BILL ANALYSIS
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THIRD READING
Bill No: SB 1242
Author: Calderon (D)
Amended: As introduced
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 10-0, 4/7/10
AYES: Calderon, Cogdill, Correa, Florez, Kehoe, Liu,
Lowenthal, Padilla, Price, Runner
NO VOTE RECORDED: Cox, Vacancy
SENATE APPROPRIATIONS COMMITTEE : 9-0, 4/26/10
AYES: Kehoe, Cox, Alquist, Corbett, Denham, Leno, Price,
Wolk, Yee
NO VOTE RECORDED: Walters, Wyland
SUBJECT : Insurance: Guarantee Association
SOURCE : California Insurance Guarantee Association
DIGEST : This bill permits 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.
ANALYSIS :
Existing law:
1. Establishes CIGA to pay "covered claims" of insolvent
CONTINUED
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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.
This bill extends 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.
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
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liabilities of companies and makes payments from the
assets, earnings on investments, and assessments levied on
member companies.
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. Section 1063.14 of the Insurance Code
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 two
percent of direct written premium. In 1983, that was
lowered to one percent. AB 1183 (Calderon), Chapter 296,
Statutes of 2001, an urgency bill, allowed CIGA to increase
the assessment up to two percent 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
(Calderon), Chapter 431, Statutes of 2002, extended the two
percent 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 one percent per year.
The two percent 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 one percent assessment on all workers'
compensation premium collected by CIGA-member companies to
pay existing and past claims, and an additional one percent
to repay bonds used to pay past and current claims. This
two percent assessment is ultimately passed along to
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customers of insurers. CIGA has never assessed more than a
total of two percent for all purposes.
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 has not been a
problem. Those reforms have also reduced CIGA's
liabilities and thus lessened the necessity (somewhat) to
float bonds to meet its obligations.
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.
Prior/Related Legislation
AB 3072 (Assembly Insurance Committee), Chapter 112,
Statutes of 2006, extended the sunset on the power of CIGA
to issue bonds from January 1, 2007 to January 1, 2009.
AB 3055 (Assembly Insurance Committee), Chapter 80,
Statutes of 2008, extended the sunset two additional years
to January 1, 2011.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11
2011-12 Fund
Increased premiums due to increased $0 to an
unknown, potentially General/
assessment on insurance policies significant
amount Special/
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passed onto policyholders Local
Potential cost avoidance
if,General/
without bill, CIGA sells all
Special/
remaining bonds Local
SUPPORT : (Verified 4/26/10)
California Insurance Guarantee Association (source)
American Insurance Association
Association of California Insurance Companies
California Applicants Attorneys Association
California Nurses Association
ARGUMENTS IN 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.
JJA:mw 4/27/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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