BILL ANALYSIS Ó
AB 2710
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ASSEMBLY THIRD READING
AB
2710 (Cooley)
As Amended March 31, 2016
Majority vote
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Insurance |13-0 |Daly, Melendez, | |
| | |Travis Allen, | |
| | |Bigelow, Calderon, | |
| | |Chu, Cooley, Cooper, | |
| | |Dababneh, Dahle, | |
| | |Frazier, Gatto, | |
| | |Rodriguez | |
| | | | |
| | | | |
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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
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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
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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
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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
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