Calif.’s AB 925 Could Mandate Insurers to Invest in Under-served Communities

California Insurance Commissioner John Garamendi and Assembly member Mark Ridley-Thomas (D-Los Angeles) introduced AB 925, a new piece of legislation that would require insurers to make investments in low- and moderate-income communities.

The legislation, modeled after the banking industry’s Community Reinvestment Act, will require insurers with less than $500 million in surplus to invest one percent of that allocated surplus over the next four years; and insurers with more than $500 million in surplus will be required to invest one percent of their allocated investments, Garamendi stated in a teleconference.

“AB 925 is not a hand out,” Garamendi said. “It’s not a gift. It’s not charity. It simply directs the insurance industry to invest a specific amount of their capital in these emerging communities. The formula that was developed and that is in the bill has been very rigorously analyzed by my department and a clear determination has been made that it is at a level that in no way harms a viable company’s security and investments.”

Garamendi said that the bill would provide the commissioner the determination to waive the requirements for companies that might have financial difficulties.

“We’re very confident that this in no way impinges upon the safety and insolvency of any insurance company,” Garamendi said.

When asked about voluntary investments on behalf of insurers in municipal bonds and other community development programs, Garamendi called the $23 billion already invested by insurers “a bogus argument,” saying that emerging communities “have been ignored” by the insurance industry, in terms of investments and in providing insurance products.

The commissioner added that, “there can be, under the terms of the bill, investments in government bonds that are specifically for community development.”

Although there are already investment law guidelines in place for insurers, Garamendi said that the new bill would not change the current state and NAIC guidelines, but would “provide for a small additional waiver for those companies that meet the full criteria of the law [that is the one percent] where they can expand by one half of one percent their discretionary investment, and these are the investments that would be outside of the normal guidelines, keeping in mind that the commissioner has the authority in this legislation to waive the entire obligations on 925 when a company is in financial distress.”

The bill will also require companies to report to the CDI and be evaluated by their performance.

“We’ve done the analysis for both large and small companies, and the determination was made that this is a safe level of investment,” Garamendi added. “These investments are considered to be the normal level of safety that any insurance company would make with a normal rate of return.”

Trade associations quickly came to the defense of the industry. “I think this whole issue should be put into context of what insurers are already doing in terms of investing in California communities,” said Sam Sorich, president of the Association of California Insurance Companies. “Insurers are already investing $23 billion in state and local bonds. Many of those bonds benefit low and moderate income communities in California. That’s something that should be kept in mind in this whole debate. We’re making a good solid contribution.”

A common concern among the industry is the ability to pay out on claims should a disaster of large proportions occur. With funds tied up in mandated investments, the possibility exists that there will be no funds available.

“Solvency is the first thing that an insurer has to worry about, and it has to remain the first priority obviously,” said Nicole Mahrt, public affairs director, Western region, of the American Insurance Association. “We have to make sure that we are investing properly for our policyholders.”

Sorich added that while the idea of mandating to insurers to make a certain level of investments in low- and moderate-income communities is a good goal, he added that every mandated investment an insurer is forced to make would likely take away from already voluntary investments made by insurers. These include bond investments and investments through the COIN and IMPACT programs.

“If it is the case that we should direct more capital to low income areas of the state, then it should really be a state activity,” said Michael Gunning, senior legislative advocate for the Personal Insurance Federation of California. “If this is such a desire, it should be a desire of all California, not just one regulator over one industry.”

“We’re already doing a good, responsible job,” Sorich added. “We really wonder about the wisdom of requiring by statute insurers to make these investments because I think there’s a potential for having negative repercussions, not only for low- and moderate-income communities in California, but for all Californians.”

As for modeling the bill after 1977’s Community Reinvestment Act, many industry representatives voiced strong opposition. “Insurance companies aren’t banks,” Gunning said. “Banks have a federal mandate because in the ’70s they were found to be redlining. They would take deposits and invest them somewhere else. So Congress created this act to make sure money taken from communities was kept in those communities. But when you look at the CRA, it is not a mandate. It requires banks to demonstrate lending, investment and philanthropy in low income communities. There is no requirement such as the requirement in AB 925, [which has a one percent investment mandate.] CRA has no mandate to invest. That’s what makes this bill so novel and so we think onerous.

“Insurers, when we take premium, we pay claims,” Gunning added. “When we have a loss that’s in a low income area, we pay the claim in that area. So the money comes back to the policyholders. I’ve asked several times, what is it that the insurance industry has done that warrants this remedy of mandatory investment? Unlike banks, I don’t think we’ve found to have redlined.”

Mahrt added, “Insurers are selling in all markets throughout California. We’re not taking someone’s money and then not putting it back in that community. Banks are federally insured, which is a benefit and a marketing tool that they can use for their customers. Banks should be putting the money where they are making the deposits. But insurers are not banks. Insurers sell insurance to protect people’s assets. It’s not about investing, it’s about selling our product, and we’re selling our product all over the state.”

Mahrt also raised concern over the impact AB 925 could have in other states. If AB 925 were to be signed into law, the possibility remains that the other 49 states could draft their own investment mandates for insurers.

“What happens then?” Mahrt asked. “The insurer ends up with 49 different mandates of where to invest their funds? Quite frankly, it makes a great argument for optional federal chartering, because how else is this going to play out? Everybody says, ‘so goes California, so goes the rest of the nation.’ Well, that’s not a pretty picture for an insurer, when you have a small limited staff that’s investing money on a daily basis for a national company or an international company and you’re supposed to carve out specific investments for specific states? That’s not an investment strategy, that’s a patchwork. It hasn’t worked for other issues, and it’s not going to work for community investment.”

AB 925 is expected to be heard in the Assembly’s Committee on Insurance April 27. In addition, the industry is backing another bill, AB 687, authored by Jerome Horton (D-Inglewood), which would prohibit the Insurance Commissioner from requiring insurers to make investments unless they are in accordance to the “rules and regulations regarding investments by domestic incorporated insurers;” and by the “investment standards adopted by the National Association of Insurance Commissioners.”