BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
AB 2230 (Cooley) Hearing Date: June 11, 2014
As Amended: April 29, 2014
Fiscal: No
Urgency: No
VOTES: Asm. Floor (05/01/14)71-01/Pass
Asm. Ins. (04/23/14) 13-00/Pass
SUMMARY Would allow the California Insurance Guarantee
Association (CIGA), beginning January 1, 2015, to levy an
assessment up to 2% of direct written premiums on insurers,
unless there are outstanding bonds being used to pay claims and
expenses, in which case the assessment could not exceed 1% for
that category; would simplify the "true-up" process and allow
credit and debits due individual insurers for over or under
payments on bond assessments to be applied against regular CIGA
assessments.
DIGEST
Existing law
1. Establishes CIGA to pay "covered claims" of insolvent member
insurers, as specified;
2. Requires each insurer admitted to transact insurance in this
state in three specified classes of insurance, including
workers' compensation, auto and homeowners, and all other
property casualty insurance, to participate in CIGA as a
condition of doing business;
3. Requires CIGA to allocate levy assessments and claims payments
and costs based on the three categories of insurance;
4. Defines "covered claims," and expressly limits CIGA's authority
to make payments to only those claims that are specifically
enumerated;
5. Authorizes CIGA to levy an assessment of up to 1% of direct
AB 2230 (Cooley), Page 2
written premium of insurers in each assessment category to pay
"covered claims;
6. Authorizes CIGA to issue up to $1.5 billion in bonds by January
1, 2023 to pay workers' compensation claims and efficiently
manage its cash flow needs, as specified;
7. Allows CIGA to levy an assessment on workers' compensation
insurers, based upon direct premium collected, for the purpose
of paying off the bonds;
This bill
1. Would delete a provision declaring CIGA a party in interest
in all proceedings involving a covered claim, and instead
provide that CIGA shall have all the same rights the
insolvent insurer would have had if not in liquidation, as
specified;
2. Would again allow CIGA, beginning January 1, 2015, to levy
an assessment up to 2% of direct written premiums on
insurers in each category, unless there are outstanding
bonds being used to pay claims and expenses, in which case
the assessment could not exceed 1% for that category;
3. Would allow credit and debits due individual insurers for
over or under payments on bond assessments to be applied
against regular CIGA assessments once any special bonds are
paid off.
COMMENTS
1. Purpose of the bill AB 2230 makes changes to statutes
governing the California Insurance Guarantee Association
(CIGA) including adjusting CIGA's current assessment cap and
applying over or under payments on bond assessments to
CIGA's regular assessment. These changes are necessary to
ensure CIGA's financial stability and protect the workmen's
compensation system from being over-burdened by potential
bankruptcies, ensuring injured workers will always receive
payment.
2. Background CIGA was created by legislation in 1969 as an
association of insurers that makes payments to policyholders
AB 2230 (Cooley), Page 3
of property/casualty, workers' compensation and
"miscellaneous" insurers when the member insurance company
becomes insolvent and is unable to do so. Generally
speaking, CIGA accepts the assets and liabilities of
insolvent companies and makes payments from the assets,
earnings on investments, and assessments levied on CIGA
member companies. Since its inception, CIGA has never
failed to pay a claim.
CIGA has the statutory authority to impose an assessment on
member insurers "sufficient to discharge its obligations" when
needed. The amount of the assessment on each insurer is
determined annually based on the insurer's net direct written
premium in the category of insurance being assessed-for example,
workers' compensation. Insurers recoup the assessment by
passing it along to policyholders, and are required 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, the maximum assessment 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 more than 30 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.
That temporary increase terminated in 2008, returning the
statutory maximum in all categories to 1%.
The temporary 2% assessment increases in 2001 and 2002 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
(subsequently extended to 2023) to pay workers' compensation
claims. At the same time, the maximum regular assessment on
workers' compensation insurers was lowered back to 1%, and
CIGA was authorized to levy a separate assessment on those
insurers in the amount necessary to repay the bonds. CIGA
issued $750 million in fixed rate and auction rate
securities in 2004, and levied an additional assessment that
has equaled 1%, and for a few years more than 1%, of direct
written premiums to pay the debt service on those bonds.
AB 2230 (Cooley), Page 4
CIGA expects to soon retire all outstanding bond
obligations, but its long-term obligation to injured workers
is going to pose a substantial liability for some time to
come.
Restoring the maximum "regular" surcharge will provide
financial flexibility for the association to pay expected
claims and pay down the debt without increasing the
financial burden of the assessments on insurers and
employers. A 2 % "regular" assessment is consistent with the
National Association of Insurance Commissioners Property and
Casualty Insurance Guarantee Model Act and the laws of 41
other states.
A complicated "true up" mechanism ensures that an insurance
company is not assessed more or less than what it should be
assessed based on the premiums it has actually written in
the year of the assessment-its net direct written premium.
As a result of a time lag in final accounting, the
assessment is reviewed two years after collection and
adjusted to reflect actual premiums written, less refunds
and other adjustments. For example, insurers are assessed
for the 2013 year based on premiums written in 2012. The
regulator will not know until approximately 18 months after
2013 how much premium each insurer in fact wrote in 2013.
The law requires CIGA to go back and compare the premiums
used to estimate the initial assessment made in 2013 with
the actual premium finally determined in 2015. At that
point, if the actual premium is more, they receive an
additional assessment which is added to the current year
assessment, and if the insurer wrote less, they receive a
credit that will be deducted from their current year
assessment. The "true up" formula is determined separately
for the "regular" assessment and for the "special bond"
assessment. Without the change in this bill, any special
bond assessment credits due an insurer after true up could
not be applied as a credit for their current year regular
assessment.
3. Support The California Insurance Guarantee Association
supports this legislation to restore the regular assessment
cap to a maximum of 2% of direct written premiums in years
in which there are no special bond assessments being levied
and collected, and to simplify the assessment "true-up"
process. CIGA notes that there are two additional insurer
insolvencies pending, and the maximum 1% maximum surcharge
AB 2230 (Cooley), Page 5
may not be sufficient for it to pay claims.
4. Opposition None received.
5. Prior and Related Legislation SB 712 (Calderon, Ch. 426,
Statutes of 2011) extended the authority of CIGA to issue
bonds to pay workers' compensation claims to 2023.
POSITIONS
Support
California Insurance Guarantee Association
Oppose
None received
Consultant: Erin Ryan (916) 651-4110