BILL ANALYSIS �
SB 1216
Page 1
Date of Hearing: June 20, 2012
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 1216 (Lowenthal) - As Amended: May 7, 2012
SENATE VOTE : 37-0
SUBJECT : Reinsurance
SUMMARY : Conforms California law with recent changes in
federal law and the National Association of Insurance
Commissioners (NAIC) model law regarding the regulation of
reinsurance. Specifically, this bill :
1)Permits the Insurance Commissioner (commissioner) to designate
a domestic insurer principally engaged in the business of
reinsurance as a professional reinsurer.
2)Permits professional reinsurers to include that designation in
their name, solicitations and advertisements.
3)Requires reinsurance contracts to include a provision that
makes the reinsurance payable to a successor entity if there
is a change of status to the insurer purchasing the
reinsurance (ceding insurer).
4)Requires a ceding insurer to notify the commissioner when
recoverables from a single reinsurer exceed 50% of the of the
insurer's policyholder surplus.
5)Requires a ceding insurer to notify the commissioner if it
obtains reinsurance for 20% or more of its gross written
premium from a single reinsurer.
6)Permits the commissioner to certify reinsurers that:
a) Hold a license to transact insurance in another
state or qualified jurisdiction.
b) Maintain minimum capital and surplus of at least
$250 million.
c) Maintain financial strength ratings from at least
two recognized rating agencies.
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d) Submits to the commissioner's jurisdiction.
e) Submits to information filing requirements
determined by the commissioner.
f) Complies with any other requirements deemed relevant
by the commissioner.
7)Requires the commissioner to consider reinsurance provided by
a certified reinsurer as an asset or credit against the
liabilities of a ceding insurer.
8)Permits the commissioner to reduce the minimum surplus in a
trust account securing reinsurance contracts if the reinsurer
has discontinued activity for at least three years and a
reduced minimum surplus is adequate to protect ceding
insurers. The commissioner may not reduce the minimum surplus
to less than 50% of the reinsurer's liabilities.
9)Requires the commissioner to assign a financial strength
rating to each certified reinsurer based on a range of factors
including the ratings provided by recognized rating agencies.
10)Permits the commissioner to recognize a reinsurance
certification and rating by another jurisdiction that has been
accredited by the NAIC. The commissioner may withdraw
recognition of another jurisdiction's certification or rating
with written notice to the certified reinsurer.
11)Permits an association of individual or corporate
underwriters to be a certified reinsurer.
12)Requires the commissioner to notice an application for
certification as a reinsurer on the Department of Insurance
website and allow 90 days for the public to comment on the
application.
13)Requires certified reinsurers to comply with a range of
information filing requirements.
14)Prohibits the commissioner from disclosing information filed
by certified reinsurers that is exempt from disclosure under
the California Public Records Act.
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15)Requires the commissioner to establish a list of nations that
are accepted as "qualified jurisdictions" for the purposes of
certifying alien reinsurers. This list must be based on a
similar list to be established by NAIC and on a number of
other factors including the comparability of the nation's
regulatory structure for insurers and the extent to which the
nation cooperates with regulators from the United States.
16)Permits the commissioner to certify an alien reinsurer from a
qualified jurisdiction.
17)Requires certified reinsurers to provide collateral for
reinsurance obligations based on a financial security rating
assigned by the commissioner. The highest rated reinsurers
would be required to provide no collateral and the lowest
rated reinsurers would have to provide 100% collateral.
18)Provides that certified reinsurers do not have to maintain
collateral levels for one year following a catastrophic event
likely to result in significant insured losses for the
reinsurer. The deferral period is contingent upon the
reinsurer continuing to pay claims in a timely manner.
19)Sunsets the reinsurer certification law on January 1, 2016.
20)Permits the commissioner to suspend or revoke a reinsurer's
certification or accreditation.
21)Permits the commissioner to collect the cost of the
certification process from the reinsurer.
22)Provides that financial statement credit for reinsurance is
determined by the regulator in the state where the ceding
insurer is domiciled.
EXISTING LAW :
1)Defines reinsurance as a contract that indemnifies an insurer
against a loss or liability created by an insurance policy.
2)Requires insurers doing business in California to file reports
detailing their financial condition on a quarterly basis.
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3)Permits reinsurance to be counted as an asset or reduction in
liability on financial statements filed with the commissioner.
4)Permits domestic insurers to act as reinsurers.
5)Permits foreign insurers to act as reinsurers if they are
accredited by the commissioner. Accredited insurers must:
a) Submit to California's jurisdiction.
b) Designate an agent for service of process in
California.
c) Be licensed as an insurer in another state.
d) File annual financial information with the
commissioner.
e) Disclose any insolvencies or enforcement actions by
other insurance regulators.
f) Maintain a surplus of $20 million.
6)Permits the commissioner to revoke accreditation of a
reinsurer.
7)Permits alien insurers to act as reinsurers if they meet the
following requirements:
a) Establish a trust fund to pay reinsurance
obligations.
b) Submit annual financial statements on the trust fund
to the insurance regulator in any state with a
beneficiary of the trust.
c) Obtain approval of the form of the trust from the
insurance regulator in the trust's state of domicile.
FISCAL EFFECT : Minor additional administrative costs that will
be recovered by fees charged for certification applications.
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COMMENTS :
1)Purpose. According to the author, SB 1216 updates California
reinsurance laws in response to changes in federal law and
revisions in the NAIC Reinsurance Model Law and Regulations.
2)Reinsurance. Reinsurance is a transaction in which one
insurance company indemnifies, for a premium, another
insurance company against all or part of the loss resulting
from the insurance policy or policies it has issued. Insurance
companies can purchase reinsurance from different sources such
as reinsurance companies located in the United States,
reinsurance departments of other insurers, and reinsurers that
are located outside the United States and not licensed here.
Insurers purchase reinsurance for a number of reasons
including to limit liability on specific risks, protect
against catastrophes, and to write policies that exceed their
available capital. Reinsurance helps insurers spread risk and
provides a tool that enables insurers to match the risks they
assume with their financial resources.
3)Types of Reinsurers. The bill modifies current law to provide
a number of different structures to regulate reinsurers. The
bill allows domestic (domiciled in California) reinsurers
primarily in the business of reinsurance to be licensed as
"professional reinsurers." Existing law allows foreign
(domiciled in another state) reinsurers to become "accredited"
to sell reinsurance in California without being an admitted
insurer. The bill allows both foreign and alien (domiciled in
another country) reinsurers to become "certified" to sell
reinsurance in California. It is expected that alien
reinsurers will opt to become "certified" which will allow
highly rated companies to use more flexible collateral
standards than are provided in current law while foreign
reinsurers are expected to continue to use the accreditation
process. All three structures are designed to:
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.
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c) Require reinsurers to demonstrate the integrity and
financial capacity to meet their obligations.
4)NAIC Model Law. This bill seeks to conform California law to
the NAIC model law for reinsurance based on revisions to the
model law adopted in 2011. Those revisions include
requirements in the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank).
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Insurance (sponsor)
Allstate
American Council of Life Insurers
Lloyd's of London (Lloyd's)
Personal Insurance Federation of California
Opposition
None Received.
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086