BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1216|
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THIRD READING
Bill No: SB 1216
Author: Lowenthal (D)
Amended: 5/7/12
Vote: 21
SENATE INSURANCE COMMITTEE : 8-0, 4/25/12
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Lieu,
Lowenthal, Wyland
NO VOTE RECORDED: Price
SENATE APPROPRIATIONS COMMITTEE : 7-0, 5/14/12
AYES: Kehoe, Walters, Alquist, Dutton, Lieu, Price,
Steinberg
SUBJECT : Reinsurance: professional reinsurers
SOURCE : Department of Insurance
DIGEST : This bill conforms California law to the
National Association of Insurance Commissioners (NAIC)
Credit for Reinsurance Model Law.
ANALYSIS :
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
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(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
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 NAIC, or
the credit or deduction from liability would be allowed
if the foreign ceding insurer were domiciled in this
state.
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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. Authorizes 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. Revises 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 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. Requires 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. Requires 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
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limit, as specified;
5. Requires 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. Requires 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 deletes the provision authorizing
a reinsurer whose accreditation has been approved to
maintain a surplus of less than $20,000,000;
7. Provides 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 requires
that an assuming insurer who is not deemed to meet this
requirement obtain the affirmative approval of the
Commissioner;
8. Requires 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;
9. Enacts, only until January 1, 2016, provisions governing
the certification and rating of assuming insurers by the
Commissioner and specifies 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. Requires, among other things, that the assuming
insurer be domiciled and licensed to transact
insurance or reinsurance in a qualified jurisdiction
and requires the Commissioner to create and publish a
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list of qualified jurisdictions, as specified;
B. Requires 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 two or more ratings
agencies, as specified.
10.Imposes various filing requirements on certified
reinsurers, including notification within ten days of
any regulatory actions taken against the certified
reinsurer and annual audited financial statements;
11.Requires 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.Authorizes the Commissioner to suspend or revoke an
accredited or certified reinsurer's accreditation or
certification after notice and opportunity for hearing,
as specified;
13.Requires 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.
Background
Legislative History . The 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,
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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 this bill refers to as professional reinsurers).
This bill conforms California law to the Model Law, which
in turn incorporates the relevant mandates of the
Dodd-Frank Act. Reflecting the Model Law, this bill
embraces the following principles:
1. Ensure the availability of legal forums in order to
effectively and fairly resolve disputes and enforce
judgments.
2. Provide sufficient means for regulators to obtain
information necessary to monitor an insurer's activities
and financial health.
3. Require reinsurers to demonstrate the integrity and
financial capacity to meet their obligations.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Costs of up to $122,396 fully recoverable by filing fees
and cost recovery (Special Fund) as follows:
FY 2012-13 costs of $51,616 with expected filing fee
revenue of $4,500 and cost recovery of approximately
$21,000. (Special)
FY 2013-14 costs of $122,396 with expected filing fee
revenue of $28,000 and cost recovery of about $94,000.
(Special)
FY 2014-15 costs of $38,035 with filing fee revenue of
approximately $27,000 and cost recovery of $11,000.
(Special)
The Department of Insurance anticipates the need for 0.8 PY
temporary Staff Counsel during the 2013-14 peak impact
year. Any costs incurred by the Department of Insurance
will either be offset by filing fee revenue or recovered
directly from the insurer. SB 1216 provides for a $2,500
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professional reinsurer filing fee, however, the department
does not anticipate a significant number of insurers
applying for qualification as a professional reinsurer.
The $1,500 filing fee for a certified reinsurer will be
established via regulations and will include a $1,500
annual certification renewal fee. The department
anticipates about 18 reinsurers applying for certification
in the first three years and an occasional one applying
thereafter. Any costs not recoverable such as those for
rulemaking will be minor and absorbable within the
department's existing budget.
SUPPORT : (Verified 5/15/12)
Department of Insurance (source)
Allstate Insurance Company
American Council of Life Insurers
American Insurance Association
Association of California Life and Health Insurance
Companies
Personal Insurance Federation of California
ARGUMENTS IN SUPPORT : According to the Commissioner,
this bill 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.
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
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.
JJA:kc 5/15/12 Senate Floor Analyses
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SUPPORT/OPPOSITION: SEE ABOVE
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