BILL ANALYSIS Ó
AB 1072
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CONCURRENCE IN SENATE AMENDMENTS
AB
1072 (Daly)
As Amended August 19, 2015
Majority vote
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|ASSEMBLY: | 79-0 |(May 11, 2015) |SENATE: |37-0 |(September 1, |
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Original Committee Reference: INS.
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.
The Senate amendments:
1)Limit the number of associations required to comply with the
bill to those that provide long term disability and long term
care benefits.
2)Exempt an association from the bill if the association merely
markets policies that are issued by licensed insurance
companies.
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3)Add a confidentiality provision, similar to current law that
governs insurance companies that file similar information with
the commissioner, to protect against inappropriate disclosure
of proprietary financial information.
4)Require associations that provide self-funded benefits to
members to include a disclosure statement in its contracts
warning members that the promised benefits are not subject to
state regulation or guarantees.
5)Clarify the specifics of what must be included in the
actuarial opinion and related documents.
EXISTING LAW:
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
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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 Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS:
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. The 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."
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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 Assembly employees through
AFLAC) and long term care benefits (very similar to the long
term care coverage available to Assembly employees through the
California Public Employees Retirement System (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)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 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
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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.
4)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 the 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 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
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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. The 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 the 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.
5)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 trust's own Web site, for comparable benefit
packages, pricing for the trust and other LTC providers is as
follows:
a) Trust: $63 per month (maximum premium of $30,240)
b) CalPERS: $170 per month
c) Genworth: $262 per month
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d) 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.
6)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 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.
Analysis Prepared by:
Mark Rakich / INS. / (916) 319-2086FN: 0001834
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