BILL ANALYSIS Ó
AB 553
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Date of Hearing: April 21, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 553
(Daly) - As Amended April 6, 2015
PROPOSED CONSENT (As Proposed to be Amended)
SUBJECT: CORPORATE GOVERNANCE: INSURANCE HOLDING COMPANIES
KEY ISSUE: SHOULD INFORMATION DISCLOSED TO THE INSURANCE
COMMISSIONER IN THE CORPORATE GOVERNANCE ANNUAL DISCLOSURE
REPORT BE SHIELDED FROM DISCOVERY OR ADMISSIBILITY IN A PRIVATE
CIVIL ACTION AS IS CURRENTLY ALLOWED WITH SIMILARLY FILED
REPORTS?
SYNOPSIS
As proposed to be amended, this bill adopts the National
Association of Insurance Commissioners (NAIC) model laws on
corporate governance. The model law regarding corporate
governance allows the insurance commissioner to encourage
insurers and insurance groups, who are not otherwise required,
to provide a Corporate Governance Annual Disclosure (CGAD)
report to the Insurance Commissioner (Commissioner). This
report provides the Commissioner with a summary of an insurer or
insurance group's corporate practices and governance framework.
This bill seeks to exclude all information obtained in the
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submitted CGAD report from disclosure or discovery in any
private civil action if obtained from the Commissioner in any
manner. This bill also makes technical amendments to the
Insurance Holding Company Service Regulatory Act (IHCS). The
bill is sponsored by the Department of Insurance. It has no
known opposition.
SUMMARY: Adopts corporate governance model laws adopted by the
National Association of Insurance Commissioners (NAIC) and
clarifies existing law relating to the oversight of financially
troubled international insurers. Specifically, this bill:
1)Provides the California Department of Insurance with a more
comprehensive understanding of the corporate governance
structure, policies and practices of insurance companies by
allowing the Insurance Commissioner to encourage insurers and
insurance groups to annually file a Corporate Governance
Annual Disclosure in compliance with NAIC requirements.
2)Updates the Insurance Holding Company System Regulatory Act to
preserve state-based insurance regulation by clarifying the
role of group-wide supervisors over multi-national insurance
groups.
3)Permits the Commissioner to adopt regulations to implement the
bill and grants the Commissioner authority to request
additional information based on the contents of a CGAD report.
4)Allows the Commissioner to use and share the CGAD report and
any related documents with other regulators for regulatory
purposes only.
5)Permits the Commissioner to retain third party experts, at the
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insurer's expense, to assist with reviewing the CGAD report
and related documents.
6)Authorizes the Commissioner to act as group-wide supervisor
for any internationally active insurance group or to recognize
another regulatory official as the appropriate group-wide
supervisor.
7)Requires that all information, documents, and copies thereof
obtained by or disclosed to the Commissioner or any other
person in the course of an examination or investigation of an
IHCS member, and all information reported to the Commissioner
in CGAD documents, be kept confidential, not be subject to
disclosure pursuant to the California Public Records Act and
not be subject to subpoena.
8) Includes legislative findings that CGAD and related
information will contain confidential and sensitive
information related to an insurer or insurance group's
internal operations and proprietary and trade secret
information that if made public, could potentially cause the
insurer or insurance group competitive harm or disadvantage.
EXISTING LAW, under the Insurance Holding Company System
Regulatory Act (Act):
1)Requires insurers authorized to do business in this state that
are part of an Insurance Holding Company System (IHCS) to
register with the Insurance Commissioner. (Insurance Code
Section 1215.4(a). All further references are to this code
unless otherwise stated.)
2)Requires that all information, documents, and copies thereof
obtained by or disclosed to the Commissioner or any other
person in the course of an examination or investigation of an
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IHCS member, and all information required to be reported to
the Commissioner in IHCS registration documents, be kept
confidential, not be subject to disclosure pursuant to the
California Public Records Act and not be subject to subpoena.
(Section 1215.8(a).)
3)Authorizes specific circumstances under which the Commissioner
may share otherwise confidential documents or information with
certain parties in order to assist in the performance of the
Commissioner's duties, so long as the recipient agrees in
writing to maintain the confidentiality and privileged status
of the documents and information and has verified in writing
the legal authority to maintain confidentiality. (Section
1215.8(b).)
4)Provides that documents, materials, or other information filed
in the possession or control of the NAIC pursuant to the
confidential and privilege sharing of documents provisions
between the Commissioner and other agencies and authorizes, be
confidential by law and privileged, not be subject to
subpoena, and not be subject to discovery or admissible in
evidence in any private civil action. (Section 1215.8(e).)
5)Provides that the people have a right of access to information
concerning the conduct of the people's business and the right
of access to public records, which must be open public
scrutiny. Any limits on the people's right of access must be
adopted with findings demonstrating the interest protected by
the limitation and the need for protecting that interest.
(California Constitution, Article 1, Section 3.)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: Under the Act, an insurer that is a member of an
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insurance holding company system is required to register with
the Insurance Commissioner and provide specified business and
transaction-related information as part of the registration
process. The Act also authorizes the Commissioner to examine
and conduct investigations of IHCS members, in which certain
information, much of which an insurer may consider sensitive, is
obtained by or disclosed to the Commissioner. This bill,
sponsored by the California Department of Insurance (CDI),
encourages insurers and insurance groups, who are not otherwise
required, to annually submit a Corporate Governance Annual
Disclosure (CGAD) report to the Commissioner. The bill seeks to
exclude all information in a CGAD report filed with the
Commissioner from discovery or admissibility into evidence in
any private civil action if the information is obtained from the
Commissioner in any manner.
According to the author:
The primary purpose of enacting model laws and amendments
is to make sure California Insurance regulatory laws
conform to national and international insurance regulatory
laws and to provide the Department with additional tools
for fulfilling its mission of overseeing solvency of
insurance companies. The amendments to the Holding Company
Service Regulatory Act will clarify the roles of a
group-wide supervisor between states and the international
insurance community.
Background on National Association of Insurance Commissioners
and its Model Laws. The NAIC is the regulatory support
organization created by and composed of the chief insurance
regulators from the 50 states, the District of Columbia and five
U.S. territories. The NAIC establishes standards and best
practices, conducts peer reviews, and coordinates regulatory
oversight by insurance commissioners in the U.S. NAIC is a key
part of the national system of state-based insurance regulation.
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NAIC's primary mission is to promote uniform practices amongst
states in regulating multi-state insurers. To support this
effort, NAIC maintains an insurance regulator accreditation
program and develops uniform standards known as Model Laws. The
Model Laws are intended to provide inter-jurisdictional
uniformity and cooperation among regulators in a manner that
builds in quality control and allows one jurisdiction to
comfortably rely on another NAIC-accredited jurisdiction
because, by statute, the regulatory processes and standards
applied are substantially similar. Additionally, NAIC performs
an on-site accreditation review of each insurance regulator at
least every 5 years. An insurance regulator's accreditation
status is dependent on its adoption of statutes and regulations
that align with NAIC Model Laws. As of March 1, 2015, the most
recent revisions to the Insurance Company Holding System
Regulatory Act have been adopted by 42 states and jurisdictions,
including California.
The Corporate Governance Annual Disclosure. The CGAD is a
report that provides the Insurance Commissioner with a summary
of an insurer or insurance group's corporate practices and
governance framework. The report consists of: 1) the insurer's
corporate governance framework and structure including duties
and structure of the Board of Directors and its committees; 2)
the policies and practices of its Board of Directors and
significant committees including appointment practices, the
frequency of meetings held and review procedures; 3) the
policies and practices directing senior management including a
description of defined suitability standards, the insurer's code
of conduct and ethics, performance evaluation and compensation
practices, and succession planning; and 4) the processes by
which the Board of Directors, its committees and senior
management ensure an appropriate level of oversight to the
critical risk areas impacting the insurer's business activities
including risk management processes, the actuarial function, and
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investment, reinsurance and business strategy decision-making
processes.
(http://www.naic.org/Releases/2014.)
In Order to Encourage Insurance Companies to File the CGAD with
the Commissioner, This Bill Provides Confidentiality. This bill
requires that all information provided to the Commissioner in
the CGAD report is confidential and privileged. This
requirement is similar to other reports that are turned over to
the Commissioner, such as registration documents that are
required to be submitted under the IHCS Act. The theory that
justifies such exclusion from the Public Records Act is that
these reports contain proprietary information of the insurers
and insurance companies who provide them. However, once the
information is provided to the Commissioner, they qualify as
public records to which the public should have access unless
there legislative findings that impose limitations on the
public's right of access to those records. Any limitation
public access is always of great concern because the public, has
a right to information that become part of a public agency's
records. However, in this situation, excluding the information
received by the Commissioner in a CGAD report encourages
insurers and insurance groups to provide valuable information to
the Commissioner, which they would likely not provide, if the
information were obtainable under the Public Records Act or by
other methods, directly from the Commissioner. The Legislature
finds that the CGAD and related information will contain
confidential and sensitive information related to the insurer
and insurance group's internal operations and proprietary and
trade secret information, which if made public, could
potentially cause competitive harm or disadvantage to the
companies. Furthermore, the information that these companies
provide to the Commissioner, may be obtained through other
lawful methods, such as discovery and subpoena, just not from
the Commissioner.
In addition, this information helps the Commissioner better
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oversee the industry. These reports provide the Commissioner
with valuable knowledge of, among other things, an insurer or
group insurance's policies, practices, code of conduct, ethics,
compensation practices, meetings and review procedures, as well
as the level of oversight exercised within the company. All of
this information provides a basis on which the Commissioner may
better understand the corporate governance structure of insurers
and insurance groups, and also allows for the Commissioner's use
of this information in conducting risk-focus analyses.
Author's Clarifying Amendments. As currently in print, the bill
provides that information obtained by the Commissioner from CGAD
reports "shall not be subject to disclosure pursuant to the
California Public Records Act?, shall not be subject to
subpoena, and shall not be subject to discovery or admissible in
evidence in any private civil action if obtained from the
commissioner in any manner." According to the author, this
provision is not intended to absolutely prohibit discovery in a
separate legal action of any and all information obtained by the
Commissioner as part of its regulatory process of member
insurers, or to make all such information inadmissible into
evidence in a separate legal action. Instead, the author
proposes amendments to clarify that in a private civil action,
CGAD-related information is not discoverable from the
Commissioner and is not admissible into evidence if obtained
from the Commissioner, but otherwise is not specifically limited
by the scope of the bill. The amendments are:
On page 7, line 17, after "disclosure", insert "by the
commissioner"
On page 7, line 21, after "discovery", insert "from the
commissioner"
Previous Legislation. AB 1234 (Levine), Ch. 448, Stats. 2014,
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protects from discovery or disclosure in civil litigation
certain information held by the Commissioner pertaining to
insurers that are members of an insurance holding company
system.
SB 1448 (Calderon), Ch. 282, Stats. 2012, adopted numerous
provisions to conform California law to the NAIC model law
regarding the regulation of insurance holding companies. Among
other things, that bill substantially broadened the
commissioner's authority to obtain otherwise proprietary
information from insurers, and established that confidential
information shared with the commissioner under that authority is
not subject to disclosure under the California Public Records
Act.
REGISTERED SUPPORT / OPPOSITION:
Support
Department of Insurance (sponsor)
Opposition
None on file
Analysis Prepared by:Khadijah Hargett / JUD. / (916) 319-2334
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