BILL ANALYSIS DATE OF HEARING: April 21, 1993 SB 959 SENATE INSURANCE, CLAIMS AND CORPORATIONS COMMITTEE ART TORRES, CHAIRMAN SB 959 (Johnston), As Amended April 15, 1993 SUBJECT: Nonadmitted Insurance Companies DIGEST Existing law: 1) Requires an insurer wishing to transact business in California to be "admitted," that is, to have applied for and received a certificate of authority to conduct business in this state. 2) Provides that if a type of insurance is unavailable from a majority of the insurers admitted for the particular class of insurance, this surplus business may be placed with a "non-admitted" insurer. Non- admitted insurers are not supervised by the Department of Insurance and are not members of the California Insurance Guaranty Associations. The law concerning the placement of this business is the Surplus Lines Law. The placement of surplus lines business is made by surplus lines brokers who are specially licensed and have a special understanding of this market. This bill requires that in order for a non-admitted insurance company to šdo business in California, it must receive approval by the Department of šInsurance. Only after tht approval would surplus line brokers be permitted što place coverage with tht non-admitted insurer. 1) Specifically, the bill requires the non-admitted insurer to be approved šand placed on a list of acceptable non-admitted insurance companies. In order to be placed on the approval list, the non-admitted insurer must: a) Have a history of financial stability, reputation and integrity; b) Demonstrate to the Insurance Commissioner that the insurer has adequate reserves of at least $15 million; c) Demonstrate to the Insurance Commissioner that if the insurer in not domiciled in the United States that the insurer has at least $5.4 million in readily marketable assets held in a trust by a financial institution in the United States; and d) Have provided insurance for the three years immediately preceding the filing of the request to be approved by the Insurance Commissioner. 2) The Insurance Commissioner would be required to publish a current list of qualified non-admitted insurers at least semiannually. 3) Insurance sold by a non-admitted insurance companies domiciled in Mexico exclusively for coverage of auto, aircraft, or boat insurance in Mexico would be exempt from the requirements to receive prior approval by the Department of Insurance. 4) This bill provides that in the case that a surplus line brokers fails to provide a disclosure form that indicates that a policy is being issued by a non-admitteed carrier, the insured may cancel the policy and receive a pro-rated share of the any premium paid as well as any broker's fee charged. 5) This bill increases the fine for failure to disclosure information on insurance policies written by non-admitted carriers from the current $200 to $1,000. FISCAL EFFECT This bill would result in substantial increased cost to the Department of šInsurance (the Insurance Fund) for the review and approval of non-admitted šinsurance companies. These costs would be off-set by allowable fees to šcover the cost of administering and enforcing the requirements on non- šadmitted insurance companies. COMMENTS 1) Purpose. The Department of Insurance, the sponsor, states that this measure is needed to assure that non-admitted insurers who are doing business in California have adequate reserves and funds that are available for payment of claims in California. The bill is intended to provide š an approved list of non-admitted insurers which may provide coverage in limited situations where no admitted carriers can provide the needed coverage. The "white list" concept requires the Insurance Commissioner to make an affirmative finding that the non-admitter carrier does indeed have assets and reserves to cover potential claims. 2) Surplus Lines. In general, surplus lines insurance is used when admitted insurers do not or cannot satisfy the insurance needs of persons wishing to buy insurance. When insurance is unavailable, persons may purchase coverage from insurers located outside of California directly or through surplus lines brokers. Surplus lines insurance may be needed because the character of the risk may be too large, may be unacceptable to admitted insurers or because admitted insurers are unwilling or unable to provide coverage. ISSUES 1) Trust Requirements. This bill establishes a requirement that the non-admitteed insurer maintain a trust of at least $5.4 million in the United States. The U.S. trust requirement is in addition to the requirement SB 959 Page 3 to demonstrate assets and capital of $15 million. This provision was šestablished by regulation (Title 10 California Code of Regulations, Section š2174). This bill would place into statute those regulations. The National Association of Insurance Commissioners currently has established voluntary standards for non-admitted insurers with a trust accounts requirement of $2.5 million as opposed the the proposed $5.4 million requirement. 2) Removal from the Approved List. This bill established both the standards for inclusion on the Approved List as well as conditions for removal from that list for non-admitteed insurers. Generally the bill requires that the Commissioner hold a hearing before a company is removed from the list or is rejected. In the case of an emergency, the Commissioner may act and provide a subsequent hearing for the insurance company (Sec. 1765.1(g)). The bill also allows the Commissioner to deny an application or remove a company from the list without a hearing for failure to meet an "objective standard" or provide timely documents (Sect 1765.1(g) (3) and (4)). In many cases the question of the completeness or the information is subject to some disagreement. It may be appropriate to allow an applicant to have a hearing when an application is denied. 3) Technical Corrections Industrial Insured. For large employers this bill appears to allow some portion of the insurance to be placed with a non-admitted insurer who is not on the "white list". Section 1765.1 (k) appears to provide a partial exemption from the requirement of Sections 1765.1 (a) through (e). a) Subsection (k) should be amended to clarify that non-listed non-admitted carriers may be used in limited cases. b) It is still unclear if non-listed, non-admitted carriers would be required to meet any criteria in regards to an industrial insured? c) Technical correction: Page 9, line 9, strike ", or". POSITIONS Support Department of Insurance Consumer Union California Trial Lawyers Association Institute of London Underwriters Opposition None SB 959 Page 4