BILL ANALYSIS Ó AB 2710 Page 1 ASSEMBLY THIRD READING AB 2710 (Cooley) As Amended March 31, 2016 Majority vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Insurance |13-0 |Daly, Melendez, | | | | |Travis Allen, | | | | |Bigelow, Calderon, | | | | |Chu, Cooley, Cooper, | | | | |Dababneh, Dahle, | | | | |Frazier, Gatto, | | | | |Rodriguez | | | | | | | | | | | | ------------------------------------------------------------------ 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 AB 2710 Page 2 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. 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 AB 2710 Page 3 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: Unknown COMMENTS: 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. Insolvent Insurers. Insurance is subject to extensive regulation to provide assurance so 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 AB 2710 Page 4 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 covered claims. 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. Analysis Prepared by: Paul Riches / INS. / (916) 319-2086 FN: 0002720 AB 2710 Page 5