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California passes Dodd-Frank-compatible insolvency legislation

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California has passed legislation that allows the state insurance commissioner to take over an insurer that the US Treasury Secretary has determined is insolvent or in danger of becoming insolvent, conforming California’s law to federal law under the requirements of the Dodd-Frank Wall Street Reform Act of 2012 (Dodd-Frank).

The new law is a response to the process for any future liquidation of systemically important insurers, as they are determined by the Financial Stability Oversight Committee (FSOC). That process is well underway, with a few unnamed institutions already identified and under review by the FSOC, including American International Group (AIG), the company announced today.

The legislation, AB 2303, authored by the Assembly Committee on Insurance, becomes effective on January 1, 2013.

Current state law allows the insurance commissioner to take over insolvent insurers domiciled in California but only after exams are done and after a review by the California Conservation and Liquidation Office.

The provision added in AB 2303 adds a new trigger as to when the commissioner may take over an insurer. 

This measure, which received unanimous, bipartisan support throughout the legislative process, is sponsored by Insurance Commissioner Dave Jones and the California Department of Insurance.

Dodd-Frank granted the Treasury secretary the authority to make insolvency-related determinations on specified insurers, but retained the act of conserving and liquidating with the states.

AB 2303, which is one of the first in the nation to address this procedural gap, ensures a timely process for initiating the conservation and liquidation process of insurers.

In 2010 Congress passed Dodd-Frank, which creates a process for the conservation and/or liquidation of “systemically important” financial companies by the FDIC, according to an analysis by Paul Riches, Assembly Committee consultant. Dodd-Frank contains a provision that requires systemically important insurance companies (or their affiliates) to be conserved or liquidated under state law. Under California law, this conservation/liquidation process is performed by the Insurance Commissioner through the Conservation and Liquidation Office (CLO). 

CLO operates as a fiduciary for the benefit of claimants, handling the property of the failed enterprises in a prudent, cost-effective, fair, timely, and expeditious manner.

This bill conforms the authority of the commissioner to initiate the conservation and liquidation process to the requirements of Dodd-Frank.

The bill also required liquidation notices to include a reference to a website that provides ongoing information for creditors of the company being liquidated.

After the bill’s signing, Commissioner Jones stated, “the ability to take over an insolvent insurer in a timely manner or an insurer on the verge of insolvency is pivotal to protecting California’s consumers.”

This bill also deletes obsolete reporting requirements and eliminates an advisory committee that is seen as duplicative to other CDI advisory boards and committees.  

In addition, AB 2303 makes several changes in law relating to insurance producer licenses, including the establishment of a license for insurance crop adjusters, and expansion of the Department’s pre-licensing and continuing education curriculum board to provide for representation from the insurance adjuster and bail agent industries.

The omnibus bill is basically a cleanup, federal conformity, and licensing change bill that was noncontroversial and received bipartisan, unanimous support throughout the legislative process.