In 1937, the California Legislature revised the surplus line law enabling the Insurance Commissioner to oversee the regulation of surplus line transactions. To assist the Commissioner with this regulatory oversight, the surplus line brokers were asked to form an association—the main objective of which would be to keep its members informed about regulations and guidelines relating to surplus line insurance. Honoring this request, the brokers formed the Surplus Line Association of California (“SLA”), a private, non-profit organization.
Shortly after its formation, in 1939, the Commissioner requested that the SLA expand its role by both undertaking the responsibilities of a “stamping office” (to receive and examine surplus line broker filings), and ensuring proper surplus line taxes were collected. At the same time, the SLA played a supportive role in assisting and encouraging its members to comply with surplus line laws and regulations in California.
Historically, the SLA performed two functions in assisting the Commissioner oversee the surplus line activities in California. First, acting as the “stamping office” for filings made by the surplus line brokers, the SLA ensured broker filings were in order and were made in compliance with existing laws and regulations. Second, the SLA collected and reviewed financial information concerning the surplus line carriers used by its members. In 1987, the SLA began a security review program limited to non-discretionary review of only U.S. surplus line insurers’ security filings. Although the security review program was designed to assist the surplus line broker in evaluating the suitability of the carrier, it is always the broker who bears the ultimate responsibility for evaluating, judging, and selecting that security which will safeguard the interests of California risks.
In the late 1980s and early 1990s, the surplus line market grew dramatically in California, both in premium volume and in the number of surplus line carriers. This was largely due to more, average household insurance buyers flocking to the surplus line market for coverage because they were either unable to get insurance in the admitted market, or because they believed it to be too expensive. These average personal lines insurance buyers lacked an understanding of the intricacies of surplus line insurance. Consequently, in many cases, their quests for lower premiums led them to unscrupulous brokers and poorly capitalized, offshore, Non-U.S. insurers who took advantage of their lack of experience. As a result, consumer complaints against the surplus line industry skyrocketed and legislative scrutiny followed.
By 1993, the state had enacted several significant pieces of legislation and regulation that specifically affected the surplus line market in California. These statutes restricted the number of surplus line insurers allowed to do business in California, limited the types of insurance that may be exported to the surplus line market, and allowed the surplus line community the opportunity to take a more active role in assisting the CDI’s regulation of the surplus line market.
Two of the statutes adopted in 1993 had a direct impact on the operations of the SLA. Regulation 2174, which took effect May 1993, established tighter financial and operational standards for surplus line insurers operating in California. Concurrent with the adoption of Regulation 2174, the CDI requested that the SLA expand its security program and perform specific analyses to determine whether U.S. and (beginning in 1994) Non-U.S. surplus line insurers met the criteria established by the CDI.
In October of 1993, California legislators passed Assembly Bill 865 (CIC 1780.50). This bill, which became effective on January 1, 1994, codifies the responsibilities of a surplus line advisory organization and allows the Insurance Commissioner to delegate certain duties under a Plan of Operation. In addition to granting statutory recognition to the advisory organization, members and employees of the advisory organization were granted immunity while performing the delegated duties.
On March 30, 1994, the SLA officially became the surplus line advisory organization, following the Commissioner’s determination that the SLA had met the qualifications identified in CIC 1780.54 (a). The CDI also approved the SLA’s Plan of Operation which outlined the specific duties to be performed by the SLA, as well as procedures to ensure that the duties are performed.
While the SLA is often perceived as a regulatory agency, it has no separate regulatory powers. The SLA’s activities are at the direction and control of the CDI. Under its new statutory authority, the SLA is also subject to an examination of its performance of the functions outlined in the Plan of Operation at least once every three years.
The SLA’s main goals are to continue working with its members and the CDI to maintain a healthy, fair, and competitive marketplace in California, as well as to protect the interests of California consumers, eligible surplus line insurers, and brokers.