BILL ANALYSIS Ó
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THIRD READING
Bill No: AB 2230
Author: Cooley (D)
Amended: 4/29/14 in Assembly
Vote: 21
SENATE INSURANCE COMMITTEE : 10-0, 6/11/14
AYES: Monning, Gaines, Corbett, Correa, DeSaulnier, Mitchell,
Nielsen, Roth, Torres, Vidak
NO VOTE RECORDED: Lieu
ASSEMBLY FLOOR : 71-1, 5/1/14 - See last page for vote
SUBJECT : Insurance: Workers Comp Bond Fund
SOURCE : California Insurance Guarantee Association
DIGEST : This bill allows the California Insurance Guarantee
Association (CIGA), beginning January 1, 2015, to levy an
assessment up to 2% of direct written premiums on insurers,
unless there are outstanding bonds being used to pay claims and
expenses, in which case the assessment may not exceed 1% for
that category; and simplifies the "true-up" process and allows
credit and debits due individual insurers for over or under
payments on bond assessments to be applied against regular CIGA
assessments.
ANALYSIS :
Existing law:
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1. Establishes CIGA to pay "covered claims" of insolvent member
insurers.
2. Requires each insurer admitted to transact insurance in this
state in three specified classes of insurance, including
workers' compensation, auto and homeowners, and all other
property casualty insurance, to participate in CIGA as a
condition of doing business.
3. Requires CIGA to allocate levy assessments, claims payments
and costs based on the three categories of insurance.
4. Defines "covered claims," and expressly limits CIGA's
authority to make payments to only those claims that are
specifically enumerated.
5. Authorizes CIGA to levy an assessment of up to 1% of direct
written premium of insurers in each assessment category to
pay "covered claims."
6. Authorizes CIGA to issue up to $1.5 billion in bonds by
January 1, 2023 to pay workers' compensation claims and
efficiently manage its cash flow needs.
7. Allows CIGA to levy an assessment on workers' compensation
insurers, based upon direct premium collected, for the
purpose of paying off the bonds.
This bill:
1. Deletes a provision declaring CIGA a party in interest in all
proceedings involving a covered claim, and instead provides
that CIGA shall have all the same rights the insolvent
insurer would have had if not in liquidation.
2. Allows CIGA, beginning January 1, 2015, to levy an assessment
up to 2% of direct written premiums on insurers in each
category, unless there are outstanding bonds being used to
pay claims and expenses, in which case the assessment cannot
exceed 1% for that category.
3. Allows credit and debits due individual insurers for over or
under payments on bond assessments to be applied against
regular CIGA assessments once any special bonds are paid off.
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Background
CIGA was created by legislation in 1969 as an association of
insurers that makes payments to policyholders of
property/casualty, workers' compensation and "miscellaneous"
insurers when the member insurance company becomes insolvent and
is unable to do so. Generally speaking, CIGA accepts the assets
and liabilities of insolvent companies and makes payments from
the assets, earnings on investments, and assessments levied on
CIGA member companies. Since its inception, CIGA has never
failed to pay a claim.
CIGA has the statutory authority to impose an assessment on
member insurers "sufficient to discharge its obligations" when
needed. The amount of the assessment on each insurer is
determined annually based on the insurer's net direct written
premium in the category of insurance being assessed-for example,
workers' compensation. Insurers recoup the assessment by
passing it along to policyholders, and are required to
separately state the surcharge on premium billing notices. From
its creation until 1983, the maximum allowable assessment was 2%
of direct written premium. In 1983, the maximum assessment was
lowered to 1%. AB 1183 (Calderon, Chapter 296, Statutes of
2001), an urgency bill, allowed CIGA to increase the assessment
up to 2% for a one year period because of the fear that it would
be unable to meet its obligations to pay worker claims following
the insolvency of more than 30 workers' compensation insurers in
2000 and 2001. AB 2007 (Calderon, Chapter 740, Statutes of
2002) extended the 2% surcharge to December 31, 2007 as a result
of several more major workers' compensation insurer
insolvencies. That temporary increase terminated in 2008,
returning the statutory maximum in all categories to 1%.
The temporary 2% assessment increases in 2001 and 2002 did not
provide sufficient revenue to meet the claims obligations
arising from the multiple workers' compensation insurer
insolvencies in such a concentrated period. As a result,
legislation in 2003 gave CIGA authority to issue up to $1.5
billion in bonds through the California Infrastructure and
Economic Development Bank through 2007 (subsequently extended to
2023) to pay workers' compensation claims. At the same time,
the maximum regular assessment on workers' compensation insurers
was lowered back to 1%, and CIGA was authorized to levy a
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separate assessment on those insurers in the amount necessary to
repay the bonds. CIGA issued $750 million in fixed rate and
auction rate securities in 2004, and levied an additional
assessment that has equaled 1%, and for a few years more than
1%, of direct written premiums to pay the debt service on those
bonds. CIGA expects to soon retire all outstanding bond
obligations, but its long-term obligation to injured workers is
going to pose a substantial liability for some time to come.
Restoring the maximum "regular" surcharge will provide financial
flexibility for the association to pay expected claims and pay
down the debt without increasing the financial burden of the
assessments on insurers and employers. A 2 % "regular"
assessment is consistent with the National Association of
Insurance Commissioners Property and Casualty Insurance
Guarantee Model Act and the laws of 41 other states.
A complicated "true up" mechanism ensures that an insurance
company is not assessed more or less than what it should be
assessed based on the premiums it has actually written in the
year of the assessment-its net direct written premium. As a
result of a time lag in final accounting, the assessment is
reviewed two years after collection and adjusted to reflect
actual premiums written, less refunds and other adjustments.
For example, insurers are assessed for the 2013 year based on
premiums written in 2012. The regulator will not know until
approximately 18 months after 2013 how much premium each insurer
in fact wrote in 2013. The law requires CIGA to go back and
compare the premiums used to estimate the initial assessment
made in 2013 with the actual premium finally determined in 2015.
At that point, if the actual premium is more, they receive an
additional assessment which is added to the current year
assessment, and if the insurer wrote less, they receive a credit
that will be deducted from their current year assessment. The
"true up" formula is determined separately for the "regular"
assessment and for the "special bond" assessment. Without the
change in this bill, any special bond assessment credits due an
insurer after true up could not be applied as a credit for their
current year regular assessment.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 6/12/14)
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California Insurance Guarantee Association (source)
ARGUMENTS IN SUPPORT : CIGA supports this bill and writes,
"Restoring the maximum "regular" surcharge will provide
financial flexibility for the association to pay expected claims
and pay down the debt without increasing the financial burden of
the assessments on insurers and employers. A 2 percent
"regular" assessment is consistent with the NAIC Property and
Casualty Insurance Guarantee Model act and the laws of 41 other
states.
"Existing law contains a rather complicated "true-up" mechanism
to ensure that an insurance company is not assessed more or less
than what it should be assessed based on the premiums it has
actually written in the year of the assessment. This mechanism
requires the assessment to be reviewed and adjusted to reflect
actual premiums written two years after the initial assessment
in any given year."
ASSEMBLY FLOOR : 71-1, 5/1/14
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom,
Bocanegra, Bonilla, Bonta, Bradford, Buchanan, Ian Calderon,
Campos, Chau, Chesbro, Conway, Cooley, Dababneh, Dahle, Daly,
Dickinson, Eggman, Fong, Frazier, Beth Gaines, Garcia, Gatto,
Gomez, Gonzalez, Gordon, Gorell, Gray, Grove, Hagman, Harkey,
Roger Hernández, Holden, Jones, Jones-Sawyer, Levine, Linder,
Logue, Lowenthal, Maienschein, Medina, Melendez, Mullin,
Muratsuchi, Nazarian, Nestande, Olsen, Pan, Perea, V. Manuel
Pérez, Quirk, Quirk-Silva, Rendon, Ridley-Thomas, Rodriguez,
Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski,
Wilk, Williams, Yamada, John A. Pérez
NOES: Chávez
NO VOTE RECORDED: Brown, Donnelly, Fox, Hall, Mansoor,
Patterson, Salas, Vacancy
AL:d 6/13/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
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