California State Legislature Passes Reinsurance Collateral Legislation (SB 1216); Bill Awaits Action by Governor Jerry Brown

The California State Legislature has passed reinsurance collateral legislation (SB 1216) that will now go to Governor Jerry Brown for action.  Should it become law, the bill would grant the California Insurance Commissioner more authority over the State’s reinsurance market.

The State Assembly approved SB 1216 by a vote of 78-0 on August 20, 2012.  The bill passed the State Senate, 37-0, on May 21.

Among other changes to existing law, SB 1216 would permit the Insurance Commissioner to certify foreign and alien reinsurers to sell reinsurance in California based on a financial security rating assigned by the Insurance Commissioner.  The highest-rated reinsurers would be required to provide no collateral and the lowest-rated reinsurers would have to provide 100 percent collateral.

SB 1216 would update California law to be in compliance with the federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as changes to the National Association of Insurance Commissioners (“NAIC”) Reinsurance Model Law and Regulation.  

If signed into law by Governor Brown, this legislation would:

• Permit the State Insurance Commissioner to designate a domestic insurer principally engaged in the business of reinsurance as a professional reinsurer
• Permit professional reinsurers to include that designation in their name, solicitations and advertisements
• Require 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
• Require a ceding insurer to notify the Insurance Commissioner when recoverables from a single reinsurer exceed 50 percent of the of the insurer’s policyholder surplus
• Require a ceding insurer to notify the Insurance Commissioner if it obtains reinsurance for 20 percent or more of its gross written premium from a single reinsurer
• Permit the Insurance Commissioner to certify reinsurers that:
  • Hold a license to transact insurance in another state or qualified jurisdiction;
  • Maintain minimum capital and surplus of at least $250 million;
  • Maintain financial strength ratings from at least two recognized rating agencies;
  • Submit to the Insurance Commissioner’s jurisdiction;
  • Submit to information filing requirements determined by the Insurance Commissioner; and,
  • Comply with any other requirements deemed relevant by the Insurance Commissioner
• Require the commissioner to consider reinsurance provided by a certified reinsurer as an asset or credit against the liabilities of a ceding insurer
• Permit the Insurance 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 Insurance Commissioner may not reduce the minimum surplus to less than 50 percent of the reinsurer’s liabilities
• Require the Insurance 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
• Permit the Insurance Commissioner to recognize a reinsurance certification and rating by another jurisdiction that has been accredited by the NAIC. The Insurance Commissioner may withdraw recognition of another jurisdiction’s certification or rating with written notice to the certified reinsurer
• Permit an association of individual or corporate underwriters to be a certified reinsurer
• Require the Insurance Commissioner to notice an application for certification as a reinsurer on the Department of Insurance Web site and allow 90 days for the public to comment on the application
• Require certified reinsurers to comply with a range of information filing requirements
• Prohibit the Insurance Commissioner from disclosing information filed by certified reinsurers that is exempt from disclosure under the California Public Records Act
• Require the Insurance 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.
• Permit the Insurance Commissioner to certify an alien reinsurer from a qualified jurisdiction
• Require certified reinsurers to provide collateral for reinsurance obligations based on a financial security rating assigned by the Insurance Commissioner. The highest rated reinsurers would be required to provide no collateral and the lowest rated reinsurers would have to provide 100 percent collateral
• 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
• Sunset the reinsurer certification law on January 1, 2016
• Permit the Insurance Commissioner to suspend or revoke a reinsurer’s certification or accreditation
• Permit the commissioner to collect the cost of the certification process from the reinsurer
• Provide that financial statement credit for reinsurance is determined by the regulator in the state where the ceding insurer is domiciled

To access the bill text, click here.

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