BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 696 (Roth) - Insurance: principle-based valuation
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|Version: May 5, 2015 |Policy Vote: INS. 7 - 0, JUD. 6 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 18, 2015 |Consultant: Maureen Ortiz |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 696 establishes a new method of calculating
reserve requirements for life insurance products,
Principle-Based Reserving (PBR), for policies issued on or after
the effective date.
Fiscal
Impact:
CDI estimates administrative costs of $389,000 in FY 2015-16;
$1.6 million in FY 2016-17; and $1.0 million in FY 2017-18 and
ongoing (Special Fund)
The Department of Insurance (CDI) estimates the above costs for
promulgating regulations, and for the hiring of additional staff
to review and approve all participating companies' detailed
modeling. In addition, SB 696 authorizes the CDI to hire an
expert in principle-based valuation and specifies that this
SB 696 (Roth) Page 1 of
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individual will be exempt from the state civil service system,
thereby authorizing the department to fix salary and
compensation without approval of the Department of Human
Resources. A preliminary estimate for total compensation is
approximately $300,000.
SB 696 authorizes the department to annually assess all insurers
to defray costs incurred preparing to implement, and
implementing, principle-based valuation including department
salaries and overhead, and consultant fees and expenses. The
assessment will be set by an aggregate assessment in tiers based
on the insurers annual premiums, and will total at least $1
million annually.
Background: Existing law sets minimum benefit values when policies are
surrendered or lapsed. It also requires every life insurer
doing business in California to annually submit to the Insurance
Commissioner the opinion of a qualified actuary as to whether
the "reserves" (assets set aside to pay future claims) are
calculated appropriately, based on assumptions that satisfy
contractual provisions, consistent with prior reported amounts,
and in compliance with applicable state law.
Insurers are currently required to calculate reserves according to a
statutory method known as the "Net Premium Reserve Method," using a
formula, specified mortality tables approved by the commissioner,
and a method for calculating the applicable interest rates, for the
purpose of determining reserves required by law for various types of
life insurance contracts.
Proposed Law:
In part, SB 696 does the following:
1. Requires the commissioner and life insurers to incorporate
a new methodology known as Principle-Based Reserving that
employs a specified manual of valuation instructions, known
as the Valuation Manual (VM), 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
SB 696 (Roth) Page 2 of
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specified.
2. Requires insurers to calculate reserves using PBR for
policies issued after the effective date of the VM.
3. Requires an insurer to annually submit to the commissioner
the opinion of a qualified actuary as to whether the
reserves are calculated appropriately and that the opinion
be governed by the VM and other applicable standards.
4. Requires a company to establish reserves subject to PBR
that meet specified conditions in the VM, including
quantifying the benefits, guarantees, and funding associated
with the contracts, and requires the company to develop and
file with the IC upon request, a principle-based valuation
report.
5. Provides that the VM goes into effect January 1 the year
after it has been adopted by the NAIC by an affirmative vote
of at least 42 members, or three-fourths of the members
voting, whichever is greater, so long as it was adopted by
July 1 of the preceding year.
6. Provides that the PBR goes into effect when enacted by
states representing greater than 75 percent of the direct
premiums written and at least 42 of the 55 jurisdictions
(including U.S. states and some territories).
7. Authorizes the commissioner to engage a qualified actuary,
at the expense of the insurer, to perform an actuarial
examination of the insurer and provide an opinion on the
appropriateness of any reserve assumption or method used, or
to review and provide an insurer's opinion on compliance
with reserving requirements.
8. Authorizes the commissioner to hire and assign department
staff, including one exempt position, and retain
SB 696 (Roth) Page 3 of
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nondepartmental actuaries and other consultants, to assist
in the implementation of PBR.
9. Establishes an annual assessment on each participating
insurer, effective when the bill (not PBR) goes into effect,
which is capped according to the insurer's volume of
business, to pay for additional staffing and resources to
implement PBR.
10. Makes numerous, clarifying, technical, and stylistic
changes.
11. Makes legislative findings regarding the need to protect an
insurer's proprietary information and keep information
received by commissioner confidential.
Staff
Comments: The Principle-Based Reserving method for calculating
reserves will not be implemented until at least 42 of the 55
jurisdictions of the U.S. (including Guam, U.S. Virgin Islands,
etc.) representing 75% of total U.S. premium adopt the NAIC
model. There are 25 states which have already adopted the model
act. Once PBR reaches the threshold, the changes will be
implemented over approximately three years and only for new
business. Because of its market share, California's
participation is essential for implementation of PBR nationally.
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