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California Gets into the Act--Dodd Frank's Credit for Reinsurance

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California is one step closer to aligning its reinsurance laws with the requirements of federal law and necessary revisions in the National Association of Insurance Commissioners (NAIC) Reinsurance Model Law and Regulations.

The state’s Senate Insurance Committee has passed SB 1216, authored by Senator Alan Lowenthal, D-Long Beach, by a vote of 8 to 0. SB 1216, which received bipartisan support, is sponsored by California Insurance Commissioner Dave Jones.

The bill now heads to the Senate Appropriations Committee for consideration.

This bill amends current insurance law and adds new statutory language to reflect the NAIC model law. Four states had already passed the legislation–they are Florida, New York, New Jersey and Indiana, while Connecticut and Virginia passed the legislation this year. Legislation is pending in Delaware and Georgia, as it is in California. 

Specifically, SB 1216 will:

·     Specify the criteria for a domiciled insurer to qualify as a professional reinsurer.

·     Align existing California insurance law related to credit for reinsurance to that of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) in its Nonadmitted and Reinsurance Reform Act (NRRA) portion. 

The Dodd-Frank Act was effective in July 2011, and the 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 NAIC-accredited. The NAIC passed the reinsurance model law in November 2011 at its Fall national meeting.

One difference in the bill from the model law is an expanded review time for some filings due to California’s larger market and a cost recovery provision.

A key provision of the NAIC changes relates to the certification of a non-admitted reinsurer. Under the revised NAIC Models, each state has the authority to certify a reinsurer or to recognize the certification issued by another NAIC-accredited state. As part of the certification process, a rating system provides for certified non-U.S.-based reinsurers to reduce collateral under specified conditions, notes the California Insurance Department. 

The certification process is pivotal to permit a California domiciled ceding insurer to qualify for a credit on its financial statement under these new conditions. 


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