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