BILL ANALYSIS                                                                                                                                                                                                    



                                                          AB 869
                                                          Page  1

Date of Hearing:   May 12, 1999

              ASSEMBLY COMMITTEE ON APPROPRIATIONS 
                    Carole Migden, Chairwoman

          AB 869 (Keeley) - As Amended: April 12, 1999 

Policy Committee:                              InsuranceVote:7 -  
5

Urgency:     No                   State Mandated Local  
Program:NoReimbursable:           -

  SUMMARY  

This bill requires insurance companies operating in California  
to invest in low-income communities.  The bill requires the  
insurance commissioner to collect and compile data on the  
performance of insurers with respect to this requirement and  
make it available to the public.  In cases where an insurer is  
found to have made insufficient investments in low-income areas,  
the bill directs the commissioner to hold an administrative  
hearing and take an appropriate regulatory action.  

  FISCAL EFFECT  :

The Department of Insurance estimates costs of $800,000 in the  
first year and $670,000 annually thereafter (Insurance Fund) for  
staff and related expenses to implement the bill's provisions.

  COMMENTS  :

  1)Purpose of the Bill  . The author introduced this bill at the  
  request of Consumers Union, Housing California, and the  
  California Community Economic Development Corporation.  The  
  sponsors argue that because insurers receive billions from  
  California policyholders and, as the second largest source of  
  private capital for long-term investment, they have an  
  obligation, similar to banks, to invest in low-income  
  communities.  Supporters note banks are required to make such  
  investments pursuant to federal law.  This bill mirrors the  
  language of the federal statute.

  2)Background  .  Legislative efforts by Senator Richard Polanco  
  and Assemblywoman Barbara Lee in 1995 resulted in negotiations  








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  with the insurance industry regarding increased voluntary  
  efforts to pursue economically targeted investment.  As a  
  result of these negotiations, the industry established "COIN,"  
  the California Organized Investment Network, which serves as a  
  "clearinghouse" to advise industry investment managers of  
  investment opportunities in low-income areas.

  3)Adequacy of Voluntary Industry Efforts: COIN and IMPACT  .  The  
  insurance industry typically invests in the so-called  
  "secondary market," generally in big block investments of  
  market-recognized credit quality.  These investments are  
  "rated" and pre-determined to be credit worthy.  Accordingly,  
  they do not require an in-depth analysis by the industry  
  investment managers.  Economically targeted investment  
  opportunities, however, generally are in the primary market -  
  essentially the purchase of loans from small loan originators  
  in certain areas.  Because the primary market normally has  
  little direct connection with investment managers operating in  
  the secondary market, the industry established COIN and more  
  recently, IMPACT Community Capital, to bridge this gap.  AB  
  1520 (Vincent) from the 1997-98 session provided tax  
  preferences for such investments.  Insurer investments through  
  COIN currently are about $190 million.

Supporters of this bill argue that while insurers are now making  
  some economically targeted investments, they are small in  
  comparison to the $70 billion in annual premiums from  
  California policyholders.  In comparison to the $190 million  
  voluntary effort by the insurance industry, supporters note  
  that in 1997, six major banks made over $9 billion in loans  
  and investments in California under provisions of federal law.

Supporters also believe insurers carry a community investment  
  obligation to offset the industry's history of redlining.   
  Supporters cite a 1996 Insurance Commissioner report, which  
  showed insurers do not provide auto, homeowners' and small  
  business commercial insurance in low-income communities to the  
  same extent as in other communities.

  4)Opposition  .  Insurers and business groups oppose the bill  
  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 result in a  








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  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  
  similar re-investment 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.  

  Analysis Prepared by  :    William Wehrle / APPR. / (916) 319-2081