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