BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 696 (Roth) - Insurance: principle-based valuation ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 5, 2015 |Policy Vote: INS. 7 - 0, JUD. 6 | | | - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 18, 2015 |Consultant: Maureen Ortiz | | | | ----------------------------------------------------------------- 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 ? 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 ? 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 ? 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. -- END --