Given the far-reaching nature of some of the bills that Gov. Jerry Brown signed into law in recent weeks, it’s no surprise that a relatively minor tweak to the insurance code didn’t muscle its way onto the front pages. But Brown’s signing of Assembly Bill 1641, which streamlines the process to obtain so-called “surplus lines” insurance coverage, really is a big deal.
As the Senate analysis explains, the measure “authorizes the insurance commissioner to allow non-admitted insurers to sell innovative insurance products in California.” One rarely finds the term “innovative” and “insurance” in the same breath, given that California’s regimen of insurance regulation allows little innovation.
In 1988, voters approved Proposition 103, which requires the state insurance commissioner to give prior approval of any proposed insurance rates. The department tightly regulates every aspect of the insurance business. Typically, insurance regulation is meant to insure that insurers have the wherewithal to pay any claims. But California micromanages every aspect of the business, and tightly controls the kind of products that insurers may offer. In fact, California’s system may soon come before the U.S. Supreme Court, as insurers and insurance trade association make the case that the Fifth and 14th Amendments preclude a regulator from setting rates so low a regulated insurer couldn’t earn a fair rate of return.
In California and all other states, the “surplus lines” market offers a way around this regulated system with coverages that fall outside the offerings of the major insurance companies. Surplus lines policies, which aren’t regulated for rate or form, are intended to offer coverage for risks that are hard to place. If one is, say, an actor who wants to insure himself against disfigurement, there probably are no major companies that will offer that line of coverage.
Under the current rules, before you go to the surplus lines market, you first have to show that you tried and failed to get coverage in the regular “admitted” market. A.B. 1641 adds significantly to the list of kinds of insurance risks allowed to buy directly from so-called “non-admitted insurers” without all that bureaucratic hoo-ha.
This is particularly important now as some innovative companies seek insurance for things that don’t fit under the current insurance rubric. For instance, for better or worse, California is building a high-speed rail system that requires specialized coverage. The autonomous vehicle industry also is gaining traction rapidly, as are new markets for legal marijuana and cyber insurance.
The new law will make it far easier for these entrepreneurial trend setters to buy specific coverage they need to allow their industries to advance. That certainly explains why the bill received zero “no” votes in its variety of committee and floor tallies. Lawmakers from both parties have an interest in enabling innovative industries to grow.
The new law also spotlights the deep flaws in the state’s heavy-handed regulatory system. The free-enterprise system works far better at providing products and services that customers demand than a command-and-control system by which an elected official acts as a czar who determines the “right” products and prices that companies can offer.
Even though the surplus-lines market represents a niche in the vast insurance market, it shows that a deregulated market works best at supporting innovation. Imagine that – companies can provide products on the open market and tailor them to what emerging industries are demanding, rather than wait for an edict from a state bureaucracy. There are downsides to surplus lines perhaps, in that they are not backed by a government-mandated guaranty fund that would bail them out if they go bust. But there are many ways to assure these companies’ solvency.
So while A.B. 1641 doesn’t merit the headlines of new laws that turn California into a sanctuary state or expand mandated parental leave, it does offer real help to important, emerging industries – and it points the way to a more market-oriented future.
Image by Randy Miramontez