BILL ANALYSIS Ó AB 2230 Page 1 Date of Hearing: April 23, 2014 ASSEMBLY COMMITTEE ON INSURANCE Henry T. Perea, Chair AB 2230 (Cooley) - As Amended: March 28, 2014 SUBJECT : California Insurance Guarantee Association SUMMARY : Reestablishes a potential 2% assessment level on insurers to fund the operations of the California Insurance Guarantee Association (CIGA). Specifically, this bill : 1)Authorizes CIGA to assess member insurers up to 2% of net direct written premium, provided that there are no outstanding bonds that were issued pursuant to specified statutes. 2)Provides that the maximum assessment is 1% of net direct written premiums in the event any of these bonds remain outstanding. 3)Clarifies how premium adjustments for member insurers shall be made once there are no longer outstanding bond obligations. 4)Clarifies language in the statute that grants CIGA the same rights in litigation that the insolvent insurer would have had. EXISTING LAW : 1)Requires all admitted insurers that write property-casualty insurance in California establish, and be members of, CIGA, for the purpose of paying statutorily defined "covered claims" of insolvent insurers. 2)Provides that CIGA's obligations to pay the claims against insolvent insurers shall be funded by assessments (termed "premiums" in the statute) on member insurers. 3)Provides that there are three assessment categories within CIGA: automobile and homeowners insurance; workers' compensation insurance; and all other property-casualty insurance. 4)Provides that, with respect to the automobile and homeowners' insurance category, and the "all other" category, members can AB 2230 Page 2 be assessed up to 2% of net direct written premium in a year in order to pay the covered claims. 5)Provides that, with respect to the workers' compensation category, the assessment is limited to 1% of net direct written premium, plus a special assessment dedicated to funding bond obligations for bonds issued pursuant to specified statutes. 6)Authorizes CIGA to issue up to $1.5 billion in bonds, in order to pay covered workers' compensation claims and efficiently manage its cash flow needs. 7)Specifies that, in order to ensure full and prompt payment of bond obligations, the special assessment may exceed 1% of net direct written premium. 8)Provides that the assessment charged to insurers in each category shall be initially based on each insurer's written premium as shown in the latest year's annual financial statement, and adjusted later once sufficient time has elapsed to obtain an accurate measurement of the net direct premium written by the insurer for that year. FISCAL EFFECT : Undetermined COMMENTS : 1)Purpose . The bill is primarily intended to re-establish the 2% maximum annual assessment on workers' compensation policies that existed for a number of years, but that was modified a decade ago when CIGA was granted the authority to issue bonds (discussed in more detail below) as a means of meeting its obligation to pay the legitimate claims of injured workers whose employer purchased workers' compensation insurance from an insurer that became insolvent. The 2% assessment was restructured at that time into a regular 1% assessment, and a special bond assessment that was not capped at (and at times did exceed) 1%. Now that the bonds have substantially served the purposes for which they were authorized, and are expected to be paid off, the bill proposes to return to the previous, single 2% assessment cap. 2)Background . CIGA's purpose is to pay legitimate "covered claims" to people who would have been entitled to an insurance AB 2230 Page 3 payment, except for the fact that the insurer at issue became insolvent (the insurance term for what is commonly called bankrupt). "Covered claims" does not include every possible claim that might have been filed against the insolvent insurer, but does cover most typical insurance claims. CIGA is funded by an assessment on insurers that write the kind of insurance that is being covered - as noted, property-casualty insurance is divided into three categories. At issue for this bill is workers' compensation insurance. Between 2000 and 2004, 36 workers' compensation insurers became insolvent. Many were small regional insurers, but several were very large companies with substantial market share. One characteristic of workers' compensation claims is that many claims have a very "long tail" - that is, the claim stays open potentially for many years if the injured workers has long-term or life-long medical needs, or has a life pension based on total disability. By 2004, it was apparent that the regular 2% assessment was going to prove inadequate in generating sufficient funds, especially on a cash flow basis, for CIGA to make timely payments to the injured workers and their medical providers who were entitled to payment. The Legislature responded to this problem by authorizing CIGA to issue bonds sufficient to meet its financial needs. Bonds allowed CIGA to gather more funds immediately, and more efficiently, than long-term borrowing against future assessment revenue. However, the Legislature conditioned the new bonding authority with a restructuring of the assessment formula. Bonds are simply not saleable unless there is a dedicated revenue source to assure repayment. Therefore, the regular assessment was reduced to 1%, and an uncapped special assessment for the bonds was added. Over time, the special assessment has approximated 1%, but it has exceeded 1% as well. By all measures, this approach has proven successful. CIGA never issued the maximum amount of bonds it was authorized to issue, and its authority to issue bonds was extended by the Legislature several times subsequent to the initial issue. It is poised to retire all outstanding bond obligations, but CIGA's long term obligations to injured workers whose employer was insured by those 36 insolvent insurers is going to continue to pose a substantial financial burden. While the special needs for financial flexibility that necessitated the AB 2230 Page 4 bonding authority have eased, the revenue lost by ending bonding activity requires a return to the 2% assessment level. 3)NAIC Model Law . The National Association of Insurance Commissioners (NAIC) Model Law on property-casualty guarantee associations recommends a 2% assessment cap, and 41 other states use this figure. As noted above, California long had the 2% cap until more aggressive financing mechanisms were required. 4)"True-up" provisions . It takes a couple of years after any particular policy year ends to obtain precise data to calculate net direct written premium, because there are several variables that do not ripen until after the policy year closes. As a result, CIGA uses a pretty close rule of thumb from the previous year's annual financial statement for the initial assessment, and then uses a somewhat cumbersome formula to "true-up" the assessments later. The bill contains language to ensure that this process pencils out properly even though there won't be any bond funds from which to draw for insurers entitled to a "true-up" of the special assessment.. 5)CIGA stands in the shoes of the insovlent insurer . The law provides that CIGA has the same rights to defend a claim as the insolvent insurer would have had. The bill's final provision is intended as a clean-up by deleting confusing language that states this rule. However, changing the language that implements a well-established rule could potentially cause the very confusion that the amendment is intended to prevent. The author may wish to delete this provision from the bill. REGISTERED SUPPORT / OPPOSITION : Support California Insurance Guarantee Association Opposition None received Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086 AB 2230 Page 5