An Almost Broke CIGA Seeks $1.5 Billion Bond Bailout

By Loretta Macktal, Executive Assistant to the Vice President, Government Relations

Capitol Update, July 18, 2003 Share this on FacebookTweet thisEmail this to a friend

The California Insurance Guarantee Association (CIGA) is running out of money to pay workers’ compensation claims of insolvent insurers. CIGA is sponsoring AB 1729 by Assemblyman Juan Vargas, (D-San Diego) that authorizes the Department of Insurance (DOI) to issue a bond up to $1.5 billion to bail them out. CMTA has expressed several concerns with the bill as drafted and opposes the bill unless it's amended.

AB 1729, in its June 10th version, expands the definition of insolvency to include “the inability of an insurer to meet its financial obligations when they are due.” CMTA is concerned that the new definition of insolvency is too broad and could be abused by insurers. Under this definition an insurer that mismanages their workers' compensation program and gets into financial trouble may be able to manipulate their funds to shield their assets, making them unable to pay claims. Under this bill, that would qualify them to be taken over by the DOI as insolvent, leaving CIGA (and subsequently employers) holding the bag.

CIGA is required by law to take over the claim files of insolvent insurers so that injured workers claims are paid. Over the past few years, increasing insolvencies has put a strain on CIGA’s ability to pay claims. According to CIGA, the current two percent assessment on employer’s premiums authorized last year by the Legislature and the recoveries from reinsurance and other assets of defunct insurers to date have not been enough to meet the increased costs.

CMTA is actively engaged in the discussion on the bill because it is not an acceptable option for employers to do nothing and let CIGA go bankrupt. Under California law, employers would still be required to pay at the current premium rate. Under AB 1729, the bond would be backed by a promise to pay through the levy of an uncapped assessment on employers' workers’ compensation premiums. However, the assessment would only occur if:

1) future recoveries from reinsurance and other assets of defunct insurers do not meet expectations; or
2) the future costs of workers’ compensation claims increases at a higher rate than currently anticipated; or
3) more workers’ compensation insurers become insolvent; or
4) any combination of these events.

Obviously this makes reforming the workers’ compensation system now even more important for employers.

According to staff analysis, DOI has never issued bonds under the statute that is proposed to be amended, so there are good reasons for employers to be concerned. CMTA believes AB 1729 needs a lot of work and is committed to ensuring that the Legislature will only enact a workable bill. CMTA’s bottom line on the bill is that whatever is agreed on should be for one-time only and with a one year sunset date.
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