BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair


          SB 1448 (Calderon)            Hearing Date:  April 25, 2012  

          As Amended:April 16, 2012
          Fiscal:             Yes
          Urgency:       No
          

          SUMMARY:  Conforms California law to the recently revised 
          Insurance Company System Regulatory Act ("Model Act") drafted by 
          National Association of Insurance Commissioners (NAIC).  
          
           
           DIGEST
           
          Existing law
            
           1. Governs the business of insurance and authorizes the 
             Insurance Commissioner to provide oversight over the 
             insurance industry, including conducting investigations and 
             bringing enforcement actions;

              a.    Provides that any officer, director, or employee of an 
                insurance holding company who willfully and knowingly 
                subscribes to, makes, or causes to be made materially 
                false statements, reports, or filings, as specified, that 
                involves the deliberate perpetration of a fraud upon the 
                commissioner is guilty of a misdemeanor or a felony; 

              b.    Prohibits a person from making a tender offer for, or 
                a request or invitation for tenders of, or from entering 
                into an agreement to exchange securities for or acquire in 
                the open market, any voting security, or any security 
                convertible into a voting security, of a domestic insurer 
                or of any other person controlling a domestic insurer, if 
                the other person is not substantially engaged either 
                directly or through its affiliates in any businesses other 
                than that of insurance, if, as a result of the 
                consummation thereof, the person would, directly or 
                indirectly, acquire control of the insurer; 

              c.    Prohibits a person from entering into an agreement to 
                merge with or otherwise acquire control of a domestic 




                                             SB 1448 (Calderon), Page 2




                insurer, unless, at the time copies of the offer, 
                purchase, request, or invitation are first published, 
                sent, or given to security holders or the agreement or 
                transaction is entered into, the person has filed with the 
                commissioner, and has sent to the insurer, a statement 
                containing the specified information, including, among 
                other things, information regarding the background and 
                identity of all persons by whom or on whose behalf the 
                purchases or the exchange, merger, or other acquisition of 
                control are to be effected, and any additional information 
                as the commissioner may by rule or regulation prescribe as 
                necessary or appropriate in the public interest or for the 
                protection of policyholders or shareholders; 

           2. Prohibits purchases, exchanges, mergers, or other 
             acquisitions of control from being made until the 
             commissioner approves those acquisitions, and requires the 
             commissioner to approve or disapprove the transaction within 
             60 days after the filing of that statement;

           3. Requires every insurer authorized to do business in this 
             state to register with the commissioner and to file a 
             registration statement containing specified information, 
             including the identity and relationship of every member of 
             the IHC system;

           4. Authorizes domestic insurers and commercially domiciled 
             insurers to enter into specified transactions, including 
             sales, loans, and reinsurance agreements, only if the insurer 
             has notified the commissioner in writing of its intention to 
             enter into the transactions at least 30 days prior thereto, 
             or a shorter period as the commissioner may permit, and the 
             commissioner has not disapproved it within that period;

           5. Requires that information reported to the commissioner in 
             the registration statement, and information disclosed in the 
             course of an examination or investigation of the registration 
             statement, be exempt from subpoena or public disclosure, 
             except as specified.

           
          This bill
           
            1. Would authorize the commissioner to hold a noticed public 
             hearing after a statement containing specified information 
             regarding the acquisition of a domestic insurer is filed and 




                                             SB 1448 (Calderon), Page 3




             would provide the person filing the statement with the right 
             to present evidence, to examine witnesses, and to offer oral 
             and written arguments; Would also provide for a consolidated 
             hearing before the commissioner and commissioners from other 
             states, as specified;

           2. Would require any controlling person of a domestic insurer 
             seeking to divest its controlling interest in the domestic 
             insurer to file with the commissioner a confidential notice 
             of its proposed divestiture at least 30 days prior to the 
             cessation of control; 

           3. Would require the commissioner to determine those instances 
             in which an insurer under those circumstances would be 
             required to file for and obtain approval of the transaction;

           4. Would require the information submitted to the commissioner 
             to remain confidential unless the commissioner makes a 
             specified determination;

           5. Would require that the ultimate controlling person of every 
             insurer subject to registration file an annual enterprise 
             risk report;

           6. Would define "enterprise risk" for purposes of these 
             provisions to mean any activity, circumstance, or event or 
             series of events involving directly or indirectly one or more 
             affiliates of an insurer that, if not remedied promptly, is 
             likely to have a material adverse effect upon the financial 
             condition or liquidity of the insurer or its IHC system as a 
             whole;

           7. Would authorize the commissioner to ascertain the enterprise 
             risk to which an insurer is subjected by the ultimate 
             controlling party or by any entity or combination of entities 
             within the IHC system, or by the IHC system on a consolidated 
             basis, and to order an insurer to produce an enterprise risk 
             report;

           8. Would provide that whenever it appears to the commissioner 
             that any person has committed a violation of the registration 
             requirements that prevents the full understanding of the 
             enterprise risk to the insurer by affiliates of the insurance 
             company holding system, the violation may serve as an 
             independent basis for disapproving dividends or distribution 
             or placing the insurer under an order of supervision;




                                             SB 1448 (Calderon), Page 4





           9. Would require the commissioner to approve or disapprove an 
             acquisition of control on or before the latter of 60 days 
             after the statement has been filed with the commissioner or 
             30 days after the close of the hearing;

           10.Would require the registration statement to specify that the 
             insurer's board of directors is responsible for overseeing 
             corporate governance and internal controls, and that the 
             insurer's officers or senior management have approved, 
             implemented, and continue to maintain and monitor corporate 
             governance and internal control procedures;

           11.Would require the insurer to include in the registration 
             statement, if requested by the commissioner, financial 
             statements, as described, of or within an IHC system, 
             including all affiliates;

           12.Would authorize the commissioner to participate in a 
             supervisory college for any domestic insurer that is part of 
             an IHC system with international operations in order to 
             determine compliance with  specified provisions and would 
             require the insurer to pay for the reasonable expenses of the 
             commissioner's participation;

           13.Would also authorize the commissioner to establish the 
             supervisory college, clarify its membership, and establish a 
             crisis management plan;

           14.Would clarify that information disclosed in the course of an 
             examination or investigation of specified transactions 
             between registered insurers and their affiliates is exempt 
             from subpoena or public disclosure;

           15.Would specify that information disclosed in the course of an 
             examination or investigation of specified transactions 
             between registered insurers and their affiliates and the 
             registration statement information is not subject to 
             disclosure pursuant to the California Public Records Act, but 
             would authorize the commissioner to share the information 
             with other state, federal, and international regulatory and 
             enforcement entities if specified requirements are met;

           16.Would authorize the commissioner to receive documents from 
             the National Association of Insurance Commissioners (NAIC) 
             and regulatory and enforcement entities and to enter into 




                                             SB 1448 (Calderon), Page 5




             agreements with the NAIC governing the sharing and use of 
             that information, as specified.

           17.Would revise the required content of statements, filings, 
             and reports, and require additional statements and reports, 
             and because it would be a crime for an officer, director, or 
             employee of an IHC to willfully or knowingly engage in 
             specified acts relative to those statements, filings, and 
             reports, the bill would impose a state-mandated local 
             program.  This bill would provide that no reimbursement is 
             required by this act for a specified reason.


          COMMENTS
           
         1. Purpose of the bill  .  According to the author, this bill 
             conforms California law to the Model Law prepared by the 
             NAIC. 


          2. Background  

              a.    History of the Model Act.  According to the Insurance 
                Commissioner ("Commissioner"), the National Association of 
                Insurance Commissioners ("NAIC") is an organization of 
                state insurance regulators for all 50 states, Washington 
                D.C., and five U.S. territories.  Its primary mission is 
                to promote uniform practices in regulating multi-state 
                insurers.  To support this effort, the NAIC maintains an 
                insurance regulator accreditation program and develops 
                uniform standards known as model laws.  Commonality in 
                regulating insurers is critical toward maintaining 
                effective state-based consumer protections.  

                   The Commissioner explains that in December 2010, the 
                NAIC adopted significant revisions to the Model Act in 
                response to concerns that insurance regulators lacked the 
                necessary authority to adequately understand the risks and 
                activities of non-insurance entities within a holding 
                company system that could pose a risk to an insurer.  The 
                argument for new tools to evaluate risks within insurance 
                groups was intensified by the financial difficulties 
                experienced by certain affiliates of the AIG insurance 
                holding company system during the 2008 financial crisis.  

                   The NAIC designed these models to provide 




                                             SB 1448 (Calderon), Page 6




                inter-jurisdictional uniformity and cooperation among 
                regulators in a manner that builds in quality control.  
                This approach should allow one jurisdiction to comfortably 
                rely on another NAIC accredited jurisdiction since, by 
                statute, the regulatory processes and standards applied 
                would be substantially similar.  

              b.    Insurance Holding Company Systems.  SB 1448 conforms 
                California law to recent revisions the NAIC made to its 
                model Insurance Holding Company System Regulatory Act.  An 
                insurance holding company system ("IHC system") consists 
                of two or more affiliated persons, one or more of which is 
                an insurer.  But these systems can be far more complex 
                than that and involve transactions that shift control and 
                apparent accountability from the actor to a remote person. 
                 In this context, person includes business entities such 
                as a corporation or partnership, as well as individuals 
                (Ins. Code § 1215); SB 1448 would also add limited 
                liability companies to that list.

                   From a top-down perspective, an entity within a holding 
                company system may be likened to a remote-controlled car, 
                both may be controlled by someone far removed.  But the 
                remote-control may be held by another remote-controlled 
                instrument, and so on and so forth.  But the analogy 
                changes when viewed horizontally in that the controlling 
                authority in a business entity may be spread around and 
                decisions are ultimately made by the person or persons who 
                have the controlling interest, not just a person who owns 
                an interest - several remotes might share control of the 
                same instrument or car.  The person with, or persons 
                sharing, the most powerful remote-control drives the car.

                   An IHC system can become a vast network of drones, 
                remotes and decision-makers; the problem is identifying 
                who is what.  SB 1448 would give regulators tools designed 
                to provide the information necessary to track down the 
                ultimate controlling person or persons - who has the most 
                powerful remote and what are they doing with it.  

                   The Act and SB 1449 would create or provide 
                enhancements to mechanisms that help to monitor IHC 
                systems:  
                               Registration of Insurers
                               Enterprise Risk Examinations
                               Acquisition of Insurers Examinations




                                             SB 1448 (Calderon), Page 7




                               Transactions within Holding Company 
                      Systems Examinations
                               Supervisory Colleges

              a.    Registration.  Currently, every insurer authorized to 
                do business in this state, that is also a member of an IHC 
                system, must file an initial registration statement and 
                every year thereafter on a form prescribed by the NAIC 
                (with narrow exception for certain foreign insurers).  
                (Ins. Code § 1415.4.)  Registration requires disclosure of 
                pertinent information regarding the operations and 
                governance of the holding company system.  (Ins. Code § 
                1415.4(b).)

                   SB 1448 expands the financial statements requirements, 
                if requested by the Commissioner, to include annual 
                audited financial statements filed with the U.S. 
                Securities and Exchange Commission (SEC) or the most 
                recently filed parent corporation financial statements 
                filed with the SEC.  Additionally, the bill would require 
                statements that the insurer's board of directors is 
                responsible for overseeing corporate governance and 
                internal controls and that the insurer's officers or 
                senior management have approved, implemented, and continue 
                to maintain and monitor corporate governance and internal 
                control procedures.

                  i.        Disclaimer.  Existing law allows a person to 
                    disclaim affiliation with any authorized insurer to 
                    relieve an insurer of any duty to register or report 
                    based on that relationship.  The disclaimer is 
                    effective unless and until the Commissioner disallows 
                    it.  SB 1448 grants the Commissioner the power to 
                    disallow the disclaimer at any time if the 
                    Commissioner determines that the information disclosed 
                    in the disclaimer is incomplete or inacurate.

                  ii.       New Cause for Sanctions.  This bill also 
                    provides that acts that violate the registration 
                    provisions preventing the full understanding of the 
                    enterprise risk to the insurer by affiliates or the 
                    holding company system may serve as an independent 
                    basis for discipline.  That means that acts or 
                    omissions, taken as a whole, designed to evade 
                    scrutiny, constitute a reason for discipline against 
                    the actor separate and apart from the individual acts 




                                             SB 1448 (Calderon), Page 8




                    or omissions (for instance, submitting an incomplete 
                    report may constitute a violation of Section 1215.4 
                    relating to disclosure, but under SB 1448, may also 
                    constitute a separate cause for interference with the 
                    monitoring of an insurance holding company).

              b.    Enterprise Risk Examinations.  SB 1448 defines an 
                enterprise risk as any activity, circumstance, or event or 
                series of events that could adversely impact the financial 
                condition or liquidity of the insurer or its IHC system as 
                a whole.  The bill also incorporates the concept into the 
                regulatory scheme.


                  i.        Reporting.  This bill would require the 
                    ultimate controlling person (the person holding the 
                    most powerful remote) of every insurer to file an 
                    annual enterprise risk report with the insurance 
                    commissioner of the lead state of the IHC system that 
                    identifies the potential enterprise risks to the 
                    insurer.  (The lead state is determined by procedures 
                    established in the Financial Analysis Handbook adopted 
                    by the NAIC.)  If the IHS system has an insurer 
                    domiciled in California but has a lead state 
                    elsewhere, its respective holding company must file a 
                    copy of that report with the Commissioner as well.  
                    The first enterprise risk report would be filed with 
                    the insurer's registration statement, but would not be 
                    due until after July 1, 2013, although the 
                    Commissioner would be able to extend the date. 
          
                  ii.       Examination.  The Commissioner already has the 
                    authority to examine the financial condition of 
                    insurers and must do so at least every five years.  
                    (Ins. Code § 730 et seq.)  Under SB 1448, if the 
                    Commissioner performs an examination that proves 
                    inadequate, or determines the policyholders are being 
                    adversely affected, he or she would have additional 
                    investigative powers. These new powers allow the 
                    Commissioner to evaluate enterprise risks related to 
                    the entities within and ultimately the controlling 
                    parties of the holding company system.  The 
                    Commissioner may require the ultimate controlling 
                    party or entity to produce records in the possession 
                    of the insurer or its affiliates, as well as retain 
                    advisory professional assistance such attorneys, 




                                             SB 1448 (Calderon), Page 9




                    actuaries, accountants, etc., to assist the 
                    Commissioner at the registered insurer's expense.
          
              e.    Acquisition of Insurers.  Acquisition of insurers 
                requires disclosure statements regarding the parties and 
                the sale.  (Ins. Code § 1215.2(g).)  The Commissioner may 
                only disapprove an acquisition for specified reasons.  
                (Ins. Code § 1215.2(d).)  SB 1448 adds provisions related 
                to 
          
                  i.        Public Hearings.  Under SB 1448, the 
                    Commissioner may hold to hold a public hearing subject 
                    to the Administrative Procedure Act (Govt. Code § 
                    11500 et seq.).  At the hearing, the filer, insurer, 
                    persons designated by the Commissioner, and any other 
                    person whose interest may be affected, may present 
                    evidence and arguments.  

                  ii.       Consolidated Hearings.  SB 1448 would allow 
                    for consolidated hearings at the request of the filer, 
                    when two or more commissioners must approve the 
                    transaction.  A commissioner may opt out or attend by 
                    telecommunication. 

                  iii.      Divestment.  This bill also requires 
                    disclosure when a controlling person seeks to divest 
                    its controlling interest in a domestic insurer, unless 
                    a statement is filed under Section 1215.2, at least 30 
                    days prior to the cessation of control.  Information 
                    provided would remain confidential until the 
                    conclusion of the transaction, unless the Commissioner 
                    determines that otherwise.  

              a.    Transactions within a Holding Company System.  
                Existing law provides that the Commissioner will review 
                certain transactions (such as sales, purchases, exchanges, 
                loans, extensions of credit, management agreement, etc.) 
                within an IHC system to determine whether the terms are 
                fair and reasonable and to monitor a one-sided gift of 
                assets - the transaction should not be a way of 
                transferring profits. (Ins. Code § 1215.5.)  The insurer 
                must notify the Commissioner within 30 days prior to 
                entering into the transaction.  
          
                   SB 1448 would require that insurers notify and seek 
                approval for amendments and modification to any affiliate 




                                             SB 1448 (Calderon), Page 10




                agreements previously filed, with an explanation for the 
                change and the financial impact on the domestic or 
                commercially domiciled insurer.  It also would require 
                that, along with reinsurance agreements, insurers disclose 
                pooling agreements and modifications and changes in the 
                insurer's reinsurance premium or liabilities projected 
                with the following three years. 

              b.    Supervisory Colleges.  Holding companies with an 
                international presence pose additional challenges to 
                regulators.  SB 1448 codifies the authority for the 
                Commissioner to participate in supervisory colleges that 
                provide for cooperation among regulatory jurisdictions in 
                order to examine a domestic insurer that is part of an IHC 
                system with international operations.  Under the bill, 
                supervisory colleges may be convened on a temporary or 
                permanent bases and used to assess the business strategy, 
                financial position, legal and regulatory position, risk 
                exposure, risk management, and governance processes.  
                Other regulators may participate as well if charged with 
                supervision of the insurer or its affiliates (such as 
                regulators from other states, the federal government, and 
                international regulatory agencies).  The Commissioner may 
                                                                                            enter into agreements providing the basis for cooperation 
                between college participants so long the confidentiality 
                and evidentiary privilege provisions are also respected.  
          
                  i.        Expenses.  SB 1448 provides that the 
                    Commissioner may charge the insurer for reasonable 
                    expenses of the Commissioner's participation in a 
                    supervisory college related to the regulation of the 
                    insurer's business.  


                  ii.       Confidentiality of Materials Examined.  Under 
                    existing law, materials provided to the Commissioner 
                    and other regulators must remain confidential unless 
                    otherwise provided.  (Ins. Code § 1215.7)  SB 1448 
                    would expressly exempt these materials from the Public 
                    Records Act and subpoena.  SB 1448 provides that the 
                    Commissioner may receive or share confidential 
                    materials with other agencies so long as the 
                    commissioners of other states are subject to statutes 
                    or regulation similar to California and recipients 
                    verify that he or she has the legal authority to 
                    maintain confidentiality and agree in writing to do 




                                             SB 1448 (Calderon), Page 11




                    so.


                    SB 1448 also permits the Commissioner to enter into 
                    written agreements with the NAIC that govern sharing 
                    and use of information, and requires NAIC to consent 
                    to intervention by an insurer in a proceeding where 
                    confidential information may be required to be 
                    disclosed (intervention would allow the insurer to 
                    defend against disclosure or subpoena in that 
                    proceeding). 

              a.    Authorizes the Commissioner to Issue Rules and 
                Regulations Relative to the Provisions of the Bill.


              b.    Exception for Home Protection Companies.  SB 1448 
                exempts specified home protection companies (that sell 
                home warranties) as insurers for the purposes of the 
                revised Act if the IHC system invested in the home 
                protection companies on or before December 31, 1978.
              

          1. Summary of Arguments in Support  
             
              a.    The Commissioner explains that adoption of the Model 
                Act's revisions is pivotal in providing uniform standards 
                for corporate governance and holding company supervision.  
                It is anticipated that the Act's revisions will be an NAIC 
                accreditation issue; consequently, enactment of SB 1448 is 
                critical for California to retain its accreditation 
                status.


              b.    The Commissioner supports SB 1448 because it provides 
                for an enterprise risk filing with CDI when California is 
                not the lead state of the holding company, but the holding 
                company system includes an insurer domiciled in 
                California.  This ensures that if CDI is examining the 
                enterprise risk of an insurer, which is permitted under 
                current law, then CDI is entitled to a copy of the 
                enterprise risk report prepared by the controlling party 
                of the holding company system.

              c.    The Commissioner also supports SB 1448 provision that 
                avoid the automatic granting of a disclaimer of 




                                             SB 1448 (Calderon), Page 12




                affiliation filing in 30 days when no action is taken by 
                the commissioner, and provides for the disclaimer to be 
                withdrawn if the commissioner determines that it is no 
                longer factually accurate.  


          1. Summary of Arguments in Opposition  
          
             None received (as of April 22, 2012)

           
         2. Questions  


              a.    The NAIC is comprised of insurance commissioners and 
                the Model Act, and SB 1448, provides the Commissioner with 
                a discretion on several key points.  


                  i.        Are the decisions of the commissioners subject 
                    to judicial review or some type of oversight?  


                  ii.   How might an insurer or entity in a holding 
                    company challenge a decision of the Commissioner on 
                    questions such as disallowed disclaimers, sanctions 
                    for registration requirements, release of confidential 
                    information, etc.?  


              a.    "Enterprise risk" means any activity, circumstance, or 
                event or series of events involving directly or indirectly 
                one or more affiliates of an insurer that, if not remedied 
                promptly, is likely to have a material adverse effect upon 
                the financial condition or liquidity of the insurer or its 
                insurance holding company system as a whole.  How would 
                the department determine which enterprise risks are 
                threatening enough to require reporting under the directly 
                or indirectly standard?


          1. Suggested Amendments  

             Amend page 21, lines 27 - 34, to read:

             (c) An insurer registered under Section 1215.4 that is 




                                             SB 1448 (Calderon), Page 13




             subject to this section shall be liable for and shall pay the 
             reasonable expenses of the commissioner's participation in a 
             supervisory college pursuant to this section, including 
             reasonable travel expenses, limited to those expenses 
             reasonably related to the regulation of the insurer's 
             business in this state.  The commissioner may establish a 
             regular assessment on the insurer for the payment of these 
             expenses.  
           









































                                             SB 1448 (Calderon), Page 14





         2. Prior and Related Legislation   

             AB 299 (Committee on Insurance) (enacted as Chapter 234, 
             Statutes of 2009) created filing and notice requirements for 
             specified transactions involving holding company systems and 
             persons therein.

             AB 109 (Committee on Budget) (enacted as Chapter 15, Statutes 
             of 2011) created civil and criminal penalties for directors 
             or officers of insurance holding company systems that engage 
             in transactions or make investments which have not been 
             properly reported or submitted.

           
           POSITIONS
           
          Support
              
          California Department of Insurance/Sponsor

           Opposition
                   
          None received (as of April 22, 2012)


          Consultant: Hugh Slayden, (916) 651-4773