BILL ANALYSIS UNFINISHED BUSINESS SB 435 Russell (R) 9/2/93 21 p. 1473, 6/3/93 60-12, 9/2/92 SUBJECT: California Life Insurance Guaranty Association (CLIGA) SOURCE: Stone Companies ____________________________________________________________________________ DIGEST: The bill adds unallocated annuity contracts sold to an šemployer to provide employees with deferred compensation or pension šbenefits to the life insurance products that are covered by the California šLife Insurance Guaranty Association, as specified. Assembly Amendments: 1. Provide that the above also applies to contracts issued by a foreign š insurer that was declared solvent or impaired after October 1, 1990, but before January 1, 1991. 2. Provide that CLIGA may cover insolvencies or impairments by insurers š that start after October 1, 1990. 3. Double join the bill with SB 482 (Johnston) relating to insurers. ANALYSIS: Under existing law, life insurance products sold in šCalifornia are protected by the California Life Insurance Guaranty šAssociation (CLIGA) in the event that an insurer becomes unable to pay šclaims incurred by an insurer. Unallocated annuities are investment plans generally known as Guaranteed š Interest Contracts (GIC). The unallocated annuities are contacts between šthe trustee of an employee benefit plan and insurance company under which šthe insurance company guarantees a fixed rate of interest for a specified period on those funds šdeposited by the plan. A key feature of the unallocated annuity is that šfunds invested by a plan in a annuity are not allocated to an individual šparticipant but to the plan as a whole. This bill provides coverage for unallocated annuity contracts sold by an šinsurer that became subject to an order of liquidation, together with a šfinding of insolvency by a court of competent jurisdiction in the state of šits domicile and which later became final (after December 20, 1991, but šprior to December 20, 1992, and sold to an employer prior to December 20, š1992) for purposes of providing employees with deferred compensation or špension benefits. Prohibits unallocated annuity contracts that are not covered by the šassociation from being offered to an employer after January 1, 1994, unless šprior to being offered to the employer, or the participation by the šemployer, the insurer or agent has disclosed to the employer and employee šin writing in a conspicuous manner that the contract is not covered by the šassociation. The above would also apply to contracts issued by a foreign insurer that šwas declared insolvent or impaired after October 1, 1990, but before šJanuary 1, 1991. FISCAL EFFECT: Appropriation: No Fiscal Committee: No Local: No SUPPORT: (Verified 9/4/93) Stone Companies (source) California Association of Life Underwriters OPPOSITION: (Verified 9/4/93) Association of California Life Insurance Companies State Farm Insurance Companies American Council of Life Insurance ARGUMENTS IN SUPPORT: The author has introduced this measure in šresponse to the insolvency of InterAmerican Insurance Company of Illinois. šInterAmerican sold a number of unallocated annuity contracts to employers šwhich were to be used as pension fund benefits for employees. CLIGA has šruled that these products sold to employees--mostly through employers in šSouthern California--are unallocated annuity contracts and are, thus, not šcovered. The result is that some employees will lose out on their šretirement funds. Unallocated annuity contracts are typically investment plans, often šreferred to as Guaranteed Interest Contracts (GICs). The contract is šbetween the trustee of an employee benefit plan and the insurance company, šwhere the insurance company guarantees a fixed rate of interest on funds šdeposited by the plan for a specified time period. According to the author, this bill has been carefully crafted to affect š CONTINUED SB 435 Page 3 only a narrowly construed definition of unallocated annuity contract, and šonly within a one-year time period. The author further states that, šwithout SB 435 innocent people (employees) are going to lose their pension šfunds, which are their life savings, because of the Illinois firm's šinsolvency. The intent of Section 3 of the bill is to provide CLIGA coverage of šretirement plan assets of employees which are on deposit with a number of šlife insurance companies which went insolvent just a few months before the šeffective date of CLIGA. The author states that, by moving the effective date to October 1, 1990, šthe pension funds of these employees--which are, in many cases, their life šsavings--will be covered. According to the author, the CLIGA coverage šresulting from this bill will not result in excessive assessments on šCalifornia life insurance companies that pay into CLIGA's fund. ARGUMENTS IN OPPOSITION: According to the Association of California šLife Insurance Companies, the exclusion of unallocated annuities in AB 4076 š(Johnston) of 1991 which established the California Life Insurance Guaranty šAssociation was recognized as a necessary element based upon: 1. The need for policyholders to have a responsibility and motivation to š select a financially strong insurer and; 2. The lack of a need to protect sophisticated purchasers who generally š are the purchasers of unallocated annuities and who are fully capable of selection strong companies. The Association states that this bill would upset the balance created in AB š4076 and contravene the two considerations above mentioned. ASSEMBLY FLOOR VOTE: CONTINUED SB 435 Page 4 DLW:sl 9/4/93 Senate Floor Analyses CONTINUED