On August 19, 2010, the California Legislature passed two bills, AB 1708 and AB 1837, which if signed into law by Governor Arnold Schwarzenegger will have a significant impact on surplus lines insurers.

AB 1708 would raise California’s minimum capital and surplus requirements for surplus lines insurers from $15,000,000 to $45,000,000. This would place California on par with New York’s minimum capital and surplus requirements; currently the only other state requiring at least $45,000,000 for eligibility. Under the new requirements, at least $25,000,000 of the capital and surplus would need to consist of cash, readily marketable securities and certain other eligible investments. Surplus lines insurers who are already eligible but do not meet the minimum requirements would have until January 1, 2011 to increase their capital and surplus to at least $30,000,000, and until December 31, 2013 to increase their capital and surplus to $45,000,000. The bill also increases the minimum capital and surplus requirements for insurance exchanges.

AB 1837 would allow for greater flexibility in the management and operations of California domestic insurers and their affiliated surplus lines insurers. Currently, California strictly prohibits an eligible surplus lines insurer from conducting any business within the state. AB 1837 would permit an affiliated California domestic insurer to perform certain administrative services including: computer operations unrelated to underwriting; clerical and administrative staffing support provided the staff have no contact with the surplus lines insurer’s policyholders; human resources functions provided all decisions are made directly by the surplus lines insurer; claims adjusting provided all decisions are made directly by the surplus lines insurer; and investment management provided that certain decisions are made by the surplus lines insurer. The bill would also allow for the surplus lines insurer to have common directors with the California domestic insurer as long as the common directors do not constitute a majority of the voting authority of the surplus lines insurer and perform all management functions for the surplus lines insurer outside of California.

The bills were enrolled and sent to Governor Schwarzenegger August 26, 2010. The Governor has until September 30th to either enact or veto the bills.

Click here to view AB 1708.

Click here to view AB 1837.