BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 409|
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CONSENT
Bill No: AB 409
Author: Garrick (R)
Amended: 4/1/09 in Assembly
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 11-0, 6/17/09
AYES: Calderon, Cogdill, Correa, Cox, Harman, Kehoe, Liu,
Lowenthal, Padilla, Runner, Wolk
NO VOTE RECORDED: Florez
ASSEMBLY FLOOR : 79-0, 5/4/09 (Consent) - See last page for
vote
SUBJECT : California Insurance Guarantee Association
SOURCE : California Insurance Guarantee Association
DIGEST : This bill revises the California Insurance
Guarantee Association law to clarify that assessments to
pay claims of insolvent insurers shall be based upon a
uniform percentage applied to the share of direct written
premium of participating insurers for the base year, as
that share is initially determined from the insurers' first
Annual Financial Statement filing following the base year,
and then as updated yearly from subsequent annual Financial
Statement filings. This method conforms to that used since
the program's 1982 inception.
ANALYSIS :
CONTINUED
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Existing law:
1. Protecting consumers from unpaid claims due to insolvent
insurers is a key purpose of insurance rate regulation;
the second line of defense protecting consumers against
harm from an insolvent insurer (i.e., nonpayment of
valid claims) is the guaranty fund system.
2. The California Insurance Guarantee Association (CIGA)
functions to provide insolvency insurance for its
participating insurers. Insolvency insurance is
insurance against loss due to the failure or inability
of an insolvent insurer to fulfill its obligations under
insurance policies it has issued.
3. All property and casualty insurers operating in
California are required to participate in the CIGA as a
condition of transacting insurance in this state.
4. In the event of a participating insurer's insolvency,
valid claims against the insolvent insurer are settled
by recourse to the CIGA.
5. The CIGA settles these claims by statutory rules using
the assets of the insolvent insurer plus funds raised by
assessing similar insurers for help in claims payment,
based upon whether the insolvent carrier wrote personal
lines coverage, commercial coverage, or workers'
compensation.
6. CIGA assessments are required to be based on a uniform
percentage applied to the net direct written premium of
all subject insurers for the prior calendar year. Net
direct written premium is determined using data reported
to the Insurance Commissioner in each insurer's most
recent filed annual financial statement. The system was
established to allow for year-to-year adjustments in
relative market share so assessments rise and fall with
market share.
This bill amends the above law to specify that the initial
premium shall be adjusted by applying the same rate of
premium charge as initially used to each insurer's written
premium as shown on the annual statement for the second
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year following the year "on" which the initial premium
charge "was based".
Background
When it is required to assess its member insurers, CIGA
makes the initial assessment based on the latest annual
statement available. For example, if an assessment was made
in the year 2000, that assessment is based on the insurer's
latest annual statement of earned premium in 1999. CIGA
then calculates the adjusted premium for the assessment
made in 2000 up or down to reflect the premium actually
collected by the insurer in 2000. That adjustment cannot
be calculated until the insurer's annual statement is filed
in 2001, which contains the accurate information on
premiums collected by the insurer in the year 2000. This
is the process required by the original provision of
Section 1063.5, enacted in 1981, and it is the process CIGA
has consistently utilized since that time. However,
amendments to this section enacted in 1987 created
confusion. The 1987 amendments mistakenly require the
premium adjustment to be calculated on the annual statement
for the second year following the year in which the initial
premium change "is made," rather than the second year
following the year in which the initial premium surcharge
"was based." The intent of this bill is to conform the
statute to the proper procedure, which fortunately has been
the practice all along.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/18/09)
California Insurance Guarantee Association (source)
ARGUMENTS IN SUPPORT : According to the author's office,
"section 1063.5 of the Insurance Code sets forth the
process by which the CIGA calculates premium assessments on
member insurers in the event of an insolvency, and the
process the association uses to "true up" each insurer's
assessment to recognize the actual amount of premium
collected by the insurer in the year subject to the
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assessment. Section 1063.5 contains a drafting mistake that
causes the statute to be inconsistent with the intent of
the statute and the process that the CIGA has used since
inception."
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Bill
Berryhill, Tom Berryhill, Blakeslee, Block, Blumenfield,
Brownley, Buchanan, Caballero, Charles Calderon, Carter,
Chesbro, Conway, Cook, Coto, Davis, De La Torre, De Leon,
DeVore, Duvall, Emmerson, Eng, Evans, Feuer, Fletcher,
Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani,
Garrick, Gilmore, Hagman, Hall, Harkey, Hayashi,
Hernandez, Hill, Huber, Jeffries, Jones, Knight,
Krekorian, Lieu, Logue, Bonnie Lowenthal, Ma, Mendoza,
Miller, Monning, Nava, Nestande, Niello, Nielsen, John A.
Perez, V. Manuel Perez, Portantino, Price, Ruskin, Salas,
Saldana, Silva, Skinner, Smyth, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Torrico, Tran,
Villines, Yamada, Bass
NO VOTE RECORDED: Huffman
JJA:do 6/19/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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