BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 553 Hearing Date: June 10,
2015
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|Author: |Daly |
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|Version: |April 22, 2015 Amended |
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|Urgency: |Yes |Fiscal: |Yes |
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|Consultant:|Erin Ryan |
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Subject: Insurance: corporate governance: insurance holding
companies.
SUMMARY Conforms California law to updated corporate governance
models laws adopted by the National Association of Insurance
Commissioners (NAIC) including establishment of a Corporate
Governance Annual Disclosure requirement (CGAD), as specified;
updates and clarifies existing law relating to the oversight of
internationally active insurance groups, including explicitly
authorizing the Insurance Commissioner (IC) to act as a
group-wide supervisor for an internationally active insurance
group, or accept another regulator as the group-wide supervisor,
as specified.
DIGEST
Existing law
1) Generally provides for the regulation of the business of
insurance by the IC.
2) Generally provides for the regulation of insurance holding
companies through the Insurance Holding Company System
Regulatory Act (IHCSRA).
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
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identity and relationship of every member of an Insurance
Holding Company (IHC) group.
4) Allows the IC to participate in a supervisory college with
other regulators charged with supervision of the insurer or its
affiliates, including other state, federal and international
regulatory agencies.
5) Requires an insurer or insurer group subject to a supervisory
college to pay the reasonable expenses of the IC's participation
in the supervisory college as reasonably related to the
insurer's business in this state.
6) Provides that all information and documents obtained by or
disclosed to the IC under the IHCSRA in the course of an
examination or investigation is confidential and not subject to
disclosure by the IC under the Public Records Act (PRA), not
subject to subpoena, not subject to discovery from the IC, and
not admissible into evidence in a private civil action if
obtained from the IC in any manner.
7) Requires every insurer doing business in this state to make
specified filings with the NAIC, including an annual statement
and quarterly statements.
8) Allows the IC to suspend, revoke, or refuse to renew the
certificate of authority for any insurer that fails to file its
annual or quarterly statement with the NAIC.
9) Requires domestic insurers to conduct an Own Risk and Solvency
Assessment (ORSA), to file an ORSA Summary report with the IC,
and specifies that the ORSA report will contain confidential and
sensitive information related to an insurer or insurance group,
and as such it shall be confidential and not subject to public
disclosure.
10) Exempts from the ORSA requirement an insurer that has direct
written premium of less than $500 million and the insurance
group of which it is a member has direct written premium of less
than $1 billion, as specified.
11) Imposes a late filing fee on an insurer who, without just
cause, fails to timely file its ORSA Summary report.
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This bill
1) Enacts the Corporate Governance Disclosure Act to provide
the IC a summary of an insurer or insurance group's
corporate governance structure, policies and practices.
2) Adopts the Corporate Governance Annual Disclosure Model
Regulation, as developed and adopted by the NAIC and as
amended by the NAIC from time to time.
3) Requires insurers domiciled in this state, or the insurance
holding group of which they are a member, to annually submit
a CGAD, as specified, to the IC by June 1, and include the
signature of the insurer or insurance group's chief
executive or corporate secretary attesting to the best of
that individual's belief and knowledge the insurer has
implemented the described corporate governance practices.
4) Specifies that if the insurer is a member of an insurance
group, the insurer shall submit the report required by this
section to the commissioner of the lead state for the
insurance group, in accordance with the laws of the lead
state, as determined by the procedures established by the
NAIC.
5) Requires an insurer not required to submit a CGAD under
this section to submit a CGAD upon the IC's request.
6) States legislative findings that the CGAD 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 cause the
insurer or insurance group competitive harm or disadvantage.
7) Defines an insurance group as those insurers and affiliates
within an IHC as defined in the IHCSRA.
8) Allows the insurer or group to decide which level of the
corporate structure will submit the CGAD report.
9) Allows the IC to request additional information he or she
deems material and necessary to gain a clear understanding
of the corporate governance policies of the insurer or
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group.
10) Gives the IC authority to adopt rules and regulations to
carry out this act in accordance with the Administrative
Procedure Act.
11) Provides that the CGAD and any documents, materials or
other information provided to the IC under this act are
proprietary and considered to contain trade secrets, and as
such are not subject to disclosure by the IC pursuant to the
PRA, not subject to subpoena, not subject to discovery from
the IC, or admissible in evidence in any private civil
action if obtained from the IC in any manner.
12) Explicitly allows the IC to use the materials in any
regulatory or legal action as part of his or her official
duties.
13) Allows the IC to share the CGAD and any other documents or
materials with other state, federal or international
regulators.
14) Allows the IC to retain third party experts, including
attorneys, actuaries and accountants as may be reasonably
necessary, at the insurer's expense to assist in the review
of the CGAD and related materials, and provides that the
third party experts are subject to the same confidentiality
provisions noted above.
15) Imposes a late fee on insurers who fail to file the CGAD by
June 1 without just cause, and allows the IC to reduce the
penalty if the insurer or group demonstrates financial
hardship.
16) Defines an "internationally active insurance group" for
purposes of the IHCSRA as a company system that writes
insurance in at least three countries, at least 10% of its
gross premiums are written outside the United States, and
the total assets of the holding company are at least $50
billion or the total gross written premiums are $10 billion.
17) Authorizes the IC to act as a group-wide supervisor for an
internationally active insurance group, or accept another
regulator as the group-wide supervisor, as specified.
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18) Makes multiple technical and clarifying changes.
19) Declares this measure will take effect as an urgency
statute in order to permit insurers and insurance groups
time to prepare their first CGAD, and to allow the IC to act
as a group-wide supervisor as quickly as possible.
COMMENTS
1. Purpose of the bill To conform California to the NAIC model
law on corporate governance, and adopt changes to the IHCSRA
that clarify to other federal and international regulators
that the IC has the authority to participate in or act as
the group-wide supervisor of a large internationally active
insurance group.
Background The NAIC promotes uniform practices throughout the
United States by regulating multi-state insurers and
maintaining an insurance regulator accreditation program.
NAIC develops uniform standards called Model Acts, and these
are periodically updated to reflect new developments. The
NAIC has played an important role in maintaining relations
with international regulators and supervisors who do not
like having to deal with more than 50 state regulators in
the U.S. insurance market. They would prefer the U.S. to
move to a federal system of insurance regulation-a move
strongly rejected by the states.
California enacted the NAIC's updated model act on Insurance
holding Companies in 2012-the IHCSRA noted above (SB 1448
Calderon, Chapter 282 Statutes of 2012). That model act
represented NAIC's response to the recent financial crisis,
and specifically the U.S. Government's bailout of American
Insurance Group (AIG) in 2008. The model act was intended
to improve state regulators' ability to monitor the
activities of non-insurance entities within a holding
company and ensure efficient and effective oversight of
affiliates that cross state and national lines. At the
time, AIG financial holding company was composed of 71
U.S.-based insurance entities and 176 other financial
services companies throughout the world. The problems
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leading to the bailout arose from the non-insurance AIG
Financial Products unit based in London, which Federal
Reserve Chairman Ben Bernanke described as making "huge
numbers of irresponsible bets" with risky investments and
taking huge losses. AIG's need for a federal bailout was
initially perceived by some as a failure of insurance
regulation. Although AIG insurers did have some financial
issues involving securities lending, this situation was in
course of correction. Despite the federal bailout of AIG, it
quickly became apparent U.S. state-based insurance
regulation effectively protected insurance policyholders,
despite the federal bailout of AIG. Had it not been for the
"walls" established in the United States, it is likely the
funds protecting policyholders in the AIG insurance
companies in the United States could have been raided by the
AIG holding company, thereby threatening insurance
policyholder protection.
The IHCSRA established "supervisory colleges," or meetings
of international regulators for internationally active
insurance groups, and codified the authority for the IC to
participate in such supervisory colleges. Generally, the
role of the group-wide supervisor is undertaken by the
supervisor in the jurisdiction where: (1) the head of the
Internationally Active Insurance Group (IAIG) is based; (2)
the insurance operations of the IAIG are controlled; and (3)
the supervisor has the statutory responsibility to supervise
the head of the IAIG.
Insurance regulators worldwide are finding that increased
levels of communication, coordination and cooperation among
regulators at supervisory colleges, or other international
fora, is vital to understanding risk trends that could
impact domestic insurers and policyholders in an
increasingly global insurance market. Supervisory colleges
allow regulators to better assess risks that are emerging
beyond their borders and outside their respective
authorities through information sharing, assessment of
holding company risk, contagion, risk exposure, overall
financial soundness, capital adequacy, group governance,
coordinated supervisory activities (including, for example,
joint inspections where relevant), liaison with holding
company management and establishing a role in crisis
management. Supervisory colleges, however, do not affect the
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legal rights and responsibilities of the insurance
regulatory authorities involved in the supervisory college,
as they continue to be subject to their existing legal
regulatory framework.
This bill updates the ICHSRA by outlining a process for
determining the lead state for domestic insurance groups,
clarifies activities the California Department of Insurance
(CDI) may engage in as a group-wide supervisor, and extends
confidentiality provisions to cover information received in
the course of group-wide supervision.
The corporate governance annual disclosure required by this
bill will be filed in the insurer or group's state of
domicile. In 2013 fewer than 4% of property casualty and
life insurers were domiciled in California. The IC may,
however, request that an insurer or group provide the CDI
with the insurer's CGAD. The CGAD disclosure will include
the following:
a. The insurer's corporate governance framework and
structure;
b. The policies and practices of its Board of
Directors and committees;
c. The policies and practices directing the
insurer's management, including a description of
defined suitability standards, the insurer's code of
conduct and ethics, performance evaluation, and
compensation practices; and
d. The processes by which the insurer's management
ensures proper oversight of the critical risk areas
impacting the insurer's business activities, including
risk management, actuarial function, investments,
reinsurance, and business strategy decision-making
processes.
1. Support According to the CDI, the bill's sponsor,
insurance regulators need to have sufficient authority to
look at insurance groups and affiliates within an entire
insurance holding company system. Without the amendments to
the Holding Company Act contained in this bill,
international regulators will challenge the authority of CDI
and other U.S. insurance regulators to lead multi-national
supervisory colleges of U.S. based insurers and
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international insurers who own U.S. insurers. This in turn
could result in significant disadvantages for U.S. based
insurers. Without states having this authority, it is also
likely that federal regulatory authorities not responsible
to state legislatures would seek an increased role in
regulating U.S. insurance companies in supervisory colleges.
2. Opposition None received.
3. Prior and Related Legislation SB 1448 (Calderon, Chapter
282 Statutes of 2012) conformed California law to revisions
the NAIC made to its model Insurance Holding Company System
Regulatory Act.
POSITIONS
Support
California Department of Insurance (sponsor)
American Council of Life Insurers
Association of California Life and Health Insurance Companies
Oppose
None received
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