DD .
e. Amend page 24, line 9-21, to read:
(i) A certified reinsurer shall secure obligations
assumed from United States ceding insurers under this
subdivision at a level consistent with its rating. The
amount of security required in order for full credit to be
allowed shall correspond with the following requirements:
Ratings security required
------------------
|Secure - 1: | 0%|
| | |
|------------+-----|
|Secure - 2: | 10%|
| | |
|------------+-----|
|Secure - 3: | 20%|
| | |
|------------+-----|
|Secure - 4: | 50%|
| | |
|------------+-----|
|Secure - 5: | 75%|
| | |
|------------+-----|
|Vulnerable |100% |
|- 6: | |
------------------
f. Amend page 26, line 4-15, to read:
(8) In order to facilitate the prompt payment of claims, a
certified reinsurer shall not be required to post security
for catastrophe recoverables for a period of one year from
the date of the first instance of a liability reserve
entry by the ceding company as a result of a loss from a
catastrophic occurrence that is likely to result in
significant insured losses, as recognized by the
commissioner. The one-year deferral period is contingent
upon the certified reinsurer continuing to pay claims in a
timely manner, as determined by the commissioner in
writing . Reinsurance recoverables for only the following
SB 1216 (Lowenthal), Page 15
lines of business as reported on the NAIC annual financial
statement related specifically to the catastrophic
occurrence will be included in the deferral:
1. Prior and Related Legislation
None
SB 1216 (Lowenthal), Page 16
POSITIONS
Support
Department of Insurance/Sponsor
Allstate Insurance Company
American Council of Life Insurers (ACLI)
American Insurance Association (AIA)
Association of California Life and Health Insurance Companies
(ACLHIC)
Personal Insurance Federation of California (PIFC)
Opposition
None received (as of April 22, 2012)
Consultant: Hugh Slayden, (916) 651-4773