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
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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,
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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
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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
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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
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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.
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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.
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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
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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
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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
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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)
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