BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 2781 (Committee on Insurance) Hearing Date: June 16, 2010
As Introduced: March 3, 2010
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor(05/13/10)76-0/Pass
Asm. Appr.
(05/05/10)17-0/Pass
Asm. Ins. (04/21/10)12-0/Pass
SUMMARY Would permit the California Insurance Guarantee
Association (CIGA) to issue bonds for an additional two years
beyond the current sunset date to January 1, 2013, but would not
change the total amount of bonds that CIGA could issue.
DIGEST
Existing law
1. Establishes CIGA to pay "covered claims" of insolvent member
insurers, as specified;
2. Requires each insurer in the specified member classes,
including workers' compensation, automobile, homeowners', and
miscellaneous, admitted to transact insurance in this state, to
participate in CIGA as a condition of doing business;
3. Defines "covered claims," and expressly limits CIGA's authority
to make payments to only those claims that are specifically
enumerated;
4. Establishes a procedure for a claimant to seek payment for
damages caused by an uninsured motorist that may be recovered
under one or more guarantee associations, and provides that CIGA
may bring a court action to recover any overpayments it may have
made that were off-set by the third party;
AB
2781 (Committee on Insurance), Page 2
5. Authorizes CIGA to issue up to $1.5 billion in bonds by January
1, 2011 to pay workers' compensation claims, as specified;
6. Allows CIGA to levy an assessment on workers' compensation
insurers, based upon premium collected, for the purpose of
paying off the bonds.
This bill
1. Would extend the sunset on CIGA's authority to issue up to
$1.5 billion in bonds to pay covered workers' compensation
claims two years to January 1, 2013.
COMMENTS
1. Purpose of the bill To extend the sunset provision on the
authority granted to CIGA in 2003 to resort to bond
financing, if needed, to continue to meet its obligations to
make workers' compensation payments to injured workers.
2. Background CIGA was created by legislation in 1969 as an
association of insurers that makes payments to policyholders
of property/casualty, workers' compensation and
"miscellaneous" insurers when the member insurance company
becomes insolvent and is unable to do so. CIGA is a
statutory entity that depends on the establishing
legislation for its existence, and for a definition of the
scope of its powers, duties and protections. It issues no
policies, collects no premiums, makes no profits, and
assumes no contractual obligations to insureds. Generally
speaking, CIGA accepts the assets and liabilities of
companies and makes payments from the assets, earnings on
investments, and assessments levied on member companies.
3. Since its inception, CIGA has never failed to pay a claim.
CIGA has the statutory ability to impose a surcharge on
insurers "sufficient to discharge its obligations" when
needed. The amount of the surcharge on each insurer is
determined annually based on the insurer's net direct
written premium. Insurance Code Section 1063.14 requires
insurers to recoup the surcharge by passing it along to
policyholders, and to separately state the surcharge on
AB
2781 (Committee on Insurance), Page 3
premium billing notices. From its creation until 1983, the
maximum allowable assessment was 2% of direct written
premium. In 1983, that was lowered to 1%. AB 1183 (Chapter
296, Statutes of 2001), an urgency bill, allowed CIGA to
increase the assessment up to 2% for a one year period
because of the fear that it would be unable to meet its
obligations to pay worker claims following the insolvency of
Superior National and several other workers' compensation
insurers in 2000 and 2001. In 2002, AB 2007 (Chapter 740,
Statutes of 2002) extended the 2% surcharge to December 31,
2007 as a result of several more major workers' compensation
insurer insolvencies. The maximum allowable premium
surcharge has now returned to 1% per year.
4. The 2% assessment did not provide sufficient revenue to
meet the claims obligations arising from the multiple
workers' compensation insurer insolvencies in such a
concentrated period. As a result, legislation in 2003 gave
CIGA authority to issue up to $1.5 billion in bonds through
the California Infrastructure and Economic Development Bank
through 2007. CIGA has previously issued $750 million in
fixed rate and auction rate securities; at this date, due to
repayment, only $690 million of the original $1.5 billion in
bonding capacity has been used, leaving a current bonding
capacity of $810 million dollars. CIGA levies a 1%
assessment on all workers' compensation premium collected by
CIGA-member companies to pay existing and past claims, and
an additional 1% to repay bonds used to pay past and current
claims. This 2% assessment is ultimately passed along to
customers of insurers. CIGA has never assessed more than a
total of 2% for all purposes.
5. CIGA's assessment has been made on a premium base that is
declining due to workers' compensation insurance reform. To
date, the reduction in base premium hasn't been a problem.
Those reforms have also reduced CIGA's liabilities and thus
lessened the necessity (somewhat) to float bonds to meet its
obligations.
6. CIGA reports that in the 2009 fiscal year, CIGA paid out
$228.7 million in workers compensation payments and
collected $14.325 million in regular workers compensation
assessments. Collections of distributions from the
liquidators of various insolvent companies were $167.9
million. Additionally CIGA made bond and principal payments
in fiscal year 2009 in the amount of $27 million while
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2781 (Committee on Insurance), Page 4
collecting special bond assessments in the amount of $76.398
million."
7. Support According to CIGA, in order to keep its costs
down, the association has taken a conservative approach to
issuing bonds, seeking to raise only the absolute minimum
amount of money necessary to sustain its operations. Because
CIGA cannot project its cash flow needs with absolute
certainty, the association simply can not calculate how much
of the remaining $810 million in bonding authority it will
need. Extending the sunset to 2013 will provide CIGA more
time to evaluate its financial status, which may ultimately
result in less borrowing and lower costs, reducing the
assessments employers will need to pay to redeem the bonds.
8. Opposition None
9. Questions None
10. Suggested Amendments This bill and Senate Bill 1242
(Calderon) both amend California Insurance Code Section
1063.1. A potential chaptering conflict exists but staff
recommends that the any required amendments to avoid
chaptering conflicts be added at a later time, if necessary.
11. Prior and Related Legislation
Senate Bill 1242 (Calderon) which makes the same change to
California Insurance Code 1063.1 was passed by this
committee on April 8th on an 10/0 vote, by Appropriations on
a 9/0 vote and was approved as a consent item on the Senate
Floor by a vote of 34 to 0.
POSITIONS
Support
California Insurance Guarantee Association (CIGA) (Sponsor)
Association of California Insurance Companies (ACIC)
Oppose
None
AB
2781 (Committee on Insurance), Page 5
Consultant: Kenneth Cooley (916) 651-4102