BILL ANALYSIS Ó
AB 1072
Page 1
ASSEMBLY THIRD READING
AB
1072 (Daly)
As Amended April 28, 2015
Majority vote
-----------------------------------------------------------------
|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+--------------------+--------------------|
|Insurance |12-0 |Daly, Beth Gaines, | |
| | |Calderon, Cooley, | |
| | |Cooper, Dababneh, | |
| | |Frazier, Gatto, | |
| | |Gonzalez, Grove, | |
| | |Mayes, Rodriguez | |
| | | | |
|----------------+------+--------------------+--------------------|
|Appropriations |17-0 |Gomez, Bigelow, | |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Daly, Eggman, | |
| | |Gallagher, Eduardo | |
| | |Garcia, Holden, | |
| | |Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
-----------------------------------------------------------------
AB 1072
Page 2
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.
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
this 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:
AB 1072
Page 3
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;
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: According to the Assembly Appropriations
Committee, one-time costs under $100,000 (Insurance Fund) to
review filings and develop related recommendations.
COMMENTS:
AB 1072
Page 4
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." This 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 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
AB 1072
Page 5
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 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
AB 1072
Page 6
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 this bill. It is a fundamental of insurance 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
AB 1072
Page 7
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. This 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 this bill called for, they support the 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
AB 1072
Page 8
trust's own Web site, 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 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
AB 1072
Page 9
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 this bill's
requirements that associations file actuarial information that
meets certain criteria is somewhat illusory, because there is no
mechanism in this bill for the commissioner to take any action
to force a non-compliant association to meet the requirements of
this 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) of 2014,
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 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.Analysis Prepared
by: Mark Rakich / INS. / (916) 319-2086 FN: 0000361
AB 1072
Page 10