In his latest attempt to garner public interest, California Insurance Commissioner John Garamendi recently introduced AB 925, authored by Mark Ridley-Thomas (D-Los Angeles), a bill that would mandate insurers to invest in lower- and middle-income communities in the state of California.
The bill sounds like a good idea at first. But when you take a closer look, all of a sudden, things just don’t seem to make much sense. There are several flaws to this bill, but perhaps the biggest is that Garamendi has stated that the bill is modeled after the banking industry’s Community Reinvestment Act, passed in 1977–a federal act that was designed to “encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods.”
So what we have here is a piece of legislation intended for the insurance industry, yet based off of a federal act for an entirely different industry with an entirely different purpose. And, unlike the CRA, which does not have any benchmarks for investing, AB 925 will require insurers to invest one percent of their allocated surplus or investments over a four-year period, depending on their size.
But by mandating insurers to invest in specified projects and communities, they will have no choice but to pull from money already invested in other community development projects. Alternatively, what would happen if a major disaster were to unexpectedly strike? How would insurers pay out claims if their money was tied up in mandated investments?
Not to mention the fact that insurers already have some $23 billion invested in municipal bonds across the state, including in low- and moderate-income communities, as well as other community development programs.
The real kicker for me is this: what happens when 49 other states pass their own legislation mandating insurers to invest in their own low- and moderate-income communities? Where on earth is all that money going to come from?
A little birdie told me that there’s no way Governor Schwarzenegger would ever sign this bill (and why should he?). So why waste our taxpayer money by pushing this bill through the Legislature?
It looks to me that we all just involuntarily contributed a little of our hard-earned money to Mr. Garamendi’s future political gains.
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