BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015-2016 Regular Session AB 1072 (Daly) Version: July 2, 2015 Hearing Date: July 14, 2015 Fiscal: Yes Urgency: No TMW SUBJECT Insurance: firefighters' or police officers' benefit and relief associations DESCRIPTION This bill would require firemen's, policemen's or peace officers' benefit and relief associations (associations) that issue long-term disability or long-term care policies or contracts to submit actuarial opinions, as specified, to the Insurance Commissioner. This bill would require associations that currently hold a certificate of authority to file an actuarial opinion no later than July 1, 2016, require that opinion to be completed no earlier than December 31, 2013, and require associations seeking a certificate of authority to submit an actuarial opinion. BACKGROUND Historically, firemen's, policemen's, and peace officers' benefit and relief associations originally provided help to survivors of deceased officers and firefighters through a charity type of mechanism wherein fellow peace officers and firefighters provided monies to the surviving families. In order to operate, these associations could apply to the California Insurance Commissioner (Commissioner) for a certificate of authority, which is not subject to renewal once it is issued. These associations evolved to provide valuable long-term AB 1072 (Daly) Page 2 of ? disability coverage, long-term care coverage, and other types of health and welfare plan coverage for their eligible members. The associations may offer the coverage on a self-insured basis, where the association is responsible for paying claims, or through a group insurance policy, where the association enters into a contract with a third-party insurance carrier. This coverage is not available to the general public and is generally designed to address the specific needs of peace officers or firefighters. This bill would require associations with a certificate of authority to submit a one-time actuarial opinion (a statement evaluating the company's pricing, underwriting, and exposure controls), as specified, to the Commissioner. This bill would provide confidentiality and non-disclosure provisions for the information submitted by the associations, as specified. This bill was heard by the Senate Insurance Committee on June 24, 2015, and passed out on a vote of 8-0. CHANGES TO EXISTING LAW Existing law generally prohibits a person from transacting any class of insurance business without first being admitted for that class, which is secured by procuring a certificate of authority, granted upon conforming to specified requirements, from the California Insurance Commissioner (Commissioner). (Ins. Code Sec. 700.) Existing law provides that the commissioner shall examine every domestic insurer before issuing to it a certificate of authority, other than renewal, to transact any class of insurance in California. (Ins. Code Sec. 730(a).) When scheduling and determining the nature, scope, and frequency of examinations, the commissioner shall consider, among other things, actuarial opinions. (Ins. Code Sec. 730(b).) Existing law authorizes the Commissioner in making insurer examinations to have free access to all the books and papers of the company, thoroughly inspect and examine all its affairs, ascertain its condition and ability to fulfill its obligations, ascertain if it has complied with all laws applicable to its insurance transactions, appraise or cause to be appraised by competent appraisers appointed by him or her all property in which the insurer has or claims an interest, or which is AB 1072 (Daly) Page 3 of ? security, in any form, for the payment of any debt or obligation to the insurer, and, in conducting the examination, observe those guidelines and procedures set forth in the Examiner's Handbook adopted by the National Association of Insurance Commissioners (NAIC). (Ins. Code Sec. 733.) Existing law provides that a commissioner may make public any final or preliminary examination report, any examiner or company workpapers or other documents, or any other information discovered or developed during the course of any examination in the furtherance of any legal or regulatory action which the commissioner may deem appropriate. (Ins. Code Sec. 735.5(a).) However, all working papers, recorded information, documents, and copies thereof produced by, obtained by, or disclosed to the commissioner or any other person in the course of an examination made are given confidential treatment and are not subject to subpoena and not to be made public by the commissioner or any other person, except as provided. (Ins. Code Sec. 735.5(c).) Existing law generally requires insurers to provide annual, quarterly, and supplemental financial statements in conformity with the standards adopted by the National Association of Insurance Commissioners. (Ins. Code Sec. 900 et seq.) Existing law makes the actuarial documents, materials, or other information in the possession or control of the Commissioner provided in support of the Statement of Actuarial Opinion confidential and privileged, and not made public by the Commissioner or any other person and are exempt from disclosure under the California Public Records Act (CPRA), not subject to subpoena, and not subject to discovery or admissible in evidence in any civil action brought by a private party. (Ins. Code Sec. 923.6(f)(1).) Existing law requires admitted life and disability insurers to submit annual actuarial opinions or statements, as specified. (Ins. Code Secs. 10489.15, 10506.4(d)(1)(B).) Existing law exempts from public disclosure any memorandum or material submitted in support of a life or disability insurer's actuarial opinion unless: (1) the insurer consents in writing to disclosure; (2) the American Academy of Actuaries provides a written request and statement for the materials, which are required for professional disciplinary proceedings and that the Academy observes the commissioner's confidentiality AB 1072 (Daly) Page 4 of ? requirements; or (3) the insurer uses the confidential material as part of its marketing efforts, releases the material to any government agency other than a state insurance department, or releases the material to any news medium. (Ins. Code Sec. 10489.15(c)(8)(A).) Existing law provides that the confidential material related to a life or disability insurer's actuarial opinion shall be subject to subpoena on the commissioner's consent or after notice to the commissioner and all other interested parties and a hearing in which the superior court determines that the need for the subpoena outweighs the interests of the insurer or actuary in preventing disclosure of the material and the public interest and any ongoing investigation or proceeding conducted by the commissioner will not be unnecessarily jeopardized by compliance with the subpoena. (Ins. Code Sec. 10489.15(c)(8)(B).) Existing law , the CPRA, generally requires records maintained by public agencies to be accessible to the public. (Gov. Code Sec. 6250 et seq.) Existing law exempts from public disclosure applications submitted by insurance companies to state agencies. (Gov. Code Sec. 6254(d)(1).) Existing law makes firemen's, policemen's or peace officers' benefit and relief associations (associations) formed for the purpose of aiding their members or dependents of their members in case of sickness, accident, distress, or death, are subject only to certain provisions of the Insurance Code, as specified. (Ins. Code Sec. 11400.) Existing law prohibits associations from operating or doing business in California without a certificate of authority, which must be issued by the Commissioner unless he or she determines, after examination, that the association does not comply with specified requirements. (Ins. Code Sec. 11401.) Existing law authorizes associations to be incorporated or unincorporated, but if incorporated they are prohibited from issuing shares of stock. (Ins. Code Sec. 11402.) Existing law limits membership of an association solely to the following or any combination thereof: members of police departments of municipal or public corporations or districts; AB 1072 (Daly) Page 5 of ? members of fire departments of municipal or public corporations or districts; peace or law enforcement officers who are regular and salaried officers or employees of the state or of a single county or other political subdivision or public or municipal corporation; persons who are emergency medical services personnel and employed by a fire department of a city, county, or district; or persons who at the time of becoming members of such association were qualified members. (Ins. Code Sec. 11403.) Existing law prohibits an association from paying, promising, or agreeing to pay, either directly or indirectly, any consideration of any nature for the solicitation or procuring of members or applications for membership. (Ins. Code Sec. 11404.) Existing law requires trustees, directors or the governing body of the association, by whatever name their office is known or designated, to be elected by the membership of the association. (Ins. Code Sec. 11405.) Existing law prohibits moneys or property directly or indirectly contributed to an association by its members from being paid out as benefits to any persons other than its members, their dependents, or beneficiaries nominated in writing by them. (Ins. Code Sec. 11406.) Existing law requires an association to be supported mainly by contributions from its members, whether in the form of fees, dues, assessments, or otherwise, and by donations made to it from time to time. (Ins. Code Sec. 11407.) This bill would require each association that holds a certificate of authority and that issues long-term disability or long-term care policies or contracts to submit to the Commissioner the opinion of a qualified actuary as to whether the reserves and related actuarial items that support the policies or contracts issued, including policies and contracts issued by entities established by the association that provide benefits, are based on assumptions that satisfy contractual provisions, are consistent with prior reported amounts, and are based on actuarial standards and procedures established by the American Academy of Actuaries and the Actuarial Standards Board. This bill would require the association that holds a AB 1072 (Daly) Page 6 of ? certificate of authority to file its opinion no later than July 1, 2016, and would require that opinion to be completed no earlier than December 31, 2013. This bill would consider an association to have issued a long-term care or disability policy or contract if it self-funds all or part of the resulting obligation, but an association that markets long-term policies or contracts issued by an insurer that is admitted by the Department of Insurance to offer insurance products in the state would be exempt from this reporting requirement. This bill would require an association seeking a certificate of authority to file an opinion, to the extent feasible, that establishes that it would have adequate resources to provide benefits as required to satisfy its proposed contractual obligations. This bill would require the opinion to include an opinion with supporting memoranda consistent with the same qualified actuary as to whether the reserves and related actuarial items held in support of the policies and contracts, when considered in light of the assets held by the association with respect to the reserves and related actuarial items, including, but not limited to, the investment earnings on the assets and the considerations anticipated to be received and retained under the policies and contracts, and shall make adequate provision for the association's obligations under the policies and contracts, including, but not limited to, the benefits under any expenses associated with the policies and contracts. This bill would require the opinion include a memorandum, in form and substance consistent with actuarial standards and procedures acceptable to the American Academy of Actuaries and the Actuarial Standards Board, in support of the opinion, and if the association fails to provide an opinion and supporting memoranda to the Commissioner that meets the requirements, the Commissioner would be required to notify the association of the deficiencies in the filing, and make a specific request that identifies the issues that should be addressed in an amended filing. This bill would require the Commissioner, to determine after a review of the filings from the associations, that the laws governing these associations are inadequate to protect the AB 1072 (Daly) Page 7 of ? interests of the members of the associations, he or she shall, on or before July 1, 2017, whether to develop and deliver recommendations to the Assembly Committee on Insurance and the Senate Committee on Insurance regarding changes in the law that would better protect the interests of members of the associations. This bill would provide that documents, materials, or other information, including the opinion with supporting memoranda, required to be submitted by an association, in the possession or control of the Department of Insurance (Department) that are obtained by, created by, or disclosed to the Commissioner or any other person, are recognized as being proprietary and containing trade secrets, and those documents, materials, or other information would be required to be kept confidential by law and privileged, not subject to disclosure by the Commissioner pursuant to the CPRA, and not subject to subpoena, discovery from the Commissioner, or admissible into evidence in any private civil action if obtained from the Commissioner in any manner. This bill would prohibit the Commissioner from otherwise making those documents, materials, or other information public without the prior written consent of the association. This bill would require an association that self-funds all or part of the benefits to include the following language, or other language approved by the Commissioner, in all contracts that are not regulated by the Department, and in certificates evidencing coverage under those contracts, in capital letters and in a minimum of 12-point type: "ALL OR A PORTION OF 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 LIFE AND HEALTH INSURANCE GUARANTEE ASSOCIATION." This bill would remain in effect only until December 31, 2018, and as of that date would be repealed, unless a later enacted statute, that is enacted before December 31, 2018, deletes or extends that date. This bill contains legislative findings and declarations that, in order to protect proprietary information, it is necessary to enact legislation that limits the public's right of access to insurance holding company information provided under this bill. AB 1072 (Daly) Page 8 of ? COMMENT 1. Stated need for the bill The author writes: Insurance Code Section 11400 Benefit and Relief Associations (which have evolved from more-than-a-century-old "widows and orphans" associations for fallen safety officers) can offer their members sophisticated "insurance-like" products (long-term disability income programs similar to what AFLAC-type insurance products offer; long-term care programs, similar to what CalPERS and Genworth, among other insurers, offer). However, they can offer these benefits with ZERO regulatory oversight. In fact, some of these associations openly market that they are "pay as you go" arrangements - that is, current members are not funding their own future benefits, but rather, they are funding past generations of members' benefits, and future members will fund current members' benefits. The statute authorizes any association that 1) raises its hand and identifies itself as such an association to the DOI, 2) has members who are policy/fire employees or dependents, and 3) elects its board of directors to operate within this unregulated environment. The basic concern is that these [associations] have evolved to the point of providing sophisticated insurance-like products, and are funding their promises to pay benefits in unsustainable ways. Future benefits reductions (after members have paid, but before the triggering event that entitles the member to benefits) is not a "financing" mechanism that would be acceptable with insurance, but is one of the tools these associations can use if they do not have adequate funds to meet all of their obligations. Another tool - increasing price on current members to pay for past members' benefits - risks chasing away current members, with a resulting disastrous impact on members who have expectations of near-term or further in the future benefits. In addition, at least with respect to some of these programs, monthly "premiums" being charged [] as low as 1/3 of what private insurers charge for comparable benefits. AB 1072 (Daly) Page 9 of ? AB 1072 calls for a [one]-time actuarial filing with the Insurance Commissioner so that a qualified, neutral analyst can evaluate the financial soundness of these associations, and make recommendations to the Legislature in the event it is determined that current law does not adequately protect the expectation of association members to receive the benefits they have been paying for. 2. Confidential, non-disclosable, non-discoverable information This bill would exempt actuarial opinions and all related information and materials submitted to the Insurance Commissioner (Commissioner) by a firemen's, policemen's, or peace officer's benefit and relief association (association) from disclosure under the California Public Records Act (CPRA), a subpoena, and civil trial discovery requests. a. CPRA confidentiality and non-disclosure The CPRA requires state and local agencies to make public records available for inspection by the public, with specified exceptions. (Gov. Code Sec. 6250 et seq.) The CPRA provides for the confidentiality and non-disclosure of numerous classes of information, including applications submitted by insurance companies to a state agency and actuarial information of life and disability insurers. (Gov. Code Secs. 6254(d)(1), 6276.28.) Proponents argue that the goal of this bill is to ensure that the benefits offered to, and paid for, by peace officers and firefighters are actually available when they need them. Proponents assert that the primary mechanism for carrying out this goal is to ensure that associations that self-insure long-term disability or long-term care coverage maintain appropriate reserves, which would include the requirement to use a certified actuary to assist in the determination of the reserve. Proponents assert that this bill would not regulate the associations on the same basis as insurance companies offering similar coverage, but, rather, the bill would provide a modest degree or regulation to ensure the fiscal soundness of the program and give the Commissioner authority to oversee the associations. This bill would provide that actuarial opinion materials required to be submitted to the Commissioner would not be AB 1072 (Daly) Page 10 of ? subject to disclosure pursuant to the CPRA because of the sensitive nature of the information and documents shared with the Commissioner. To protect the information submitted by the associations to the Commissioner, this bill would apply the existing confidentiality provisions that protect actuarial opinion information provided for insurance companies. b. Civil action discovery Under this bill, all actuarial opinion information, documents, and copies thereof obtained by or disclosed to the Commissioner as required under this bill would not be subject to subpoena, discovery, or be admissible as evidence in any private party civil action. Generally, all working papers, recorded information, documents, and copies thereof produced by, obtained by, or disclosed to the Commissioner or any other person in the course of an examination are given confidential treatment, are not subject to subpoena, and cannot be made public by the Commissioner or any other person. (Ins. Code Sec. 735.5(c).) Existing law protects various types of insurance documents submitted to the Commissioner from discovery or use as evidence in civil actions. (See, i.e., Ins. Code Sec. 923.6(f)(1) (insurer certification examination); Ins. Code Sec. 935.8 (own risk and solvency information); (Ins. Code Sec. 1215.8(a), (e) Insurance Holding Company System Regulatory Act information.) These protections from disclosure ensure the critical cooperation and full disclosure of insurers and affiliates who otherwise may be forced to seek protection under other law. Similarly, this bill would apply these confidentiality and non-disclosure provisions to actuarial opinion information submitted by associations. 3. Oppositions' concerns In opposition, the San Diego County Public Safety Retiree Medical Trust (SDCPSRMT), which is comprised of the members of the Deputy Sheriffs' Association of San Diego County, the San Diego County Probation Officers' Association, the San Diego County Supervising Probation Officers Association, and the San Diego County District Attorney Investigator's Association, argues that this bill would, in essence, eliminate the ability for public safety associations throughout the State to continue, or assume, the responsibility of providing their members with AB 1072 (Daly) Page 11 of ? reasonable and reliable benefits of which the members themselves have direct control over. Further, SDCPSRMT states that their public safety trusts are models of transparency and accountability with no documented financial issues or concerns. Additionally, the Los Angeles County Professional Peace Officers Association, the Sacramento County Deputy Sheriffs' Association, the Long Beach Police Officers Association, the Santa Ana Police Officers Association, and the California State Lodge, Fraternal Order of Police raise concerns that this bill would increase the operational costs if an actuarial opinion review is applied to non-profit benefit associations, which have been able to offer their members high quality benefits at a very competitive rate by keeping administrative costs to a minimum, and by rigorously pursuing statutory workers' compensation benefits that are available to public safety personnel in California. These groups argue that the associations have never failed to pay benefits to its members in the 40 plus years they have been in existence. However, these groups note that they would not object to a retrospective financial review of the long-term disability plans offered by associations, as long as the review focuses on whether the revenue and claims of the plan have been managed in compliance with existing and historical standards applied to such "pay as you go" long-term disability plans. Support : Anaheim Police Association; Madera Police Officers Association; Monterey County Probation Association; Oakland Police Officers Association; San Bernardino County Safety Employees' Benefit Association; Santa Monica Police Officers' Association; Shasta County Deputy Sheriff's Association; Simi Valley Police Officers' Association; Ventura County Deputy Sheriffs' Association Opposition : San Diego County Public Safety Retiree Medical Trust HISTORY Source : California Correctional Peace Officers Association Benefit Trust Fund; California State Firefighters' Association; Peace Officers Research Association of California Related Pending Legislation : SB 696 (Roth, 2015) would AB 1072 (Daly) Page 12 of ? establish a new method of calculating reserve requirements for various types of life and disability policies and contracts using a principle-based valuation that meets specified conditions and make confidential all information, documents, and copies thereof obtained by or disclosed to the Insurance Commissioner or any other person in the course of an examination or investigation regarding life and disability insurance reserve liabilities, and all information required to be reported to the Commissioner in support of reserve liability opinions. SB 696 would also exempt that information from disclosure under the California Public Records Act and provide that the information would not be subject to subpoena or discovery from the Commissioner or admissible into evidence in any private civil action if obtained from the Commissioner in any manner. Prior Legislation : AB 2366 (Bocanegra, 2014) would have authorized the Commissioner to receive and investigate formal written complaints made against a firemen's, policemen's, or peace officer's benefit and relief association that has been issued a certificate of authority, as specified, and would have authorized the Commissioner, after providing notice and an opportunity for a hearing, to suspend or rescind the certificate if a complaint cannot be resolved in a timely manner. AB 2366 was held without hearing in the Assembly Insurance Committee. Prior Vote : Senate Insurance Committee (Ayes 8, Noes 0) Assembly Floor (Ayes 79, Noes 0) Assembly Appropriations Committee (Ayes 17, Noes 0) Assembly Insurance Committee (Ayes 12, Noes 0) **************