BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015 - 2016 Regular Session SB 696 (Roth) Version: April 14, 2015 Hearing Date: April 28, 2015 Fiscal: Yes Urgency: No TMW SUBJECT Insurance: principle-based valuation DESCRIPTION This bill would 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. This bill would make confidential all information, documents, and copies thereof obtained by or disclosed to the Insurance Commissioner (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. This bill would 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. This bill would also authorize the Commissioner to issue bulletins, adopt an accredited valuation manual, and develop and amend regulations to implement actuary declaration requirements. This bill would make those actions exempt from the Administrative Procedure Act. BACKGROUND The California Department of Insurance (CDI) participates in an insurance regulator accreditation program developed by the SB 696 (Roth) Page 2 of ? National Association of Insurance Commissioners (NAIC). This accreditation program provides uniformity among the member state insurance departments as well as consumer protections. Periodically, NAIC develops uniform insurance standards which are included in NAIC's model laws. Each member of the accreditation program must then adopt the model laws in order to maintain its accreditation. According to the NAIC, reserve calculations for life insurance have been unchanged for almost 150 years. Currently, insurers use a formula-based static approach to calculate reserves for products. However, insurance products have increasingly grown in complexity which led to a need for a new reserve method. The NAIC adoption of the Standard Valuation Law (SVL) in 2009 introduced a new method for calculating life insurance policy reserves. This new method, referred to as Principle-Based Reserving (PBR), replaces the current formulaic approach to determining policy reserves with an approach that more closely reflects the risks of the highly complex products. The improved calculation is expected to "right-size reserves," reducing reserves that are too high for some products and increasing reserves that are too low for other products. This bill would adopt the NAIC Model Standard Valuation Law and provide standards for the calculation of life and disability insurance policy reserves. This bill would also make the information received by or disclosed to the Insurance Commissioner required to be provided by life and disability insurers under this bill confidential and non-disclosable under the California Public Records Act, a subpoena, or discovery. This bill would also exempt bulletins, manuals, and emergency regulations, as specified, from the Administrative Procedure Act. This bill was heard by the Senate Insurance Committee on April 22, 2015, and passed out on a vote of 7-0. CHANGES TO EXISTING LAW Existing law governs the issuance of life and disability insurance and authorizes the Insurance Commissioner (Commissioner) to regulate those insurers. (Ins. Code Sec. 10110 et seq.) Existing law , the Standard Valuation Law, among other things, SB 696 (Roth) Page 3 of ? requires life and disability insurers to calculate the minimum standard for the valuation of policies and contracts using specified mortality tables approved by the Commissioner, sets forth the applicable interest rates, and establishes the reserve requirements for various types of life and disability policies and contracts. (Ins. Code Sec. 10489.1 et seq.) Existing law requires every life and disability insurer doing business in this state to annually submit the opinion of a qualified actuary as to whether the reserves and related actuarial items held in support of the policies and contracts specified by the Commissioner are computed appropriately, are based on assumptions that satisfy contractual provisions, are consistent with prior reported amounts, and comply with applicable state law. (Ins. Code Sec. 10489.15.) Existing law , the California Public Records Act (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 authorizes the Commissioner to issue a bulletin to provide tables of select mortality factors and rules for their use, rules concerning a minimum standard for the valuation of plans with nonlevel premiums of benefits, and rules concerning a minimum standard for the valuation of plans with secondary guarantees. That bulletin has the same force and effect, and may be enforced by the Commissioner to the same extent and degree, as regulations issued by the Commissioner. (Ins. Code Sec. 10489.94(a).) Existing law , the Administrative Procedure Act, governs the procedure for the adoption, amendment, or repeal of regulations by state agencies and for the review of those regulatory actions by the Office of Administrative Law. (Gov. Code Sec. 11340 et seq.) This bill would establish new life and disability insurance reserve liability requirements, as specified. This bill would require the Commissioner and life and disability insurance companies engaging in specified activities relating to the business of life insurance to incorporate the methodology SB 696 (Roth) Page 4 of ? employed by a specified manual of valuation instructions adopted by the National Association of Insurance Commissioners (NAIC) in making determinations relating to reserve requirements and the minimum standard of valuation for policies and contracts, as specified. This bill would require a life or disability insurance company to establish reserves using a principle-based valuation that meets specified conditions in that manual, including quantifying the benefits, guarantees, and funding associated with the contracts, and would require the company to develop and file with the Commissioner upon request, a principle-based valuation report. This bill would require a life or disability insurance company to submit mortality, morbidity, policyholder behavior, or expense experience and other data as prescribed in the valuation manual. This bill would provide that documents, materials, or other information in the possession or control of the Department of Insurance that are a memorandum in support of a reserves liability opinion, and any other material provided by the company to the Commissioner in connection with the memorandum, shall be confidential by law and privileged, and not subject to the CPRA, not subject to subpoena, and not subject to discovery or admissible in evidence in any private civil action. This bill would prohibit the Commissioner or any person who received documents, materials, or other information while acting under the authority of the Commissioner from testifying in any private civil action concerning any confidential documents, as defined, materials, or information. This bill , in order to assist in the performance of the Commissioner's duties, would authorize the Commissioner to share confidential and privileged documents, materials, or other information, with other state, federal, and international regulatory agencies, with the NAIC and its affiliates and subsidiaries, and with state, federal, and international law enforcement authorities, provided that the recipient agrees to maintain the confidentiality and privileged status of the document, material, or other information. This bill would authorize the Commissioner to receive SB 696 (Roth) Page 5 of ? confidential and privileged documents, materials, or information, from the NAIC and its affiliates and subsidiaries, and from regulatory and law enforcement officials of other foreign or domestic jurisdictions, and requires the Commissioner to maintain as confidential or privileged any document, material, or information received with notice or the understanding that it is confidential or privileged under the laws of the jurisdiction that is the source of the document, material, or information. This bill would provide that a waiver of any applicable privilege or claim of confidentiality in the documents, materials, or information shall occur as a result of disclosure to the Commissioner or as a result of sharing as authorized. This bill would provide that a memorandum in support of the opinion, and any other material provided by the company to the Commissioner in connection with the memorandum, may be subject to subpoena for the purpose of defending an action seeking damages from the actuary submitting the memorandum by reason of an action, as specified. This bill would authorize the Commissioner to issue an order adopting the valuation manual adopted by the NAIC, and that order would not be subject to the Administrative Procedure Act. This bill would authorize the Commissioner to develop and amend regulations to implement or modify relating to written declarations of confidentiality required to be signed by actuaries retained or hired by the Commissioner. This bill would deem the initial adoption of those regulations to be an emergency and necessary in order to address a situation calling for immediate action to avoid serious harm to the public peace, health, safety, or general welfare. This bill would exempt all bulletins adopted by the Commissioner pursuant to the Standard Valuation Law from review under the Administrative Procedure Act. This bill contains legislative findings and declarations that, in order to protect proprietary information, it is necessary to enact legislation to ensure that information provided pursuant to the Standard Valuation Law be kept confidential. COMMENT SB 696 (Roth) Page 6 of ? 1. Stated need for the bill The author writes: Life insurers offer a variety of life insurance products that involve levels of complexity and risk different from traditional "whole life products." Actuarially, an insurance product that poses less risk to the insurer should require lower reserve levels, but the existing [Standard Valuation Law (SVL)] will require the insurer to set aside more assets than necessary. Applying inappropriate reserving requirements may: Cause higher premium for some types of products. Adversely impact investment income (that could be used to offset premium) since reserves must be held as liquid assets. Discourage, impede, or eliminate the development of new products. Over-reserving also incentivizes insurers to use riskier, but legal means, to work around the higher requirements. Insurers may use captive insurers to avoid "perceived reserving redundancies." In these transactions, an insurer cedes risk another insurer (called reinsurance), but the other reinsurer is actually owned by the insurer and may be domiciled in a jurisdiction with less rigorous regulation. These methods take advantage of weaknesses in the inter-state insurance regulatory system (limited under federal law) and make it more difficult for the regulator to monitor insurance holding company systems that use these methods. This bill would apply a dynamic reserving method for new life insurance policies based on a model law adopted by the National Association of Insurance Commissioners (NAIC) called "principle-based reserving" (PBR). PBR replaces the current approach based on market-wide actuarial data with an individualized approach that more closely reflects the risks of modern life insurance products and the individual experience of the insurer. PBR is intended to more accurately and precisely determine the reserving requirements according to the individual characteristics of each product, incorporate data on policyholder behavior (such as policy lapse rates) from an insurer's own experience, and reflect random variables. For example, PBR would allow an insurer to use life expectancy data from its own experience rather than rely on standardized mortality tables. SB 696 (Roth) Page 7 of ? PBR requires insurers to submit detailed modeling and analysis, along with proposed reserves, to the Insurance Commissioner (Commissioner). Insurers must follow a Valuation Manual (VM) which establishes standards and serves as the cornerstone of calculating reserves. The VM incorporates a review and updating process to ensure ongoing evaluation of the effectiveness of the PBR methodology. 2. Confidential, non-disclosable, non-discoverable information This bill would exempt information submitted to the Commissioner, as required under the SVL, 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 Secs. 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.) According to the author, this bill would provide that materials submitted under the PBR process would not be 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 private insurance companies to the Commissioner pursuant to SVL, this bill would reaffirm the existing confidentiality provisions for that information. b. Civil action discovery Under this bill, all information, documents, and copies thereof obtained by or disclosed to the Commissioner as required under the SVL in the course of an examination or investigation or reported as required under existing law would not be subject to subpoena, discovery, or admissible as evidence in any private party civil action. SB 696 (Roth) Page 8 of ? The author argues that the additional protections in this bill "against disclosure to third parties helps to ensure the critical cooperation and full disclosure of insurers and affiliates who otherwise may be forced [to] seek protection under other law. However, these protections only apply to materials obtained by the [Commissioner] pursuant to the provisions of this bill. This bill would not affect the ability of a litigant to obtain information or documents through the normal discovery process." 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(e) Insurance Holding Company Regulatory Act information.) By extending these confidentiality and non-disclosure provisions in the SVL, this bill would bring California into conformity with NAIC requirements and maintain California's NAIC accreditation. 3. Waiver of Administrative Procedure Act The Administrative Procedure Act (APA) establishes rulemaking procedures and standards for state agencies in California. The requirements set forth in the APA are designed to provide the public with a meaningful opportunity to participate in the adoption of state regulations and to ensure that regulations are clear, necessary, and legally valid. In emergency situations, where the adoption (or repeal) of a regulation is necessary for the immediate preservation of the public peace, health, or safety, an agency is not required to comply with all of the public participation requirements of the APA. (See Gov. Code Sec. 11346.1.) In those situations, the agency is required to take additional action to ensure transparency and subsequent participation by the public. The APA is particularly important because many state agencies effectively hold legislative, executive, and judicial power over SB 696 (Roth) Page 9 of ? the industries they regulate. Thus, the APA represents the basic level of protection that individuals and entities can expect with respect to rulemaking by state agencies, and agencies should not be able to exempt themselves from its requirements without good justification. The APA prohibits state agencies from issuing, utilizing, enforcing, or attempting to enforce any guideline, criterion, bulletin, manual, instruction, order, standard of general application, or other rule, which is a regulation, unless that document has been adopted as a regulation and field with the Secretary of State. (Gov. Code Sec. 11340.5(a).) Further, pursuant to the requirements of the APA and the Insurance Code, an emergency regulation adopted by the Commissioner is subject to the following: at least 5 working days prior to submission of the emergency regulation to the Office of Administrative Law, the Commissioner shall mail a notice of proposed emergency action to every person, group, or association who had previously filed a request for notice of regulatory actions with the commissioner; and the notice of proposed emergency action shall include the following: o a description of the problem and the necessity for the regulation; o a description of the justification for adoption of the regulation as an emergency regulation; and o a copy of the text of the proposed emergency regulation. (Gov. Code Sec. 11346.1; Ins. Code Sec. 12921.7.) In addition to the APA, existing law provides that the acts and orders of the Commissioner are subject to review, or other action by a court of competent jurisdiction, as is permitted or authorized by law. (Ins. Code Sec. 12940.) Yet, this bill would authorize the Commissioner to issue bulletins regarding the SVL, issue an order adopting the Valuation Manual (VM) approved by the NAIC, and adopt emergency regulations relating to the written confidentiality requirements for actuaries retained or hired by the Commissioner. This bill would also exempt all SVL bulletins adopted by the Commissioner from the APA. The author states that sections of the bill permit the Commissioner to issue binding rules without compliance with the SB 696 (Roth) Page 10 of ? APA, and this bill would conform to current practice by continuing to allow the Commissioner to adopt bulletins related to industry-wide assumptions. Further, the author contends the Commissioner is permitted to "ratify" the adoption of a revised operating VM by issuing an order recognizing that certain procedural elements have been satisfied by the NAIC; in the absence of applicable standards prescribed by the VM, this bill would also require the insurer to comply with minimum valuation standards established by regulation or bulletin. The author argues that this bill would provide a blanket exception to all bulletins issued pursuant to SVL, but many of these bulletins are already in existing law and are frequently used to establish minimum valuation assumptions, such as life expectancies, by recognizing instruments developed using industry-wide data, such as mortality tables adopted by the NAIC. The author contends that most of the bulletins are already provided for in existing law and exemption from the APA reflects existing practice. Although the Insurance Code provides for the promulgation of emergency rules by the Commissioner, those emergency rules are subject to the APA and expire after 180 days. (See Ins. Code Secs. 674.5, 12693.75.) Further, the Insurance Code does not exempt bulletins, orders, or manuals from the APA issued by the Commissioner. The author offers the following amendments to remove the APA exemptions from the bill and make two technical corrections: Author's amendments : 1. On page 36, in line 34, strike "Commissioner" and insert "commissioner" 2. On page 37, in line 8, after "Insurance" insert "Policies" 3. On page 38, in line 27, strike "The order" and strike lines 28 and 29. 4. On page 47, in lines 25 through 27, strike "Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, any" and insert "Any" 5. On page 47, in line 28, after "shall" insert "be adopted or amended in accordance with the Administrative Procedure Act (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and" 6. On page 47, in lines 28 through 32, strike "until amended or repealed by the department. All bulletins SB 696 (Roth) Page 11 of ? adopted by the commissioner pursuant to this article shall not be subject to Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code." and insert "for 180 days. Support : None Known Opposition : None Known HISTORY Source : Association of California Life and Health Insurance Companies; California Department of Insurance Related Pending Legislation : None Known Prior Legislation : AB 1234 (Levine, Chapter 448, Statutes of 2014) supplemented the Insurance Holding Company Regulatory Act provisions related to the confidential treatment of materials submitted to the Insurance Commissioner. AB 584 (Perea, Chapter 238, Statutes of 2013) enacted the Own Risk and Solvency Assessment provisions and provided confidential treatment of materials submitted to the Insurance Commissioner and exemption of those materials from public disclosure under the California Public Records Act. SB 1448 (Calderon, Chapter 282, Statutes of 2012) adopted the National Association of Insurance Commissioners revisions under California's Insurance Holding Company System (IHCS) Regulatory Act, and provided that all information required to be reported to the Commissioner in IHCS registration documents, shall be kept confidential, shall not be subject to disclosure pursuant to the California Public Records Act CPRA and shall not be subject to subpoena. Prior Vote : Senate Insurance Committee (Ayes 7, Noes 0) ************** SB 696 (Roth) Page 12 of ?