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  







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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  








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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  








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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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