BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 696|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: SB 696
Author: Roth (D)
Amended: 5/5/15
Vote: 27
SENATE INSURANCE COMMITTEE: 7-0, 4/22/15
AYES: Roth, Gaines, Berryhill, Hernandez, Liu, Mitchell,
Wieckowski
NO VOTE RECORDED: Hall
SENATE JUDICIARY COMMITTEE: 6-0, 4/28/15
AYES: Jackson, Anderson, Hertzberg, Leno, Monning, Wieckowski
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/28/15
AYES: Lara, Beall, Hill, Leyva, Mendoza, Nielsen
NO VOTE RECORDED: Bates
SUBJECT: Insurance: principle-based valuation
SOURCE: Association of California Life & Health Insurance
Companies
California Department of Insurance
DIGEST: This bill replaces the current method of calculating
reserves for some types of life insurance products, including
whole and term life insurance policies, with a new method known
as Principle-Based Reserving applicable to contracts issued on
or after the effective date, as specified.
SB 696
Page 2
ANALYSIS:
Existing law:
1) Requires every life insurer doing business in California to
annually submit to the Insurance Commissioner (IC) 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.
2) Requires insurers to use a prescribed formula, specified
mortality tables approved by the IC, and method for
calculating the applicable interest rates for the purpose of
determining reserves required by law for various types of
life insurance contracts.
3) Sets minimum benefit values when policies are surrendered or
lapsed (referred to as "nonforfeiture benefits").
This bill:
1) Requires the IC and life insurers to incorporate a new
method known as Principle-Based Reserving (PBR) for
calculating reserves that employs a specified manual of
valuation instructions, known as the Valuation Manual (VM),
as adopted by the National Association of Insurance
Commissioners (NAIC).
2) 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).
SB 696
Page 3
3) Requires insurers to calculate reserves using PBR for
policies issued after the effective date of the VM.
4) Establishes a process for amending the VM and for
determining the effective date of the VM.
5) Requires that the VM include minimum valuation standards;
establishes criteria for which method applies to particular
policies or contracts and specifically which ones are subject
to PBR; establishes rules on how to treat assumptions of risk
for which the company has little to no control; imposes
procedures for corporate governance and oversight of the
actuarial functions; and sets standards for products not
subject to PBR.
6) Requires reserves subject to PBR to reflect potentially
unfavorable condition and describes appropriate sources of
data acceptable when establishing assumptions not otherwise
prescribed in the VM.
7) Requires an insurer to annually submit to the IC 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.
8) Requires a company to establish reserves subject to PBR that
meet specified conditions in the VM and requires the insurer
to develop and file with the IC upon request, a
principle-based valuation report that complies with standards
prescribed in the VM.
9) Requires an insurer to submit mortality, morbidity,
policyholder behavior, or expense experience, and other data
as prescribed in the VM.
SB 696
Page 4
10)Authorizes the IC 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 opinion on compliance with reserving requirements.
11)Authorizes the IC to require an insurer to change any
assumption or method necessary to comply with the VM or
applicable law, and adjust the reserves as required.
12)Authorizes the IC to take other disciplinary action as
permitted by all other applicable laws.
13)Exempts specified documents and information, with some
exceptions, that are submitted under the PBR process from
subpoena, disclosure under the Public Records Act, civil
discovery as applied to the IC, and prohibits documents and
information from being admitted into evidence in a civil
proceeding.
14)Authorizes the IC to hire and assign department staff,
including one exempt position, and retain outside actuaries
and other consultants, to assist in the implementation of
PBR.
15)Establishes an annual assessment on each participating
insurer, effective when this bill goes into effect, that is
capped according to the insurer's volume of business.
16)Coordinates the assumptions used to determine nonforfeiture
benefits with those used to determine reserves under PBR when
applicable.
17)Makes numerous, clarifying, technical, and stylistic
changes.
SB 696
Page 5
Comments
In order to make sure that life insurers have sufficient funds
to pay future claims, they are required by law to set aside
sufficient assets, "reserves," to pay anticipated liabilities.
It is not necessary to set aside funds equivalent to the entire
life insurance benefit, but enough to ensure payment of future
claims given the probabilities related to claims, investment
income on the assets, future premium to be received, reinsurance
agreements (where one insurer assumes risks from another
insurer) and other factors. Existing law establishes methods
required by law to calculate reserves that apply in a similar
manner to all insurers and most products, and that operates on
standardized assumptions, such as life expectancies established
by mortality tables developed using industry-wide data and
formulas used to anticipate investment income. The current
method has worked well for many products, especially traditional
whole life products with basic terms.
However, life insurers offer a many types of products that
involve a variety of complexity and different risks. For
example, term life insurance policies expire after a specified
period and appeal to consumers who are more likely to give up
the policy as they get older; they also cost less for the same
death benefit because they pose less risk of loss to the
insurer. Insurers and regulators recognize that the current
method does not accurately measure reserving needs of some
products and results in excessive reserving for some products
and under-reserving for others.
This bill codifies the PBR, a new method defined in the Model
Standard Valuation Law adopted by the NAIC, intended to
determine more accurate reserving requirements. The language
lays out a framework but the actual method is structured
according to a detailed manual, the VM. The most current
version of the VM was adopted by the NAIC in December of 2012.
Under PBR, the insurer proposes a valuation method and reserve
requirement based on its experience and other factors specific
to the product and insurer. The insurer's proposal would
include detailed modelling and data that has been run through
SB 696
Page 6
numerous simulations reflecting a variety of economic
conditions.
The IC must review and approve the model, figures, data, and
assumptions. Because PBR is much more labor intensive for the
Department of Insurance (CDI), this bill establishes an
assessment on each participating insurer (capped according to
the insurer's volume of business) to offset the additional
workload. SB 696 also empowers the IC to hire independent
actuaries for additional analysis at the insurer's expense,
require insurers to change assumptions or methods inconsistent
with the VM or applicable law, and establish specific valuation
requirements when needed.
Two studies, one sponsored by the NAIC and one by the American
Council of Life Insurers suggest that PBR would lower reserves
for term life insurance, have mixed results for universal life
insurance with secondary guarantees (ULSG), and would not affect
many other types of products. (ULSG are sophisticated policies
that provide the policyholder flexibility to adjust premium
amount and frequency, as well as the death benefit, but also
contain a lapse protection feature.)
States would not implement PBR until at least 42 of the 55 NAIC
jurisdictions (including Guam, Puerto Rico, etc.) representing
75% of total U.S. premium adopt the NAIC model. At least 26
jurisdictions have adopted the model act.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee:
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 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
SB 696
Page 7
valuation and specifies that this individual will be exempt from
the state civil service system, thereby authorizing the CDI 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 CDI 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.
SUPPORT: (Verified 5/29/15)
Association of California Life & Health Insurance Companies
(co-source)
California Department of Insurance (co-source)
American Council of Life Insurers
Pacific Life Insurance Company
United Services Automobile Association
OPPOSITION: (Verified5/29/15)
None received
ARGUMENTS IN SUPPORT: The Association of California Life and
Health Insurance Companies and the American Council of Life
Insurers state that PBR would provide a uniform approach to
reserve calculations that more realistically reflects the risks,
variables, and changes in consumer behavior that affect the
value of cash reserve calculations. This in turn leads to more
flexible product designs, greater consumer choice, and could
improve pricing.
Prepared by:Hugh Slayden / INS. / (916) 651-4110
5/31/15 9:04:41
SB 696
Page 8
**** END ****