BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 1072 Hearing Date: June 24,
2015
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|Author: |Daly |
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|Version: |June 10, 2015 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Hugh Slayden |
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Subject: Insurance: firefighters' or police officers' benefit
and relief associations.
SUMMARY Requires firefighters' and police officers' benefit and
relief associations to file an actuarial opinion with the
Insurance Commissioner (IC) that meets specified standards.
DIGEST
Existing law
1. Prohibits a person, generally, from transacting insurance
without a certificate of authority from the IC and
establishes laws and standards applicable to the business of
insurance.
2. Provides that firemen's, policemen's or peace officers'
benefit and relief associations ("associations") formed for
the purpose of aiding their members and dependents in case
of sickness, accident, distress, or death shall not be
subject to any other provision of the Insurance Code nor any
state law relating to insurance.
3. Requires associations to obtain a certificate of authority
from the IC.
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4. Limits membership to current and former members (who
qualified at the time of membership in the association) of
police departments and fire departments; regular and
salaried peace or law enforcement officers; and emergency
medical services personnel employed by a fire department of
a city, county, or district.
5. Requires that the trustees, directors or governing body be
elected by the membership.
6. Prohibits the use of money or property from being paid out
as benefits to anyone other than its members, their
dependents, or beneficiaries nominated in writing by them.
7. Provides that the association shall be supported mainly by
contributions from its members and by donations.
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This bill
1. Requires associations that issue long-term disability or
long-term care policies or contracts to submit an actuarial
opinion and supporting memorandum to the IC, no later than
July 1, 2016, as to whether the reserves and related
actuarial items that support the policies or contracts are
based on assumptions that satisfy contractual provisions,
consistent with prior reported amounts, and based on
actuarial standards and procedures established by the
American Academy of Actuaries and the Actuarial Standards
Board.
2. Permits the association to submit a previously prepared
opinion if it had been completed no earlier than December
31, 2013.
3. Exempts associations that offer benefits through an
admitted insurer.
4. Provides that an association that is seeking a certificate
of authority to file, if feasible, an actuarial opinion that
it would have adequate resources to provide the benefits
promised in its contracts.
5. Requires the IC to notify an association if a filing fails
to meet the standards required by the bill and specify
issues that are deficient to be addressed in an amended
filing.
6. Prohibits an association that receives a notification from
indicating that it is operating under the auspices of the
authority of any provision of the Insurance Code, the IC or
the Department of Insurance, and shall, commencing 30 days
from the date of the notification, include the following
language in all contracts that are not regulated by CDI, and
in certificates evidencing coverage under those contracts:
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"THE BENEFITS PROVIDED BY THIS CONTRACT ARE NOT SUBJECT TO
REGULATION BY THE CALIFORNIA DEPARTMENT OF INSURANCE, AND
THE CONTRACT IS NOT GUARANTEED BY THE CALIFORNIA INSURANCE
GUARANTEE ASSOCIATION."
7. Authorizes the IC to make recommendations to the Assembly
and Senate Committees on Insurance in the event a review of
the filings required by the bill leads to the conclusion
that existing law does not adequately protect the interests
of the police and fire members of the associations.
8. Sunsets on December 31, 2018.
COMMENTS
1. Purpose of the bill According to the CCPOA Benefit Trust
Fund ("Trust"), one of the co-sponsors, this bill is
intended to insure that benefits offered to, and paid for,
by peace officers and firefighters are actually available
when they need them. The primary mechanism for carrying out
this goal is to insure that such benefits are offered on an
actuarially sound basis. The trust notes that AB 1072 does
not propose to regulate these associations on the same basis
as insurance companies offering similar products. Rather it
proposes only a one-time check to insure the fiscal
soundness of the programs.
2. Background Police, peace officer, 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. As needs and sophistication developed, the
nature of benefits developed as well.
The nature of benefits provided by these associations has
grown to the point where they resemble sophisticated
insurance products including long-term disability income
(LTD) benefits and long term care (LTC) benefits. As the
nature of benefits has expanded, and the number of members
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has expanded, concerns have arisen about the unregulated
status of these associations. These concerns have led many
associations to shift from self-insured arrangements
(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).
The associations follow the pattern shared with other
mutually beneficial risk management arrangements exempt from
insurance regulation. These associations may not sell
benefits to the public, they must limit their membership to
specified public safety personnel, and the members must
elect the governing body. It also prohibits the use of
contributions from its members for use as benefits for
anyone other than members, their dependents, or
beneficiaries.
The law does not limit these associations to a "one
employer" or "one union" model; a benefit association may be
established by virtually anyone as long as it meets the
necessary organizational qualifications. It may offer any
scope of health care, disability and related benefits it
chooses. Since they are organized around employment, they
are often connected with organized labor and frequently
qualify as ERISA plans subject to oversight by the U.S.
Department of Labor.
There are approximately 70 of these associations in the
various forms operating in California, but the following
entities are among the largest. 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; 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.
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Insurance regulation typically requires that an insurer must
have adequate resources to make good on promised benefits.
This is usually, but not always, established through
reserving requirement. As the sophistication of promised
benefits has grown, the sophistication of financial
regulation to ensure promises has evolved as well. However,
benefit relief associations are not subject to commercial
insurance oversight and there is no formal mechanism at the
state level for evaluating the status of the system.
Some associations 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. These benefit associations
are voluntary; if the association has to adjust
contributions or benefits in a way that make the product
unattractive, the association could suffer from adverse
selection or a self-perpetuating cycle of premium
increase/benefit reductions and membership losses. On the
other hand, some of these groups providing pay-as-you-go
benefits have been offering these benefits for up to 30
years and have not failed to make good on promised benefits.
This bill would require these associations to provide an
opinion by a qualified actuary with a supporting memorandum
regarding the association's reserves and related practices
are actuarially sound. The IC will review and analyzes all
of these opinions and may advise the Legislature on
recommended changes to existing law necessary or helpful in
making sure members receive promised benefits.
3. Suggested Amendments
The bill provides that if IC determines that the actuarial
opinion does not meet the standards provided in this bill,
the association shall not communicate that it is operates
under the auspices of the Insurance Code, the IC, or CDI,
and shall within 30 days include prescribed language in all
of its contracts that the benefits provided are not subject
to regulation by CDI or is a member of an insurance
guarantee association.
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The proposed notice in the contract language is usually
required of similar insurance-like arrangements that are not
subject to the same standards as commercial insurers, such
as nonprofit risk pools, risk retention groups, and the
California Earthquake Authority. The notice discloses
critical information to consumers regardless of whether the
association submits a compliant opinion.
Additionally, this provision authorizes the IC to prohibit
them from disclosing truthful information (that the
association operates lawfully under the auspices of the
Insurance Code Section 11400). This raises issues of
commercial free speech, especially since the IC may only
suspend or rescind an association's authority for reason
unrelated to this bill. For these reasons, the Committee
may wish to consider amendments that strike paragraph (3) of
subdivision (c) in proposed section 11401.5 and insert a new
section that requires all associations that self-funds all
or a part of the promised benefits to provide a notice in
its contracts and certificates, as appropriate, that it is
not regulated by CDI and not a member of the appropriate
insurance guarantee association.
Given the importance and urgency of protecting members'
benefits, the Committee may wish to consider amendments that
would require the IC to make the report and recommendations
on or before July 1, 2017.
The information provided to the IC under this proposal
involves sensitive and proprietary information. Typically,
the type of information gathered in the course of a similar
examination of a commercial insurer would be exempted from
the California Public Records Act, the civil litigation
process, subpoena, etc. The Committee may wish to consider
amendments that would add language to that effect in order
to encourage frank conversation between the association and
CDI.
4. Prior and Related Legislation AB 2366 (Bocanegra, 2013-14)
proposed to authorize the IC to receive and investigate
written complaints against an association, and revoke an
association's certificate if those complaints could not be
resolved. The bill was held in the Assembly Insurance
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Committee without hearing.
POSITIONS
Support
CCPOA Benefit Trust Fund (co-sponsor)
Peace Officers Research Association of California (co-sponsor)
Anaheim Police Association
San Bernardino County Safety Employees' Benefit Association
California Correctional Peace Officers Association*
California Firefighters' Association
Madera Police Officers Association
Monterey County Probation Association
Oakland Police Officers Association
Santa Monica Police Officers Association
Shasta County Deputy Sheriffs Association
Simi Valley Police Officers' Association
Ventura County Deputy Sheriffs' Association
Oppose
None received
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