Bill To Align California With Dodd-Frank Passes Committee

By | April 26, 2012

The California Senate Insurance Committee passed a law regarding reinsurers that would put the state in alignment with the Dodd–Frank Wall Street Reform and Consumer Protection Act and a model law from the National Association of Insurance Commissioners.

Senate Bill 1216 was authored and carried by Sen. Alan Lowenthal, D-Long Beach, on behalf of California Insurance Commissioner Dave Jones.

The committee passed the bill on an 8-0 vote on Wednesday. The bill would enable the insurance commissioner to determine if a domiciled insurer qualifies as a professional reinsurer. It also amends insurance law to align credit for reinsurance requirements for foreign ceding insurers with federal law, according to the bill’s wording.

“I am pleased that the Senate Insurance Committee has passed this important legislation to align California’s reinsurance laws with federal law and the NAIC revisions relating to reinsurance,” Jones said in a statement. “This legislation will enable the department to continue to protect California consumers to the best of our ability.”

Dodd-Frank impacted the regulatory oversight of reinsurance and reinsurers by states. One provision of Dodd-Frank states that if a U.S. domiciled reinsurer meets certain criteria, the reinsurer’s state of domicile will be the sole regulator of the reinsurer’s solvency and no other state can require information from the reinsurer beyond what is required by the reinsurer’s state of domicile.

NAIC, through its Reinsurance Task Force, is addressing reinsurance provisions contained within the Nonadmitted and Reinsurance Reform Act (NRRA) included in Dodd-Frank. The act prohibits a state from denying credit for reinsurance if the domiciliary state of the ceding insurer recognizes such credit and is an NAIC-accredited state.

“NRRA preempts the extraterritorial application of state credit for reinsurance law, and would permit states to proceed forward with reinsurance collateral reforms on an individual basis if they are accredited,” NAIC states on its website.

Under the current Credit for Reinsurance Model Law & Regulation, in order for U.S. ceding companies to receive reinsurance credit, the reinsurance must either be ceded to U.S. licensed reinsurers or secured by collateral representing 100 prercent of U.S. liabilities for which the credit is recorded, and these collateral requirements for non-U.S. licensed reinsurers have been a subject of debate over the last few years among regulators, NAIC states.

“The bill would also 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,” the bill’s language states. “The bill would also 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.”

“I want California to be a safe place for both consumers and for businesses,” Lowenthal said through a spokesman. “SB1216 proves that the rights of consumers and business growth do not have to be mutually exclusive. It is a critical step in helping California conform to Dodd-Frank regarding reinsurance, while offering what I believe are critical protections for both consumers and businesses.”

Florida and New York have adopted such revisions, and several other states are moving forward with plans to make similar changes.

The ability to keep a closer eye on financial firms other than banks is a major aspect of the Dodd-Frank, which is intended to prevent the chaos that occurred in late 2008 when insurer American International Group Inc. ran into trouble. Ultimately the government rescued AIG with $182 billion in government funds.

Federal oversight could be costly for companies because it involves maintaining higher capital reserves, having a plan for liquidation in the event of a failure and other regulatory requirements.

SB 1216 now heads to the Senate Committee on Appropriations.

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