CIGA Looks to Bond Sound Future

Thanks to the legislature, the California Insurance Guarantee Association (CIGA) will stave off financial ruin by floating bonds next year.

Part of the reform package passed by both houses in the Capitol includes provisions for letting CIGA float more than $700 million in bonds next year. It plans to fund bond payments by continuing surcharging the state’s insurers two percent of their annual workers’ comp premium during the foreseeable future.

The reforms also turned back a recent California appellate court ruling that forced CIGA to pay penalties for Labor Code infractions committed by the insurance companies before they went under and were put under the control of the state. This measure should save CIGA tens of millions of dollars. CIGA may also benefit from other cost cutting reforms in the legislative package, passed Sept. 9.

In all, the new measure should keep CIGA paying workers’ comp claims, which amount to more than $1.8 billion through the end of 2007. During the special conference committee on workers’ compensation, saving CIGA was one issue that legislators on both sides of the aisle could agree on. The insurer backstop keeps claims payments flowing to injured workers after insurers go broke and if it were to falter, employers could face the possibility that their injured employers would go after them.

There was also a third benefit of the bill. Supporters of the legislation say that a healthy CIGA could spur more insurers to write business in California.

“CIGA’s needs this bond for cash flow reasons. It has the funds to pay its obligations, they’re just not ready,” said Norman Williams, spokesman for the Department of Insurance. “CIGA’s problems are really symptomatic of the workers’ compensation system. This legislation brings stability to the marketplace and should encourage more insurers to come into the market.”

CIGA pitched its plan to float bonds to the Legislature’s conference committee on workers’ compensation in the last week of August. Its executive director, Lawerence Mulryan, told the committee that if nothing is done, CIGA mid-2004 would be forced to halt or curtail payments going to injured workers, their doctors and others that have a piece of the claims dollar. While CIGA surcharges all workers’ compensation insurers in the state 2 percent of their annual premium to help fund those claims, the carriers in turn pass that assessment onto their policyholders.

CIGA pays claims for insurers that went belly up and were taken over by regulators. It pays claims for both California-domiciled carriers, like Superior National Insurance Group, seized by the CDI in 1999, as well as national carriers based elsewhere like Pennsylvania-based Reliance Insurance Co., which was seized by regulators there last year.

Many of the carriers were under-reserved, leaving CIGA holding the bag for the difference. Because many were severely under reserved, CIGA’s assessments haven’t been enough to make up for the difference. It’s currently paying out more than $80 million a month in workers’ comp claims.

The most recent carrier to go under was the old Fremont Compensation Insurance Co., the estate of which is still undergoing a thorough accounting to assess how much it’s under reserved by. CIGA will also have to make up for those shortfalls as well.

CIGA tries to collect receivables from reinsurers that once covered now defunct carriers. The case with the most at stake is an arbitration with one of Superior National’s reinsurers, U.S. Life Insurance Co. Mulryan said that CIGA, the department and U.S. Life are closing in on a resolution that should allow the fund to recoup from U.S. Life at least $110 million in returned premium, or up to $700 million if an arbitrator enforces the treaty.

All these shortages as well as claims cost inflation were leaving CIGA in a world of hurt.

“We projected that by the end of 2007 we’d be $800 million short in our workers’ comp account,” Mulryan said. “This bonding is a method to raise that capital. We can do it without increasing the annual two percent assessment.”

The recently-passed Assembly Bill 227 would authorize CIGA to float “callable” bonds that would mature in 20 years, but CIGA could pay them off earlier without any penalty. The bill explicitly states that the state would not be on the hook for the bonds if CIGA fails to pay them.

CIGA during the last year has been forced to borrow from its other accounts—one for other property and casualty insurers and another for life insurers. It also raised funds through short-term borrowing until the lender, UBS Paine Webber, started worrying about CIGA’s creditworthiness and pulled the plug on the loan.

SB 228 also reverses a controversial ruling that left CIGA on the hook for penalties incurred by insurance companies before they were taken over by the state. Last year a California Appellate Court ruled that CIGA was responsible for late claims payment penalties incurred by California Compensation Insurance Co. before it was seized by the state as part of the Superior National estate. Earlier this year the state Supreme Court refused to hear CIGA’s appeal on the case.

The penalties fall under State Labor Code Section 5814, which calls for a 10 percent penalty to be assessed on the entire amount of a claim (including all the indemnity and medical for the entire life of the claim) for one late payment.

Although Mulryan won’t say exactly how much the new legislation could end up saving CIGA, the potential savings are in the tens of millions of dollars. He said that one case recently had a whopping $5.5 million in penalties on one file after a former insurer failed to make claims payments in a timely manner. According to Richard Guilford, an attorney representing CIGA, CIGA last year settled out of court on a few cases with penalties in excess of $1 million.

“Eliminating the penalties decreases CIGA’s need to borrow more to fund claims payments,” Williams said, adding that the CDI supports the recent legislation. “If CIGA didn’t commit the infractions it shouldn’t have to pay the penalties.”

It should be noted that CIGA’s problems are not unique in the country, although its debts overshadow any other states’ guaranty fund workers’ comp obligations.

The Alaska Guaranty Association could be in the hole $10 million in its workers’ comp fund if it doesn’t get legislative relief next year, according to Dan Havard, contract administrator for the fund. To ensure continued claims payments, its board has appointed a legislative drafting committee to come up with ideas on how to keep a positive cash flow.

“We have sufficient funds for 2003 but we will need a legislative fix in early 2004,” Havard said.

Some ideas the committee may consider is going to financial institutions for lines of credit or borrowing from the guaranty fund’s other accounts.

As for CIGA, it has already used up those options, which led it to come up with the bond plan.

Topics California Trends USA Carriers Legislation Claims Workers' Compensation