BILL ANALYSIS
AB 869
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Date of Hearing: April 14, 1999
ASSEMBLY COMMITTEE ON INSURANCE
Jack Scott, Chair
AB 869 (Keeley) - As Amended: April 13, 1999
SUBJECT : Community Reinvestment Act
SUMMARY : Establishes a Community Reinvestment Act for
California insurers by creating an affirmative obligation for
insurers to invest in low-income communities. Specifically,
this bill :
1)Makes legislative findings that insurers are a large
institutional source of capital in the state and that
insurers' assets available for investment are derived, in
part, from premiums paid by California policyholders.
2)Makes legislative findings that California Organized
Investment Network (COIN) in the Department of Insurance (DOI)
efforts to encourage insurer commitment to safe investments
that benefit low-income communities have resulted in
insufficient economically targeted investments; that IMPACT
Community Capital, a for-profit insurance industry investment
intermediary designed to make economically targeted
investments, has also resulted in insufficient investments in
comparison to the amount of premiums collected in the state.
3)Establishes an affirmative and continuing obligation for
California insurers to make economically targeted investments
in low-income communities.
4)Requires the Commissioner to recognize economically targeted
investments as admitted assets.
5)Requires the Insurance Commissioner (Commissioner) to collect
and compile data on the performance of insurers with respect
to economically targeted investments.
6)Requires the Commissioner, if he or she finds that an insurer
has failed to make adequate economically targeted investments,
to hold a hearing to determine if the insurer should be
ordered to cease and desist from further noncompliance.
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EXISTING LAW :
1)Generally regulates insurer loans and investments.
2)Requires lending institutions under the federal Community
Reinvestment Act to make community development investments.
FISCAL EFFECT : Unknown
COMMENTS :
The author introduced AB 869 at the request of Consumers Union,
Housing California, and the California Community Economic
Development Corporation because insurers receive billions from
California policyholders and, as the second largest source of
private capital for long-term investment. have an obligation,
similar to banks, to invest in the needs of low-income
communities. Communities throughout the state, both urban and
rural, are in need of greater investment for small businesses
and farms. Banks are required to address these needs through
the Community Reinvestment Act (CRA) and have made significant
investments in low-income communities. The author believes
insurers, likewise, should be reinvesting in their
policyholders' communities. AB 869 mirrors the language of the
federal CRA and would create an "affirmative obligation" for
insurers to invest in economically targeted investments.
Background
Senator Polanco introduced SB 1217 in 1995 that would have
required insurers to make community development investments in
low-income communities. Also in 1995, Assemblymember Lee
introduced the Community Reinvestment Act (AB 1557), which would
have required minimum levels of economically targeted
investments. Negotiations between these authors and the
insurers on insurer community investment resulted in an
agreement to establish COIN and a commitment on the part of
insurers to pursue economically targeted investments. The
authors dropped their bills to permit the insurers to
demonstrate what could be accomplished without mandates to
increase insurer economically targeted investments. Last year,
Senator Polanco introduced SB 2165, which would have required
insurers to invest a specific percentage of premium in targeted
investments. SB 2165 was held in Senate Appropriations
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Committee.
COIN and IMPACT
The insurance industry has historically invested in the
secondary market, generally in big block investments of market
recognized credit quality. These investments are "rated" and
pre-determined to be credit worthy, so do not require an
in-depth analysis by the industry investment managers.
Economically targeted investment opportunities, however, are
generated in the primary market, the first level at which
dollars flow into investment transactions. Small loan
originators in the primary market would normally have little
direct connection with investment managers operating in the
secondary market. First COIN, and now IMPACT Community Capital,
have worked to bridge the gap between the primary and secondary
markets.
Insurance industry managers have described COIN as the
"clearinghouse" and IMPACT as an "investment pool." During the
past two years, COIN has made progress in its goal of increasing
industry investment in the state's low-income and rural areas.
Building on the tax credit authorized through 1997 legislation,
AB 1520 (Vincent), COIN has successfully promoted investments in
Community Development Financial Institutions throughout the
state. Insurer investments through COIN exceed $180 million at
this time.
IMPACT Community Capital was formed by insurers to create a
mechanism for insurers to make economically targeted
investments. Eleven insurers participate in IMPACT,
representing about one-third of California's premium dollars.
IMPACT serves as a broker, buying loans made by banks and
non-profit community organizations and repackaging them into
bonds, a portion of which can be "rated" by Standard & Poors or
Moody's. These bonds are then sold to insurers for their
investment portfolios and the originators can then recycle the
capital into new loans. IMPACT has just recently hired its
first president and is close to finalizing its first project, a
$40 million pool of existing affordable housing loans,
representing almost 1500 units throughout the state
Support
Supporters argue AB 869 is needed to provide investment and meet
unmet credit needs in low- and
moderate-income neighborhoods in California. Consumers Union
(CU), Housing California and others point out that while
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insurers are now making some economically targeted investments,
they are small in comparison to the $70 billion in annual
premiums from California policyholders. Through the voluntary
effort coordinated by DOI, insurers have committed $188 million.
In comparison, in 1997, six major banks made over $9 billion in
CRA loans and investments in California. CU argues that the $70
billion in premiums that insurers collect from California
residents creates an obligation to invest in the state's
communities. The insurer obligation is also justified by
benefits insurers receive from the state, such as the California
Earthquake Authority, a state-run insurance company that removed
the insurers' earthquake risk, the policy surcharge that
supports the guaranty fund, and the state law that mandates auto
insurance. The convergence of banks and insurers further
justifies CRA-type requirements for insurers. In its support of
AB 869, CHARO Community Development Corporation of Los Angeles
pointed to the difference CRA has made in low-income
communities. "Prior to passing of CRA, banks rarely made
investments in low-income communities. CRA lending has created
more affordable rental housing, homeownership opportunities, and
new business."
Supporters also believe insurers carry a community investment
obligation to offset the industry's history of redlining. CU
cited the Insurance Commissioner's recent report, "1996
Commissioner's Report on Underserved Communities", which showed
that insurers do not provide auto, homeowners' and small
business commercial insurance in low-income communities to the
same extent as other communities.
CU makes an historical argument in pointing out that Dr. Martin
Luther King, Jr. and others recognized community investment by
insurers as an important element of the civil rights movement.
Dr. King called for a boycott of Metropolitan Life Insurance in
1966 to improve its investment practices. Subsequently, the
life insurance industry created the Urban Investment Program,
which committed $2 billion from 161 companies between 1967 and
1972. Unfortunately, 1972 marked the end of a significant
insurance industry community investment effort while the CRA, in
contrast, has directed $4 to $6 billion in bank dollars to low
and moderate-income communities. Housing California points out
that COIN has identified over $1 billion in safe and sound
investments, but since the program has started, there has been
only $200 million in investments by the industry through COIN.
Of the 1500 insurers in the state, only 60 have invested through
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COIN. Supporters underscore that the historical lack of
commitment and the failure of the voluntary approach are why
legislation is needed.
Community investments do offer competitive rates of return,
argue supporters in response to insurer assertions that AB 869
would require unreasonable investment risks. Housing California
notes that the Bank of America reports a lower foreclosure rate
in their CRA single family portfolio than they do in their
traditional program. It further points out that CRA mortgages
over the past twenty years have gone from being a product that
banks thought was too risky to now being a Triple-A rated
security and a "hot investment on Wall Street." CU cites a
March 1995 GAO study of pension fund economically targeted
investments that found rates of return were "generally similar"
to that of benchmark investments.
Responding to industry arguments that other states would
retaliate against California-domiciled companies, CU argues that
the law on retaliation does not apply to AB 869 because it is
not a tax, license, fee, fine, penalty or deposit requirement.
In response to other industry concerns, CU emphasizes that AB
869 creates an affirmative obligation to make investments, but
requires no minimum amoun t and notes that insurers who have
invested through COIN would already be in compliance with the
measure.
Opposition
Insurers and business groups oppose AB 869 because they believe
the mandatory approach in the bill will undermine the ability of
insurers to fulfill their primary obligations to their
policyholders and shareholders; create a competitive
disadvantage for domestic insurers; cause retaliation by other
states; be unworkable; and will result in a shift of investment
capital, rather than an infusion of new capital to low income
communities. Insurers emphasize that insurance companies
differ from banks in their purpose, organization, and regulation
and should not be subject to CRA-type requirements. Opponents
also argue that the measure fails to recognize the substantial
investments insurers already make in the form of claims
payments, municipal bonds, and specifically, in COIN and IMPACT.
All insurer opponents emphasized that AB 869 undermines their
primary obligation to their policyholders. The industry points
out that the liquidity of the investment is very important to
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meet claim demands. Pacific Select, for example, notes that in
the situation of earthquake insurance, all the company's
investments could be required to be converted to cash on very
short notice. Opponents emphasized that insurer solvency
requirements are one of the key tools used by insurance
regulators to protect the public from insolvencies, such as
Executive Life. Life insurers also pointed out that a large
percentage of their premium is sold in the form of variable life
products, wherein the policyholder directs where the funds are
invested.
Pacific Mutual and others point out that AB 869 may only apply
to California domiciled companies, which places California
companies at a significant competitive disadvantage to
out-of-state insurers. Insurer investment practices are
governed by the laws of the states in which they are domiciled.
For example, only 8.5% of life insurance premiums go to
California companies, therefore, insurance companies writing
over 90% of California premiums would not be covered by AB 869.
The Association of California Life and Health Insurance
Companies (ACLHIC) and others also argue that other states may
retaliate against companies domiciled in California by requiring
them to invest a percentage of their assets in those other
states. A legal analysis of AB 869 presented by ACLHIC opined
that the measure could lead to retaliation, constitutional
challenge based on impairment of the right to contract, conflict
with the Employment Retirement Income Security Act (ERISA) among
other legal challenges.
Most insurers strongly objected to the notion that insurance
companies should be subject to CRA-type requirements because
insurers were like banks. CRA applies to services delivered by
banks; AB 869 does not apply to the service provided by
insurers. The American Council of Life Insurance (ACLI) makes
the point that banks, unlike insurers, are chartered for the
specific purpose of making credit available to the communities
they serve, and they receive extensive government-sponsored
benefits.
A number of opponents make the point that AB 869 would not bring
in new capital, but create shifts in capital away from current
investments, such as municipalities or entrepreneurial
start-ups. The American Insurance Association pointed out that
AB 869 would divert investments away from the $15 billion in
state and municipal investments insurers already make, driving
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up bond costs for state and local government taxpayers. The
California Chamber of Commerce notes that assets currently
committed to entrepreneurial start-ups have been a source of
tremendous job growth and high rates of return for
policyholders. The California Manufacturers Association and
others argue that AB 869 would put pension plans and annuities
at risk.
Most opponents believe that the voluntary efforts, such as COIN
and IMPACT, are more constructive alternatives with more
long-term potential for community investment.
Related legislation
SB 964 (Polanco), pending in the Senate Rules Committee, makes
certain findings and calls on insurers to enhance their
participation in COIN's programs. AB 145 (Vincent), pending in
Assembly Revenue and Taxation Committee, extends the existing
tax credits for specified investments to premium tax.
REGISTERED SUPPORT / OPPOSITION :
Support
Housing California (Sponsor)
Consumers Union (Sponsor)
California Community Economic Development Association (CCEDA)
(Sponsor)
Honorable Phil Angelides, Treasurer of the State of California
Affirmed Housing Group - Escondido
Alpha Project for the Homeless - San Diego
Association of Homeless and Housing Services Providers of Contra
Costa County
Bayview Community Development
Building Opportunities for Self-Sufficiency (BOSS)
Cabrillo Economic Development Corporation
California Coalition for Rural Housing - Sacramento
Campesinos Unidos, Inc. - Brawley
Casa Familiar, Inc. - San Ysidro
CDC Small Business Finance Corporation
CHARO Community Development Corporation - Los Angeles
City-County Reinvestment Task Force
Coachella Valley Housing Coalition - Indio
Community Interface Services - Carlsbad
Community Loan Fund
Community Reinvestment Committee
Congress for California Seniors
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Consumer Action
Developmental Services Continuum, Inc. - Lakeside
East Bay Asian Local Development Corporation - Oakland
East Bay Habitat For Humanity - Oakland
Echo Housing - Hayward
Economic & Employment Development Center - Los Angeles
Esperanza Community Housing Corporation
Fair Housing Council of Orange County
Greenlining Institute
Home Buyer Assistance Center - Oakland
Homeless Prenatal Program
Human Rights/Fair Housing Commission - Sacramento
Imperial Valley Respite, Inc. - Brawley
Inner City Business Association - Imperial
Korean Youth Community Center - Los Angeles
Lenders for Community Development - San Jose
Los Angeles Community Design Center
Los Angeles Economic Development Corporation
Los Angeles Housing Partnership
MECA, Inc.
National City CDC
Nehemiah Progressive Housing Development Corp. - Sacramento
Neighborhood housing Services of Orange County
Nevada County Housing & Community Services - Nevada City
Oakland Business Development Corporation - Oakland
Orange County Community Housing Corporation
Partnerships With Industry - San Diego
Pico Union Housing Corporation - Los Angeles
QUEUE - UP - Compton
Rural California Housing Corporation
Rural California Housing Group - Sacramento
Rural Community Assistance Corporation
Sacramento Housing Alliance
San Diego City-County Reinvestment Task Force (RTF)
San Diego Habitat for Humanity
San Diego Local Initiates Support Corp. (LISC)
Santa Cruz Community Credit Union
Shelter, Inc.
Southern California Association of Non-Profit Housing
Teamsters Local 601 - Stockton
The Enterprise Group
The Fair Housing Council of San Diego
Opposition
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American Council of Life Insurance (ACLI)
American Insurance Association (AIA)
Association of California Insurance Companies (ACIC)
Association of California Life and Health Insurance Companies
California Business Alliance
California Chamber of Commerce
California Manufacturers Association
Farmers Insurance Group of Companies
Fremont Compensation Insurance Company
Mercury Insurance Company
National Association of Independent Insurers (NAII)
Pacific Select Insurance Company
Pacific Life Insurance Company
Personal Insurance Federation (PIF)
The Seniors Coalition
Transamerica Occidental Life
Zenith Insurance Company
Analysis Prepared by : Beverly Hunter / ains / (916) 319-2086