BILL ANALYSIS Ó
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.)
AB 584 (Perea), Page 2
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.
AB 584 (Perea), Page 3
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
AB 584 (Perea), Page 4
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.
AB 584 (Perea), Page 5
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
AB 584 (Perea), Page 6
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
AB 584 (Perea), Page 7
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.
AB 584 (Perea), Page 8
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.
AB 584 (Perea), Page 9
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