BILL ANALYSIS Ó
AB 2710
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Date of Hearing: April 6, 2016
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
AB 2710
(Cooley) - As Amended March 31, 2016
SUBJECT: Insurance: California Insurance Guarantee
Association: premium charges
SUMMARY: Revises the methodology used by the California
Insurance Guarantee Association (CIGA) to calculate assessments
charged to property/casualty insurers to pay covered claims for
insolvent property/casualty insurers. Specifically, this bill:
1)Eliminates the current process of adjusting an assessment over
a two-year period and replaces it with an annual process.
2)Requires CIGA to reconcile the premium assessed in the initial
year with the surcharges collected in the subsequent year.
3)Require CIGA to refund insurers for any outstanding credits.
4)Applies the new methodology to assessments on and after
January 1, 2017.
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EXISTING LAW:
1)Establishes the Conservation and Liquidation Office (CLO) in
the Department of Insurance to take control of insolvent
insurers.
2)Requires insurers to establish CIGA to pay "covered claims" of
property/casualty insurers liquidated by the CLO.
3)Requires property/casualty companies admitted to sell
insurance in California to be members of CIGA.
4)Defines "covered claims" generally to include payments for
benefits owed to insureds under the policy and excludes
payments to others with claims against the estate of the
insolvent insurer.
5)Requires member insurers to pay assessments to CIGA to cover
the cost of paying covered claims (and the associated
administrative expenses) of liquidated insurers. Those
assessments are a fixed percentage of the total written
premium in the prior calendar year.
6)Requires member insurers to levy surcharges on individual
insurance policies to recoup the cost of the CIGA assessment.
7)Specifies the process by which CIGA reconciles the amount of
surcharges collected by an individual insurer with the amount
of the assessment paid by an individual insurer.
FISCAL EFFECT: Undetermined
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COMMENTS:
1)Purpose . According to the author, the current process for
reconciling assessments and surcharges is complicated,
confusing, and protracted. It involves several calculations,
significant time delays, and unnecessary work on the part of
member insurers and CIGA staff. This bill adopts a simpler
process going forward that will reduce workload for CIGA staff
and provide insurers with greater certainty in the process.
2)Insolvent Insurers . Insurance is subject to extensive
regulation to provide assurance to that an insurer can fulfill
its contractual responsibilities and pay claims. The CLO can
seek a court order to take over operation of an insurer that
becomes financially troubled despite this regulatory
oversight. The CLO will attempt to conserve the assets of the
insurer for the benefit of policy holders, creditors, and
others with claims against the insurer (an insurer in the
conservation/liquidation process is referred to as an
"estate"). Part of the conservation process is a
determination of whether the insurer can be rehabilitated and
continue to operate as an insurance company or whether the
insurer must be shut down. If the insurer cannot be
rehabilitated or wound down in an orderly fashion, it is then
subject to liquidation by the CLO. When the CLO decides to
liquidate an estate, responsibility for paying "covered
claims" is transferred to a guarantee association (CIGA for
property/casualty policies and the California Life and Health
Insurance Guarantee Association for life and health insurance
policies). When an insurer is liquidated, all existing
policies are cancelled and all the assets of the estate will
be sold off to satisfy claims against the estate. CIGA uses
whatever assets are available from the estate in combination
with assessments levied on its member insurers to resolve
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covered claims.
3)Assessments and Surcharges . CIGA sets the assessment for an
individual insurer based on the "net written premium" the
insurer reports collecting in the relevant line of insurance
for the prior year. The insurer then is required to collect a
surcharge on premiums charged in that line of insurance during
the next year to recoup the amount of the assessment. Because
the amount of "net written premium" for an individual insurer
is almost certain to vary from year to year, the amount of the
surcharge collected varies from the amount of the assessment.
This arrangement requires the amount of the assessment to be
reconciled with the collected surcharges and adjustments made
to deal with the inevitable disparity between the two. Under
current law, assessments are made for two years before the
reconciliation process occurs. This bill requires that process
to occur each year and requires CIGA to refund credits to the
insurer.
REGISTERED SUPPORT / OPPOSITION:
Support
California Insurance Guarantee Association (sponsor)
Opposition
None received
AB 2710
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Analysis Prepared by:Paul Riches / INS. / (916) 319-2086