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
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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
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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
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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;
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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
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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
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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.
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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.
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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
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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
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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
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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)
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