BILL ANALYSIS �
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Date of Hearing: April 23, 2014
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
AB 2230 (Cooley) - As Amended: March 28, 2014
SUBJECT : California Insurance Guarantee Association
SUMMARY : Reestablishes a potential 2% assessment level on
insurers to fund the operations of the California Insurance
Guarantee Association (CIGA). Specifically, this bill :
1)Authorizes CIGA to assess member insurers up to 2% of net
direct written premium, provided that there are no outstanding
bonds that were issued pursuant to specified statutes.
2)Provides that the maximum assessment is 1% of net direct
written premiums in the event any of these bonds remain
outstanding.
3)Clarifies how premium adjustments for member insurers shall be
made once there are no longer outstanding bond obligations.
4)Clarifies language in the statute that grants CIGA the same
rights in litigation that the insolvent insurer would have
had.
EXISTING LAW :
1)Requires all admitted insurers that write property-casualty
insurance in California establish, and be members of, CIGA,
for the purpose of paying statutorily defined "covered claims"
of insolvent insurers.
2)Provides that CIGA's obligations to pay the claims against
insolvent insurers shall be funded by assessments (termed
"premiums" in the statute) on member insurers.
3)Provides that there are three assessment categories within
CIGA: automobile and homeowners insurance; workers'
compensation insurance; and all other property-casualty
insurance.
4)Provides that, with respect to the automobile and homeowners'
insurance category, and the "all other" category, members can
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be assessed up to 2% of net direct written premium in a year
in order to pay the covered claims.
5)Provides that, with respect to the workers' compensation
category, the assessment is limited to 1% of net direct
written premium, plus a special assessment dedicated to
funding bond obligations for bonds issued pursuant to
specified statutes.
6)Authorizes CIGA to issue up to $1.5 billion in bonds, in order
to pay covered workers' compensation claims and efficiently
manage its cash flow needs.
7)Specifies that, in order to ensure full and prompt payment of
bond obligations, the special assessment may exceed 1% of net
direct written premium.
8)Provides that the assessment charged to insurers in each
category shall be initially based on each insurer's written
premium as shown in the latest year's annual financial
statement, and adjusted later once sufficient time has elapsed
to obtain an accurate measurement of the net direct premium
written by the insurer for that year.
FISCAL EFFECT : Undetermined
COMMENTS :
1)Purpose . The bill is primarily intended to re-establish the
2% maximum annual assessment on workers' compensation policies
that existed for a number of years, but that was modified a
decade ago when CIGA was granted the authority to issue bonds
(discussed in more detail below) as a means of meeting its
obligation to pay the legitimate claims of injured workers
whose employer purchased workers' compensation insurance from
an insurer that became insolvent. The 2% assessment was
restructured at that time into a regular 1% assessment, and a
special bond assessment that was not capped at (and at times
did exceed) 1%. Now that the bonds have substantially served
the purposes for which they were authorized, and are expected
to be paid off, the bill proposes to return to the previous,
single 2% assessment cap.
2)Background . CIGA's purpose is to pay legitimate "covered
claims" to people who would have been entitled to an insurance
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payment, except for the fact that the insurer at issue became
insolvent (the insurance term for what is commonly called
bankrupt). "Covered claims" does not include every possible
claim that might have been filed against the insolvent
insurer, but does cover most typical insurance claims.
CIGA is funded by an assessment on insurers that write the kind
of insurance that is being covered - as noted,
property-casualty insurance is divided into three categories.
At issue for this bill is workers' compensation insurance.
Between 2000 and 2004, 36 workers' compensation insurers
became insolvent. Many were small regional insurers, but
several were very large companies with substantial market
share. One characteristic of workers' compensation claims is
that many claims have a very "long tail" - that is, the claim
stays open potentially for many years if the injured workers
has long-term or life-long medical needs, or has a life
pension based on total disability. By 2004, it was apparent
that the regular 2% assessment was going to prove inadequate
in generating sufficient funds, especially on a cash flow
basis, for CIGA to make timely payments to the injured workers
and their medical providers who were entitled to payment.
The Legislature responded to this problem by authorizing CIGA to
issue bonds sufficient to meet its financial needs. Bonds
allowed CIGA to gather more funds immediately, and more
efficiently, than long-term borrowing against future
assessment revenue. However, the Legislature conditioned the
new bonding authority with a restructuring of the assessment
formula. Bonds are simply not saleable unless there is a
dedicated revenue source to assure repayment. Therefore, the
regular assessment was reduced to 1%, and an uncapped special
assessment for the bonds was added. Over time, the special
assessment has approximated 1%, but it has exceeded 1% as
well.
By all measures, this approach has proven successful. CIGA
never issued the maximum amount of bonds it was authorized to
issue, and its authority to issue bonds was extended by the
Legislature several times subsequent to the initial issue. It
is poised to retire all outstanding bond obligations, but
CIGA's long term obligations to injured workers whose employer
was insured by those 36 insolvent insurers is going to
continue to pose a substantial financial burden. While the
special needs for financial flexibility that necessitated the
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bonding authority have eased, the revenue lost by ending
bonding activity requires a return to the 2% assessment level.
3)NAIC Model Law . The National Association of Insurance
Commissioners (NAIC) Model Law on property-casualty guarantee
associations recommends a 2% assessment cap, and 41 other
states use this figure. As noted above, California long had
the 2% cap until more aggressive financing mechanisms were
required.
4)"True-up" provisions . It takes a couple of years after any
particular policy year ends to obtain precise data to
calculate net direct written premium, because there are
several variables that do not ripen until after the policy
year closes. As a result, CIGA uses a pretty close rule of
thumb from the previous year's annual financial statement for
the initial assessment, and then uses a somewhat cumbersome
formula to "true-up" the assessments later. The bill contains
language to ensure that this process pencils out properly even
though there won't be any bond funds from which to draw for
insurers entitled to a "true-up" of the special assessment..
5)CIGA stands in the shoes of the insovlent insurer . The law
provides that CIGA has the same rights to defend a claim as
the insolvent insurer would have had. The bill's final
provision is intended as a clean-up by deleting confusing
language that states this rule. However, changing the
language that implements a well-established rule could
potentially cause the very confusion that the amendment is
intended to prevent. The author may wish to delete this
provision from the bill.
REGISTERED SUPPORT / OPPOSITION :
Support
California Insurance Guarantee Association
Opposition
None received
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
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