BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair


          AB 584 (Perea)      Hearing Date:  June 26, 2013  

          As Amended:April 15, 2013
          Fiscal:             Yes
          Urgency:       No

          VOTES:              Asm. Floor(05/09/13)75-0/Pass
                         Asm. Appr.          (05/01/13)17-0/Pass
                         Asm. Ins. (04/10/13)13-0/Pass


          SUMMARY:   Would require insurers with annual premiums greater  
          than $500 million and insurance groups with annual premiums  
          greater than $1 billion to maintain a comprehensive risk  
          management framework to identify, assess, and manage material  
          and relevant risks.  Would also require the qualifying insurer  
          or insurance group to file an Own Risk and Solvency Assessment  
          (ORSA) report annually with the Insurance Commissioner detailing  
          the risks identified and the sufficiency of its capital to  
          support the risks.  

           
           DIGEST
           
          Existing law


            1.  Regulates the business of insurance, including, but not limited  
              to, requiring that each domestic, foreign, and alien insurer  
              doing business in this state annually, on or before the first  
              day of March of each year, file with the National Association of  
              Insurance Commissioners (NAIC) a copy of its annual statement  
              convention blank, along with any additional filings as  
              prescribed by the Insurance Commissioner for the preceding year.


           2.  Requires state and local agencies to make their records  
              available for public inspection and to make copies available  
              upon request and payment of a fee unless the records are exempt  
              from disclosure.  (California Public Records Act, Government  
              Code  6250 et seq.)
           




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          This bill


            1.  Would find and declare that the reports required by this  
              bill contain sensitive, proprietary, and trade secret  
              information that shall not be subject to public disclosure.


           2.  Would define "insurance group" as insurers and affiliated  
              companies within an insurance holding company system.


           3.  Would exempt insurers that are agencies, authorities, or  
              instrumentalities of the United States government, state  
              governments, or political subdivisions of a state  
              government.


           4.  Would define an ORSA as:


                A.      A confidential internal assessment of the material  
                  and relevant risks associated with an insurer's business  
                  plan, and 


                B.      A determination of whether the insurer has  
                  sufficient capital to support those risks.


           1.  Would define "ORSA Guidance Manual" as the current version  
              of the Own Risk and Solvency Assessment Guidance Manual  
              developed and adopted by the National Association of  
              Insurance Commissioners (NAIC) and as amended from time to  
              time.


           2.  Would define "ORSA Summary Report" as a confidential  
              high-level summary of an insurer's or insurance group's  
              ORSA.


           3.  Would require insurers to conduct an ORSA at least annually  
              or when there are significant changes to the risk profile of  
              the insurer or group. 




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           4.  Would require the insurer to submit an ORSA Summary Report  
              on request by the commissioner or a regulator of another  
              jurisdiction as provided.  


           5.  Would require the chief risk officer to attest that the  
              ORSA Summary Report accurately describes the risk management  
              process and that a copy of the report has been provided to  
              the insurer's board of directors.


           6.  Would exempt insurers from the bill if the insurer has less  
              than $500 million per year in premium and is part of an  
              insurance group with less than $1 billion per year in  
              premium.


           7.  Would require an insurer with less than $500 million per  
              year in premium that is part of an insurance group with more  
              than $1 billion per year in premium to include an ORSA  
              report for every insurer in the group.


           8.  Would require an insurer with more than $500 million per  
              year in premium that is part of a group with less than $1  
              billion per year in premium to file an ORSA report only for  
              the insurer.


           9.  Would permit an insurer to request the Commissioner to  
              grant a waiver from complying with ORSA based upon unique  
              circumstances.


           10. Would permit the Commissioner to require any insurer to  
              comply with ORSA based on unique circumstances that include  
              the type and volume of business written, ownership and  
              organizational structure, federal agency requests, and  
              requests from international regulators.


           11. Would permit the Commissioner to require any insurer that  
              fails to meet risk based capital requirements or otherwise  
              exhibits qualities of a troubled insurer to maintain a risk  




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              management framework, conduct an ORSA, and submit an ORSA  
              summary report.  


           12. Would require the ORSA summary report submitted to the  
              Commissioner to be prepared consistent with the guidelines  
              issued by NAIC.


           13. Would provide that the ORSA summary report and any related  
              documentation held by the Commissioner contains proprietary  
              information and those materials are confidential and are  
              not:


                A.      Subject to disclosure through the California  
                  Public Records Act;


                B.      Subject to subpoena;


                C.      Subject to discovery in any civil proceeding; and


                D.      Admissible in any civil proceeding.  


           1.  Would permit the Commissioner to use the ORSA summary  
              report and any related documentation in a regulatory or  
              legal proceeding related to the Commissioner's official  
              duties.


           2.  Would require the Commissioner to obtain consent from the  
              insurer before making the ORSA summary report and any  
              related materials public.


           3.  Would permit the Commissioner to share the ORSA summary  
              report and related documents with other state, federal, and  
              international regulatory agencies and the NAIC if the  
              recipient agrees to maintain the confidentiality of the  
              documents.






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           4.  Would permit the Commissioner to receive confidential ORSA  
              documents from other regulatory agencies and permits the  
              Commissioner to agree to preserve the confidentiality of  
              those documents.


           5.  Would require the Commissioner to enter into a written  
              agreement with any consultant to the NAIC prior to sharing  
              any ORSA related documents and requires that agreement to  
              contain specific provisions.


           6.  Would require insurers that fail to submit their ORSA  
              summary report to the Commissioner in a timely manner to pay  
              a late filing fee.  


           7.  Would provide that the bill takes effect on January 1,  
              2015.


          COMMENTS
           
          1.  Purpose of the bill  .  According to the sponsor, the  
              California Department of Insurance (CDI),  the near collapse  
              of the American International Group (AIG) during the 2008  
              economic crisis revealed the need for insurers and insurance  
              groups to better evaluate their risks.  In response, the  
              NAIC adopted the ORSA model law to establish regulatory  
              oversight needed to assess an insurer's or insurance group's  
              ability to weather severe economic stress.  

           2.  Background   


                A.     NAIC Accreditation.  Accreditation is given to a  
                  state insurance department once it has demonstrated it  
                  has met and continues to meet an assortment of legal,  
                  financial and organizational standards established by  
                  the NAIC.  Accreditation allows for inter-state  
                  regulatory cooperation and reduces regulatory  
                  redundancies.  For instance, if a company is domiciled  
                  in an accredited state, the other states in which that  
                  company is licensed and/or writes business may be  
                  assured that, because of its accredited status, the  
                  domiciliary state is adequately monitoring the financial  




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                  solvency of that company.  Other state insurance  
                  regulators may accept the examination report prepared by  
                  another accredited insurance department in lieu of  
                  performing its own financial examination avoiding  
                  duplicative regulatory costs.  Uniformity and  
                  cooperation allows insurers to operate efficiently in  
                  multiple states.  It is anticipated that adoption of the  
                  ORSA model law will become a requirement for state  
                  insurance departments to retain NAIC accreditation.


                B.     Own Risk and Solvency Assessment (ORSA).  According  
                  to the NAIC, an ORSA will require insurers to analyze  
                  all reasonably foreseeable and relevant material risks  
                  (including credit, operational, and liquidity risks, as  
                  well as others) that could have an impact on an  
                  insurer's ability to meet its policyholder obligations.   
                  Insurers and insurance groups would be required to  
                  articulate their own judgment about risk management and  
                  the adequacy of their capital position.  ORSA is  
                  intended to encourage management to anticipate potential  
                  capital needs and take early action if necessary.  ORSA  
                  is proposed as a continuous process and as a fundamental  
                  part of the risk management system for an insurer.  


                C.     ORSA Guidance Manual and Summary Report.  The ORSA  
                  Guidance Manual provides information for insurers on  
                  performing its ORSA and documenting risk policies and  
                  procedures.  The manual is deliberately nonprescriptive  
                  and allows each insurer to decide how to conduct the  
                  ORSA.  Results and contents of an ORSA report will vary  
                  from company to company.

                 The ORSA Summary Report should demonstrate that each  
                 entity's capital is sufficient to cover the risks  
                 inherent in the entity's business plan by describing the  
                 insurer's (i) risk management framework; (ii) assessment  
                 of risk exposure (include detail showing the insurers'  
                 process for assessing risks in both normal and stressed  
                 environments; and (iii) group risk capital and  
                 prospective solvency demonstrating that current and  
                 future capital is sufficient to support the identified  
                 risks.  

                 If the insurer does not have the necessary capital to  




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                 meet its current or projected risk capital requirement,  
                 then the report should also include a description of the  
                 management actions it has taken (or will take) to  
                 remediate any capital adequacy concerns.














































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           3.  Arguments in Support  


                A.      CDI argues that this bill protects insurance  
                  consumers by helping to make sure insurers and insurance  
                  groups do not collapse like big banks in 2008.  The bill  
                  establishes enhanced risk management requirements and  
                  provides the commissioner access to information to  
                  better understand the risks to which an insurer or  
                  insurance group is exposed.


                B.      The Association of California Insurance Companies  
                  notes that this this bill maintains important  
                  confidentiality protections related to sensitive  
                  commercial information that insurers will be required to  
                  report.


                C.      America's Health Insurance Plan notes that  
                  adoption of this NAIC Model Act is expected to become a  
                  requirement for NAIC accreditation.

           1.  Arguments in Opposition  

              None received.


           2.  Suggested Amendments  

              On page 4, line 4, prior amendments struck the "(a)", but  
              subdivision (c) refers to "subdivision (a)."  Committee  
              staff recommends amendments that return the "(a)".
           

          3.  Prior and Related Legislation 


               SB 1448 (Calderon), Chapter 282, Statutes of 2012, adopted  
              revisions to the NAIC Insurance Holding Company System  
              Regulatory Act and required the ultimate controlling person  
              of every insurance holding company system to file an annual  
              enterprise risk report identifying potential enterprise  
              risks to the insurer.
           





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           POSITIONS
           
          Support
           
          Department of Insurance (Sponsor)
          America's Health Insurance Plan
          Association of California Insurance Companies
          Pacific Compensation Insurance Company
           
          Opposition
           
          None received.  


          Consultant:   Hugh Slayden, (916) 651-4773