On September 27, 2010, California Governor Arnold Schwarzenegger signed into law AB 1708, which will have a significant impact on surplus lines insurers by amending Section 1765.1 of the California Insurance Code.
Effective January 1, 2011, California’s new minimum capital and surplus requirements for surplus lines insurers applying for eligibility will increase from $15,000,000 to $45,000,000. Under the new requirements, at least $25,000,000 of the capital and surplus will 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 will 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. AB 1708 also increases the minimum capital and surplus requirements for insurance exchanges.
Meanwhile, AB 1837, the companion bill to AB 1708, has not yet been signed into law by Governor Schwarzenegger; however, every indication is that it will be signed into law shortly. AB 1837 allows for greater flexibility in the management and operations of California domestic insurers and their affiliated surplus lines insurers. Under the bill, an affiliated California domestic insurer may 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. Also, foreign surplus lines insurer may 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.