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California updates reinsurance rules after protracted talks with industry

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SACRAMENTO, Calif.—New California reinsurance regulations--the result of extensive negotiations between the state Department of Insurance and the industry--go into effect today, but do not include sweeping changes, say observers.

The complex technical Reinsurance Oversight Regulations, which update the state's 1997 insurance law, cover issues that include credit for ceded reinsurance, contract requirements and oversight of reinsurance transactions, among other issues.

The regulations, initially proposed by the California department in 2005, were vigorously opposed by insurance and reinsurance groups, which said the rules were overly broad and improperly extended the department's authority. The subsequent compromise that produced the revised rules should not create significant problems for the industry, observers said.

"The industry and the department did a great job of coming to basically a meeting of the minds on a lot of issues, so the industry is relatively happy" with the outcome, said Marsha A. Cohen, senior vp and director of state relations at the Washington-based Reinsurance Assn. of America.

The industry "can live with the terms that ended up in the...version that was ultimately adopted," said Brian S. Kaas, an attorney with Foley & Lardner L.L.P. in Milwaukee. "Many of the changes are more technical in nature and do not result in what I would characterize as real substantial or substantive revisions."

Barry Leigh Weissman, an attorney with Sonnenschein Nath & Rosenthal L.L.P. in Los Angeles, said, "Nobody is really happy with them, but it was a compromise" that avoids "huge battles" in the legislature or courts. "However, one of the cornerstones of the compromise is an agreement by the department" that there will be continued scrutiny of the regulations, particularly this year "as to their practicality and how they work."

That could lead to modifications later, he said.

Legislation spurs compromise

Mr. Weissman said a version of Assembly Bill 2400, which "would have completely neutralized" the regulations proposed originally, encouraged cooperation between the department and the industry. "As a result, the department was willing to start negotiations and we came to compromises" with it. A revised version of AB 2400, which was signed into law in September, makes minor changes to the law regarding reinsurance.

"A principal feature of the final regulations, together with the legislation that was enacted in September by the legislature, is to bring the California structure closer to the model law and regulations of the National Assn. of Insurance Commissioners," said Wolcott B. Dunham Jr., an attorney with Debevoise & Plimpton L.L.P. in New York.

Norris W. Clark, a financial and regulatory consultant with Lord, Bissell & Brook L.L.P. in Los Angeles, said the regulations codify "things the department had been doing by administrative guidelines in the past. It provides a clearer roadmap, I think, to the insurance industry as to what the department's requirements are with regards to reinsurance agreements and cessions and assumptions. I think the industry now knows what the rules are in California."

Mr. Clark is a former deputy commissioner of financial surveillance with California's insurance department.

Observers say one change introduced in the regulations is creation of a new class of insurer, a "volume" insurer. These are insurers that are not California domestic insurers, but those with average gross direct premiums written in California in the prior three years that exceed those in their domicile state and equal or exceed 33% of their total U.S. gross direct premiums.

It's similar to the threshold test for "commercially domiciled" insurers under the California Holding Co. System Regulatory Act.

"It changes the definition of who the Department of Insurance has authority over" and broadens the department's extraterritorial controls "so that companies that before were not under the authority of the California Department of Insurance are now under its authority, and will have to comply with these regulations," said Mr. Weissman.

Companies that are not volume insurers, though, "will notice little difference" with the new regulations, said Mr. Clark.