BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 1242 (Calderon) Hearing Date: April 7, 2010
As Introduced: February 19, 2010
Fiscal: Yes
Urgency: No
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;
5. Authorizes CIGA to issue up to $1.5 billion in bonds by January
1, 2011 to pay worker's 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.
SB 1242 (Calderon), Page 2
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
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
SB 1242 (Calderon), Page 3
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
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
SB 1242 (Calderon), Page 4
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. The California Applicants' Attorney Association supports
this bill, and states "(e)xtending the period would assure
adequate funding to pay claims without the need to increase
the CIGA surcharge on employers".
9. The California Nurses Association supports the bill as a
means to ensure that workers whose claims are held by CIGA
benefit are not subject to further delays in receiving their
benefits.
10. The Association of California Insurance Companies, which
supports SB 1242, notes the current sunset date "limits
CIGA's ability to assure adequate funding to pay covered
workers compensation claims".
11. Opposition None received.
12. Questions None.
13. Suggested Amendments None.
14. Prior and Related Legislation
a. AB 3072 (Committee on Insurance), Chapter
112, Statutes of 2006: Extended the sunset on the
power of CIGA to issue bonds from January 1, 2007 to
SB 1242 (Calderon), Page 5
January 1, 2009;
b. AB 3055 (Committee on Insurance), Chapter
80, Statutes of 2008: Extended the sunset two
additional years to January 1, 2011.
POSITIONS
Support
California Insurance Guarantee Association (sponsor)
California Applicants Attorneys Association
California Nurses Association
Association of California Insurance Companies
Oppose
None received
Consultant: Kenneth Cooley (916) 651-4102