BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2710


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          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  








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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










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