BILL ANALYSIS Ó
AB 1072
Page 1
Date of Hearing: April 22, 2015
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
AB 1072
(Daly) - As Amended April 13, 2015
SUBJECT: Insurance: firefighters or police officers' benefit
and relief associations
SUMMARY: Requires firefighters' and police officers' benefit
and relief associations (associations) to file an actuarial
opinion with the Insurance Commissioner (commissioner) that
meets specified standards. Specifically, this bill:
1)Requires each association to file, by July 1, 2016, and each
July thereafter, the opinion of a qualified actuary as the
whether the reserves and related actuarial items are adequate
to support the benefits promised by the contracts.
2)Provides that an association that is seeking a certificate of
authority to act as an association must file, if feasible, an
actuarial opinion that it would have adequate resources to
provide the benefits promised in its contracts.
3)Requires the opinion to meet the standards established by the
American Academy of Actuaries and the Actuarial Standards
Board.
AB 1072
Page 2
4)Requires the opinion be accompanied with supporting memoranda.
5)Requires the commissioner to notify an association if a filing
fails to meet the standards required by the bill, and specify
the issues that are deficient.
6)Authorizes the commissioner to make recommendations to the
Legislature in the event his review of the filings required by
the bill leads him to conclude that existing law does not
adequately protect the interests of the police and fire
members of the associations.
EXISTING LAW:
1)Provides for the regulation of insurance by the commissioner,
through the Department of Insurance (DOI).
2)Requires in most cases that any person or entity that accepts
money in exchange for a promise to pay benefits in the future
upon the occurrence of some event or fact is required to
obtain a certificate of authority (license) from the
commissioner to act as an insurer, and is subject to the full
range of regulations that govern insurers.
3)Provides that a firefighters' or police officers' benefit and
relief association is totally exempt from all rules governing
insurance companies if:
a) It asks for a certificate from the commissioner;
AB 1072
Page 3
b) It has an elected board of directors; and
c) Its members are employees of police or fire departments,
or their dependents.
4)Authorizes these associations to provide benefits to members
"in case of sickness, accident, distress or death."
FISCAL EFFECT: Undetermined
COMMENTS:
1)Purpose. According to the sponsors, the Peace Officers
Research Association of California (PORAC) and the California
Correctional Peace Officers Association (CCPOA), there are
police and fire benefit associations that are operating in the
state that do not adequately reserve for their promise to pay
future benefits, and this inadequate reserving places the
safety officers who join those groups in a risky position that
they may not appreciate. Specifically, PORAC and CCPOA point
to an association that has targeted PORAC and CCPOA members to
switch to a program for long term disability and long term
care benefits that might be "too good to be true." The bill
is designed to provide a neutral party - the Insurance
Commissioner - with adequate information to be able to make a
judgment about the security of benefits promised to members of
these associations.
2)Background. Police and firefighter benevolent associations
have been around in the United States for well over 150 years.
These groups formed to provide aid and assistance to either
injured public safety employees or their dependents. In
general, the benevolent associations were made up of officers
AB 1072
Page 4
in the same department - a brotherhood of sorts. As needs and
sophistication developed, the nature of benefits developed as
well. These groups have been long-codified in California as
associations that are totally exempt from any insurance
regulation. Current law states that these associations "shall
not be subject to any other provision of this code nor to any
law of this State relating to insurance, whether now existing
or hereafter enacted."
The potential problem is that the nature of benefits provided by
these associations has grown to the point where they resemble,
or are identical to, sophisticated insurance products. The
two most common benefit offerings are disability income
benefits (very similar to the disability income insurance
available to Assembly employees through AFLAC) and long term
care benefits (very similar to the long term care coverage
available to Assembly employees through CalPERS). Disability
income is often referred to as "long-term disability" (LTD)
and long-term care is referred to as LTC. As the nature of
benefits has expanded, and the number of members has expanded,
concerns have arisen about the unregulated status of these
associations. These concerns have led many associations to
shift from self-insured entities (entities that keep the
money, charge membership fees, and pay benefits out of the
funds collected) to insured programs (where the entities
contract with a licensed insurance company to provide the
benefits.) Nonetheless, many associations have continued to
operate as self-insured (and therefore unregulated)
organizations.
3)Clear statutory exemption. There are many entities that
would, by application of general insurance laws, be subject to
regulation as insurers by the DOI. In some cases limited
exemptions have been granted for entities in unique
circumstances. In other cases, partial or lesser regulatory
programs, less comprehensive that what is applicable to
insurers, have been adopted. The associations at issue in
this bill, however, have the most complete and explicit
AB 1072
Page 5
exemption from all insurance laws otherwise applicable to
insurance or insurance-like entities. The specific rationale
is not clear, but probably lies in the fact that these
associations started historically as mutual benefit societies
offering relatively minor benefits to members. Nonetheless,
it is clear that the commissioner currently has no regulatory
authority over these associations, as long as they meet the 3
criteria noted above.
4)Association structure. Fire and peace officer unions can form
benefit associations that are comprised only of the union's
members, for the benefit of the union members. However, the
law does not limit these associations to a "one employer" or
"one union" model. Thus, there can be a benefit association
established by virtually anyone, and as long as it is
comprised of qualified public safety members, elects its board
of directors, and seeks a certificate from the commissioner,
it can offer any scope of health care, disability and related
benefits it chooses, independent of any governmental
regulation. One particular association group has organized
itself in this latter form. The California Law Enforcement
Association (CLEA) for police, and the California Association
of Professional Firefighters (CAPF) for firefighters, are
multi-employer associations that offer LTD benefits, and their
joint trust, the National Peace Officers and Fire Fighters
Benefit Association (NPFBA) offers LTC benefits. PORAC has a
multi-employer association that offers LTD benefits, and CCPOA
is a single union association that offers LTD benefits. There
are approximately 70 of these associations in the various
forms operating in California, but the entities just noted are
among the largest.
5)Reserving vs. Pay As You Go. Whether to fully reserve for
future obligations, or whether it is prudent to rely on future
contributions from future members in order to fund benefits
for current members, appears to be the primary policy debate
posed by the bill. It is a fundamental of insurance
AB 1072
Page 6
regulation that an entity that accepts a consumer's money
today, on the promise to pay something in the future, must
have adequate resources to make good on that promise. As the
sophistication of promised benefits has grown, the
sophistication of financial regulation to ensure promises are
kept has also grown. However, in the case of these benefit
associations, there is no financial regulation, and thus
concerns have arisen as to whether legitimate government
oversight to protect association members' rights has developed
adequately in comparison to the nature of the future financial
promises that are now being made.
CLEA, CAPF, and NPFBA acknowledge that they, at least partially,
rely on a "pay as you go" model to fund their benefit
promises. That is, they are depending on the premiums paid
currently by active members to fund at least some of the
obligations owed to members who accrued their membership
rights in the past. This is not dissimilar to how social
security funding currently works. The difference is that
social security is an "all in" governmentally mandated
program, and police and fire benefit associations are totally
voluntary. Thus, if current members decide to simply stop
paying, which they have a right to do, the funding structure
may be problematic.
The CLEA groups argue that they are mutual benevolent
associations, and the members have an affinity amongst
themselves, and this potential problem is not an issue. They
further point out that on both the LTD and the LTC side of
their groups' operations, they have never failed to make good
on promised benefits. As a result, they argue strict
insurance-model reserving for this sort of self-insured
association is not necessary or appropriate. The bill's
proponents are not convinced of this argument, and believe
more oversight is needed. While proponents have concluded
that a financial regulatory program is in order, as the
"introduced" version of the bill called for, they support the
AB 1072
Page 7
evaluation by a sufficiently sophisticated neutral regulator -
the Insurance Commissioner - as to whether existing
associations' financial structure is adequate to protect the
interests of members who are expecting benefits to be paid in
the future.
6)LTC insurance. Long term care insurance, a relatively new
insurance product, has proven to be a financial disaster to
the insurers and other large institutions that have attempted
to collect money today, to pay for complex benefits many years
in the future. Most private insurers no longer sell LTC
insurance to new customers. CalPERS recently froze its
program temporarily, and instituted a 95% rate increase. On
one hand, this may suggest that alternatives to insurance are
needed. On the other hand, this may suggest that as a
society, we have underestimated the true cost of funding LTC
services. This discussion is relevant because the NPFBA trust
offers an LTC benefit program at a very favorable price.
According to the trust's own website, for comparable benefit
packages, pricing for the trust and other LTC providers is as
follows:
Trust: $63 per month (maximum premium of $30,240)
CalPERS: $170 per month
Genworth: $262 per month
John Hancock: $262 per month
According to proponents, the Trust's pricing is "too good to
be true" over the long term, and justifies further scrutiny.
The trust responds that over more than a decade, it has met
its contractual obligations, and that its ability to pay
benefits in both LTC and LTD over time suggests it can
continue to do so. It also argues that the nature of its
members is a different mix than in CalPERS and other
commercial programs, and the different mix of members enables
its pricing to be more favorable. Proponents are concerned
that it is relatively easy to pay LTC benefits in the short
run, but that other LTC providers such as CalPERS and private
AB 1072
Page 8
insurers that have been at it longer discovered that
underpricing is a serious problem. As a result, further
evaluation by the commissioner is warranted.
7)Association bylaws vs. insurance policies. One of the
distinctions between an insurance policy and an association
benefit is the nature of when benefit rights vest. Under an
insurance policy, the benefits attach at the time the
policyholder pays premium. An association can establish
through its bylaws that the specific benefits that a member is
entitled to receive vest when the right to benefits is
triggered. That is, until the point where the disability that
triggers a disability income benefit, or an LTC benefit,
actually happens, the precise level of benefits has not
vested. This flexibility allows an association to better
manage its risk; however, absent clear disclosure, it may
leave members with an impression that benefits are more
guaranteed than they really are. This feature can be a
characteristic of all associations, but proponents argue that
those associations that under-reserve are more prone to having
to resort to benefit reductions in the future.
8)Enforcement. Proponents have suggested that the bill's
requirements that associations file actuarial information that
meets certain criteria is somewhat illusory, because there is
no mechanism in the bill for the commissioner to take any
action to force a non-compliant association to meet the
requirements of the bill. The author may wish to consider
adding a provision that establishes some form of sanction or
incentive to ensure that associations fully comply with the
filing requirements.
9)Prior legislation. Last year, AB 2366 (Bocanegra) proposed to
authorize the commissioner to receive and investigate written
complaints against an association. It would further have
authorized the commissioner to revoke an association's
certificate if those complaints could not be resolved. The
bill was held in the Assembly Insurance Committee without
hearing. In lieu of moving the bill, the DOI committed to the
AB 1072
Page 9
author to holds discussion with stakeholders to determine
whether further regulation would be appropriate and agreeable
to the industry. Some participants in those discussions
proposed this bill, as introduced. But not all associations
were either involved or in agreement with that proposal.
REGISTERED SUPPORT / OPPOSITION:
Support
Anaheim Police Association (co-sponsor)
CCPOA Benefit Trust Fund (co-sponsor)
Peace Officers Research Association of California (co-sponsor)
San Bernardino County Safety Employees' Benefit Association
(co-sponsor)
California Correctional Peace Officers Association
Oakland Police Officers Association
Ventura County Deputy Sheriffs' Association
Opposition
AB 1072
Page 10
None received
Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086