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Hearing on California Export List Covered Record Number of Items

A dozen doesn’t sound like a lot, but it may be a record in the world of the California Export List.

More items were proposed for the list than in recent memory during a California Department of Insurance hearing conducted via a telephone conference on Thursday.

Proposed items for the list included coverages for cyber, parametric products, earthquake, and COVID-19.

The 12 items this year compares to the typical number of between zero and two items proposed for the list each year, according to records from the Surplus Line Association of California.

The Export List is a list of coverages, maintained by the CDI, which are eligible for placement in the surplus line market without the necessity of a broker obtaining three declinations from the admitted market. Coverages are placed on the export list after the CDI holds a public hearing and determines that the coverages are not readily available in the admitted market.

Adding a risk or coverage to the export list requires evidence there isn’t an adequate or reasonable market for that risk or coverage in the admitted market, or that the type of coverage is for new, innovative products for which a reasonable or adequate market among admitted insurers has not had time to develop.

More than two dozen states have some form of export list, but the process of getting an item onto the list in California is a long and difficult one.

California’s Export List requires an administrative process, including gathering input from surplus lines insurers or brokers with request for items to be added to the list, proper notice of an item being potentially put on or off the list and an official public hearing – a follow up hearing can also be requested.

“The export list is an important efficiency tool,” said Ben McKay, executive director of the SLA-Cal, the first speaker at the hearing.

The list seems to have been growing in the last two years. Last year, there were a half-dozen items proposed.

A change in the law over two years ago gave the CDI the authority to add “new and innovative products” to the list. An example of new and innovative product added to the list last year was commercial drone coverage.

McKay said more people in the surplus lines industry are finding the change in the law a valuable tool to save themselves the time and effort to obtain declinations for markets that they know don’t exist.

There are roughly 62 items on the existing list.

McKay noted the “lengthy list of coverages” on this year’s list.

“This year’s hearing includes significantly more items…than we normally see,” McKay said.

He said that demonstrates the need for the surplus market.

The following products and/or variations were requested to be added to the Export List:

  • Brush Exposed Homeowners Business
  • Commercial Property Insurance for Accounts in High Brush Areas
  • Class – Trucking: Commercial Auto Liability and Auto Physical Damage
  • Excess Auto Liability and Excess Liability with a Substantial Auto Component
  • Production Related COVID Cast, Civil Authority and Imminent Peril Insurance
  • All Commercial Earthquake
  • Difference in Conditions and the peril of Earthquake
  • Scaffold / Scaffold Contractor
  • Cyber Coverage
  • Commercial Cyber Liability
  • First-Dollar, Economic Loss Parametric Earthquake Gap Coverage (no physical damage requirement)
  • Parametric Earthquake Insurance (no physical damage requirement, no deductible, no claims adjustment – 70% shake intensity or above threshold triggers coverage).

The CDI also had a request to delete the threshold “with coverage limits over $10,000,000” from “Commercial DIC/Stand Alone Earthquake for Policies with Coverage Limits Over $10,000,000.”

This was one of the more contentious items, with several people from either the admitted or not-admitted markets testifying.

McKay cited a 2019 report from Milliman that the SLA-Cal commissioned in 2018 to examine what constitutes a “reasonable and adequate market,” and to determine whether a market exists for commercial earthquake DIC, which Milliman concluded there was not an adequate earthquake DIC market.

Among those in the wholesale market who testified was Kim Randall, executive property director with wholesaler Worldwide Facilities, who noted that in California there is only one admitted carrier offering such policies with more than $10 million in limits.

“I would not consider one carrier to be a reasonable and adequate market for that,” she said.

There are five admitted carriers offering below that limit in the commercial DIC and standalone earthquake market, and many of those are either not writing new businesses or are limited in the ZIP codes in which they write, she said.

“The admitted markets are shrinking as we speak,” she said.

That was not the view of Travis Noland, assistant vice president with Risk Insurance Brokers, a wholly owned subsidiary of ICW, an admitted carrier in California.

Noland said that ICW was authorizing “a significant number of accounts,” and has a low number of declinations.

He said the company’s declination rate is less than 9%, that those declinations were primarily for underwriting reasons, and none of the declinations were made because there was no capacity available.

Michael Brown, vice president of property insurance for Golden Bear, also took issue with the findings in the Milliman report.

“We are growing, we are improving our AM best rating though time, and are writing more DIC earthquake insurance now than we ever have before,” Brown said.

The earthquake items on the list appeared to garner the most debate.

Another point of contention was All Commercial Earthquake.

Justin Lehtonen, vice president at Worldwide Facilities, testified that there is not an adequate admitted market for commercial earthquake insurance in California.

Lehtonen cited a CoreLogic report that shows a maximum possible loss in excess of $200 billion resulting from a large earthquake on the San Andreas Fault.

There are only four admitted insurance companies writing commercial earthquake that are doing a total of $2 billion in business, he said, comparing that to the maximum possible loss of $200 billion.

“That means that the four admitted insurance companies have less than 1% of the amount of capacity required to insure the greatest possible loss predicted by CoreLogic,” Lehtonen said.

He argued that that is not an adequate market, because capacity is less than 1%.

Noland, with Risk Insurance Brokers, disagreed.

He noted that the figures cited do not take reinsurance into account.

“There actually is a very robust reinsurance regimen,” he said adding that “reinsurance is spread globally.”


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