BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2230
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          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  








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            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  








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            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  








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            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 










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