BILL ANALYSIS Ó
SB 696
Page 1
Date of Hearing: July 14, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
696 (Roth) - As Amended July 2, 2015
As Proposed to be Amended
SENATE VOTE: 38-1
SUBJECT: INSURANCE: PRINCIPAL-BASED VALUATION
KEY ISSUE: SHOULD INFORMATION DISCLOSED TO THE INSURANCE
COMMISSIONER IN AN INSURANCE COMPANY'S PRINCIPLE-BASED VALUATION
REPORT BE SHIELDED FROM DISCOVERY OR ADMISSIBILITY IN A PRIVATE
CIVIL ACTION AND FROM DISCLOSURE UNDER THE PUBLIC RECORDS ACT?
SYNOPSIS
This bill, as proposed to be amended, seeks to permit life
insurers and the Insurance Commissioner (the Commissioner) to
use a new methodology, known as principle-based reserving (PBR),
for determining the amount of reserves required for some types
of life insurance policies. This method is based on a model law
developed by the National Association of Insurance Commissioners
(NAIC). Currently the calculation method for life insurance
reserves is located in the Standard Valuation Law, a standard
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that was originally designed for whole life insurance policies.
However, there are other forms of life insurance policies that
involve various forms of complexities and risks that differ from
those contained in whole life policies. For example, term life
policies expire after a certain term of years instead of an
entire lifetime and have been found to be an appealing
alternative to consumers who do not want the terms offered by a
whole life policy. According to the sponsors, PBR allows for a
more accurate and precise determination of the required reserves
based on the characteristics of the individual life insurance
policy.
In order for PBR to take effect, at least 42 states
(representing at least 75% of total U. S. premiums) must adopt
it. Currently, 29 states have adopted PBR, but New York has
rejected the PBR methodology in favor of a modified version of
the current statutory formula. This means that, size-wise,
California's adoption of the method is required in order for the
method to become effective in other states, and that is what
this bill does. Specifically, the bill authorizes the
Commissioner to assess life insurers for the cost of
implementing PBR and requires insurers to submit detailed
modeling, data, and analysis to justify their proposed reserves
specific to a particular insurance product to the Commissioner
for review and approval. The information in the report to the
Commissioner must include factors such as future economic
conditions, mortality, policyholder behavior and other financial
variables. This bill adds provisions to hold a qualified
actuary liable for negligent and tortious acts with regards to
PBR and allows the Commissioner to provide for disciplinary
actions against an insurance company or a qualified actuary in
regulations that the bill allows the Commissioner to develop as
emergency regulations. This bill also excludes a PBR report
from public disclosure or discovery in any private civil action
if obtained from the Commissioner, unless the information is
used in an action against an actuary, in a public hearing, or is
released by the insurer to the media. The amendments clarify
that the bill's provisions would not affect the ability of the
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public to obtain the information that is contained in the report
to the Commissioner from the insurer through the normal
discovery process, which is consistent with how similar reports
are available today. This bill is co-sponsored by the
California Department of Insurance (CDI) and the Association of
California Life and Health Insurance Companies. This bill has
no known opposition.
SUMMARY: Authorizes life insurers and the Insurance
Commissioner to use a new methodology, known as principle-based
reserving to calculate the reserves required for life insurance
policies and increases confidentiality of newly required
reports. Specifically, this bill:
1)Provides that PBR only applies to policies issued on or after
PBR's effective date. Provides that PBR only applies to
non-forfeiture benefits on policies issued on or after PBR's
effective date.
2)Requires all life insurers to annually submit an actuarial
analysis of the company's reserves based on the Valuation
Manual (VM) adopted by the NAIC.
3)Provides that future changes to the VM shall become effective
on January 1 of the year following its adoption by NAIC and
the issuance of an order adopting the changes by the
Commissioner.
4)Permits the Commissioner to conduct an independent actuarial
analysis of a life insurance company's reserves if the company
fails to submit one or if the Commissioner finds the submitted
analysis to be unacceptable. Permits the Commissioner to
conduct the actuarial examination, at the insurer's expense,
of a life insurer's reserves, reserve assumptions, and reserve
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methodology.
5)Permits the Commissioner to adopt regulations establishing the
PBR valuation method, including a process to discipline
actuaries and insurers for misconduct related to the insurer's
actuarial opinion supporting the insurer's reserving under
PBR, as emergency regulations for a period of 180 days.
6)Provides that documents and information provided to the
Commissioner as part of the actuarial analysis of reserves,
assets supporting reserves and the opinion of the actuary of
whether the reserves are sufficient to support the companies'
policies and contracts are confidential and not subject to
disclosure under the California Public Records Act, subpoena,
or discovery from the Commissioner, unless the information is
to be used in a private civil action against the actuary, the
company cites the information in a public hearing, in
marketing materials, or to the media.
7)Provides the Commissioner with access to the confidential
materials in the actuarial memorandum and supporting documents
as necessary to perform his or her official duties. Permits
the Commissioner to share documents and information related to
the actuarial analysis with other regulators, the American
Academy of Actuaries, and the NAIC if the recipient agrees to
maintain confidentiality.
8)Provides that if the VM does not address a specific product or
does so in a manner in conflict with California law, the
insurer must comply with the minimum reserve requirements
established by the Insurance Code or by regulations and
bulletins issued by the Commissioner.
9)Permits the Commissioner to require a life insurer to change
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any reserve assumption or methodology that, in the
Commissioner's opinion, is necessary to comply with California
law or the VM. Requires a life insurer to subsequently adjust
reserves as required by the Commissioner.
10)Permits a life insurer using PBR to consider the particular
experience of its insureds, if that experience is
substantiated by credible statistical evidence, when
determining the level of reserves it is required to maintain.
11)Requires a life insurer to share mortality, morbidity, policy
holder behavior, or expense experience data with the
Commissioner as specified in the VM.
12)Permits the Commissioner to hire one subject matter expert,
exempt from the civil service, to lead the implementation of
PBR and permits the Commissioner to set the salary for that
position without approval of the Department of Human
Resources.
13)Permits the Commissioner to assess life insurers for the cost
of implementing PBR, based on the dollar value of life
insurance premiums collect by each insurer.
14)Requires that actuaries engaged by the Commissioner maintain
confidentiality, be free of any conflicts of interest, and
disclose potential conflicts of interest.
15)Provides that an actuary providing an opinion under PBR is
liable for his or her negligence or any other tortious act.
16)Provides that PBR takes effect on January 1 of the year
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following the first July 1 after PBR is adopted by at least 42
of the 55 jurisdictions within the National Association of
Insurance Commissioners (NAIC) representing 75% of the
premiums for life, health, and accident insurance policies
collected in all states and U.S. territories, provided that in
order for PBR to become effective in California, the
Commissioner must first provide a letter to the Insurance
Committees of the Legislature certifying that adequate funding
has been appropriated by the Legislature and that all other
resources are available and sufficient to implement PBR. The
certification letter must be posted to the CDI Internet Web
site immediately after being submitted to the Legislature.
17)Makes numerous technical and clarifying changes to the
Insurance Code.
EXISTING LAW:
1)Authorizes the Commissioner to regulate the insurers of life
and disability insurance. (Insurance Code Section 10110 et
seq. Unless stated otherwise, all further references are to
that code.)
2)Provides that the Standard Valuation Law 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.
(Section 10489.1 et seq.)
3)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
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assumptions that satisfy contractual provisions, are
consistent with prior reported amounts, and comply with
applicable state law. (Section 10489.15.)
4)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 non-level 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. (Section
10489.94(a).)
5)Authorizes 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.
(Government Code Section 11340 et seq.)
6)Provides that the people have a right of access to information
concerning the conduct of the people's business and the right
of access to public records, which must be open to public
scrutiny. Any limits on the people's right of access must be
adopted with findings demonstrating the interest protected by
the limitation and the need for protecting that interest.
(Cal. Const., art. I, Section 3.)
7)Requires, generally, that records maintained by public
agencies are to be accessible to the public. (Government Code
Section 6250 et seq.)
8)Authorizes an exemption from public disclosure for
applications filed with the state agency responsible for
regulation or supervision of insurance companies. (Government
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Code Section 6254(d)(1).)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: National Association of Insurance Commissioners and
its Model Laws. The NAIC is the regulatory support organization
created by and composed of the chief insurance regulators from
the 50 states, the District of Columbia and five U.S.
territories (in California, the chief insurance regulator is the
Commissioner). The NAIC establishes standards and best
practices, conducts peer reviews, and coordinates regulatory
oversight by insurance commissioners in the U.S. NAIC is a key
part of the national system of state-based insurance regulation.
NAIC's primary mission is to promote uniform practices amongst
states in regulating multi-state insurers. To support this
effort, NAIC maintains an insurance regulator accreditation
program and develops uniform standards known as Model Laws. The
Model Laws are intended to provide inter-jurisdictional
uniformity and cooperation among regulators in a manner that
builds in quality control and allows one jurisdiction to
comfortably rely on another NAIC-accredited jurisdiction
because, by statute, the regulatory processes and standards
applied are substantially similar. Additionally, NAIC performs
an on-site accreditation review of each insurance regulator at
least every 5 years. An insurance regulator's accreditation
status is dependent on its adoption of statutes and regulations
that align with NAIC Model Laws.
Existing Method of Calculating Reserves for Life Insurance
Policies in California. Existing law requires life and
disability insurers to set aside reserves for their existing
insurance policies and contracts. In calculating the minimum
standard for the valuation of policies and contracts, the
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insurer must use specified mortality tables that have been
approved by the Commissioner. (Section 10489.94(a).) The
Standard Valuation Law sets forth the applicable interest rates,
and establishes the reserve requirements for various types of
life and disability policies and contracts. (Section 10489.1 et
seq.) Insurers calculate the required reserves for their
existing policies and then submit to the Commissioner an annual
report with the opinion of a qualified actuary as to whether the
reserves held to support the policies and contracts are:
calculated accurately, based on assumptions that meet
contractual provisions, consistent with prior reported amounts,
and comply with state law. (Section 10489.15.) This bill seeks
to authorize a new method of calculating reserves for life
insurers and the Commissioner.
According to the author:
In order to make sure that life insurers will be able to
fulfill their contractual obligations, they are required to
set aside assets or "reserves" dedicated to payment of
anticipated claims. It is not necessary to set aside funds
dollar-for-dollar, but enough to ensure payment of future
claims according to the probability of losses, anticipated
premium and investment income, reinsurance agreements
(where one insurer assumes risks from another insurer) and
other factors. For life insurers, the formula used to
determine the value of those reserves is set forth in the
Standard Valuation Law (SVL) which reflects an approach
originally designed for whole life insurance policies and
utilizes market-wide standards and statutorily established
assumptions.
But life insurance products have evolved far beyond whole
life products and involve varying degrees of complexity and
risk. Actuarially, an insurance product that poses less
risk to the insurer should require lower reserve levels,
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but the existing formulaic approach does not always take
that into account. For some products, existing law
requires life insurers to set aside higher reserves than
necessary for some products and too little for others.
Applying inappropriate reserving requirements may cause
higher premium for some types of products and discourage or
eliminate the development of new products.
New Method of Calculating Reserves. This bill, co-sponsored by
the CDI and the Association of California Life and Health
Insurance Companies, authorizes life insurers and the
Commissioner to use a new methodology, known as principle-based
reserving (PBR), for determining the amount of reserves required
for some types of life insurance policies. This method is based
on a model law developed by NAIC. According to the NAIC, the
adoption of the SVL in 2009 introduced a new method for
calculating life insurance policy reserves. The Valuation
Manual (the manual of valuation instructions adopted by NAIC)
was adopted by a supermajority of NAIC members in December 2012,
paving the way for states to begin adopting revisions to the SVL
in their legislative sessions. The Valuation Manual begins the
process of revising reserving requirements to meet the need of
the various insurance products that are available in today's
marketplace, by establishing calculation methods for reserves
required to be held on different types of life insurance
policies. This bill replaces the current "one size fits all"
approach to determining policy reserves for life insurance
policies with the PBR approach that, according to the sponsors,
more closely reflects the risks of highly complex life insurance
products. For example, term life policies expire after a
certain term of years instead of the entire lifetime of the
insured, and have, according to the sponsors, been found to be
an appealing alternative to consumers who do not want the terms
offered by a whole life policy. The reserves required for whole
life and term life, argue the sponsors, should be different
because the life term of the policy is calculated differently by
insurers due to several factors such as risk, life span, and
anticipated payouts. However, under the existing valuation
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methods, they are calculated in the same manner. According to
the NAIC, PBR calculations are expected to be more exacting, and
will reduce the chance of reserves being too high for some
products or too low for others.
Once at least 42 states (a supermajority) representing 75% of
total U.S. premiums adopt the revisions to the SVL, PBR will be
implemented over approximately three years and only for new
policies issued. As of June 1, 2015, 29 states, representing
45% of premium, have adopted the revised model laws.
( http://www.naic.org/cipr_topics/principle_based_reserving_pbr.ht
m ) This bill would require that PBR take effect on January 1 of
the year following the first July 1 after PBR is adopted by at
least 42 of the 55 jurisdictions within the NAIC, representing
75% of the premiums for life, health, and accident insurance
policies collected in all 55 jurisdictions. However, PBR will
not be effective in California until the Commissioner provides a
letter to the Insurance Committees of the Legislature certifying
that adequate funding has been appropriated by the Legislature
and that all other resources are available and sufficient to
implement PBR. The certification letter must be posted to the
CDI Internet Web site immediately after being submitted to the
Legislature. PBR will only apply to policies and non-forfeiture
benefits (a refund of all or part of the premiums paid by an
insured, if the insured decides to cancel his or her policy
after a specified date) issued on or after its effective date.
Does the California Department of Insurance Have the Necessary
Professional Workforce to Implement PBR Effectively and, Given
New York's Reasons for not Participating, Does PBR Make Sense
for California Consumers? When this bill was heard by the
Assembly Insurance Committee, that Committee was concerned about
whether the California Department of Insurance will have
sufficient resources and staff to implement PBR. The
Committee's concerns were based on reports regarding the ability
of states to effectively implement PBR. One such report was
published in December 2013 by the Federal Insurance Office of
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the U.S. Department of the Treasury entitled, How to Modernize
and Improve the System of Insurance Regulation in the United
States, in the report the Federal Office of Insurance cautions:
The U.S. life insurance sector's reserving requirements
should properly reflect current mortality rates, the life
insurer's business model, and its particular risk profile,
but substantial concerns arise with the prospect of a
wholesale adoption of PBR. In addition to consistency
issues, state regulators will also face the challenge of
maintaining a sufficiently high level of expertise for
understanding the "black box" of the models on which
reserve levels would be established. Specifically, the
need for many more sufficiently trained and expert
actuaries and examiners than are currently available to
regulators raises necessary questions with respect to
states' ability to verify insurers' implementation of PBR
in a uniform manner that is consistent with the [Valuation]
Manual. To obtain necessary expertise, states likely would
have to contract with consulting actuaries and other
professionals, many of whom may have clients in the life
insurance industry and, thus, state regulators will need to
sort through and manage potential conflicts of interest.
This report also provides that while New York, California,
Florida and North Dakota moved forward in establishing a working
group through the NAIC to recognize challenges of implementing
PBR, the New York Department of Financial Services identified
flaws and raised serious questions about the efficiency of the
working group process. New York eventually opted not to
implement PBR because, according to a November 2012 letter from
the New York State Superintendent of the Department of Financial
Services, Benjamin Lawsky, "There are numerous factors that
should give regulators pause [with an untested PBR model]: (1)
Principles-based reserving in the banking sector proved
disastrous; (2) Under PBR, reserves will decrease, and the risk
of insurer insolvency will increase; (3) It is not clear that a
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PBR regime will benefit consumers; (4) Regulators are
ill-equipped at present to implement and oversee PBR; and (5)
Even if the rules-based approach has its shortcomings, it does
not necessarily follow that PBR is the answer." Thus, as
California looks to implement the PBR, it is critical that the
Commissioner does so in a way that benefits consumers and does
not risk insurer insolvency.
The PBR Report and Supporting Documents Submitted to the
Commissioner Are Exempt From the Public Records Act. Documents
that are provided to the Commissioner qualify as public records
to which the public has access unless there are legislative
findings or exceptions that impose limitations on the public's
right of access to those records. Any limitation to public
access is always of great concern because the public has a right
to information that becomes part of a public agency's records.
The bill seeks to exclude all information in a PBR report
annually filed with the Commissioner from disclosure and from
discovery or admissibility into evidence in any private civil
action if the information is obtained from the Commissioner in
any manner. This bill requires that documents and information
provided to the Commissioner as part of the actuarial analysis
of an insured's reserves using PBR be confidential and not
subject to disclosure under the California Public Records Act,
subpoena, or discovery and are not admissible in any private
civil action unless the documents and information are cited to
in an action against an actuary, in a public hearing, or are
released by the insurer to the media. The basis of the
exemption is that the report and supporting documentation,
according to the insurers, contain confidential data, trade
secrets, and proprietary information that the insurers have
developed through extensive research and development.
Existing law holds that the confidential memorandum and
supporting information is subject to subpoena with the
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Commissioner's consent, or after notice to the Commissioner and
all other interested parties and a hearing, the superior court
can release the information if it determines that the need for
the subpoena outweighs the interest of the insurer or actuary in
protecting the confidential information, and the public interest
and ongoing investigation of the Commissioner will not be
unnecessarily jeopardized by compliance with the subpoena.
(Section 10489.15(B).) The provisions of this bill, by
contrast, do not include an exception to disclose the contents
of the PBR report that is filed with the Commissioner, either by
consent of the Commissioner or by a subpoena and a court order.
However, the proposed amendments clarify that the public may
still obtain the information that is contained in reports to the
Commissioner from the insurer through the normal discovery
process.
This bill also permits the Commissioner to share documents and
information related to the actuarial analysis with other
regulators, the American Academy of Actuaries, and the NAIC if
the recipient agrees to maintain confidentiality. The
additional disclosure to third parties helps to ensure the
critical cooperation and full disclosure of insurers and
affiliates who otherwise may be forced to seek disclosure of
this information under other laws.
Civil Liability for Actuaries. Under existing law, an actuary
is liable to persons for damages caused by his or her negligence
or other tortious conduct with respect to any act, error,
omission, decision, or conduct with respect to the actuary's
opinion. This bill provides that a qualified actuary (an
individual who is qualified to sign the applicable statement of
actuarial opinion in accordance with the American Academy of
Actuaries qualification standards and who meets the requirements
specified in the VM is liable for his or her negligence or other
tortious conduct regarding PBR. Existing law gives the
Commissioner the authority to suspend or revoke a license, but
due to the apparent severity of that penalty, that option
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apparently is rarely invoked. This bill allows the Commissioner
to define "disciplinary action" in the emergency regulations
(for the initial 180 days of the regulations) for implementing
the PBR law against a company or the qualified actuary.
Creating a new form of discipline for a negligent actuary should
help serve as a deterrent for actuarial misconduct in
calculating PBR reporting information and providing false or
misleading information in reports regarding a company's
available reserves.
ARGUMENTS IN SUPPORT: In support of this bill, the Association
of California Life and Health Insurance Companies writes:
PBR is a modern method of calculating these mandatory
reserves required to pay claims of policyholders for
certain insurance products sold to individuals. It
accomplishes this goal by prescribing a dynamic approach to
calculating a company's reserve requirements that expressly
factors in an individual company's inherent risk associated
with a particular product. Compared with today's
industrywide, static, formulaic approach, in which reserve
requirements are locked in and inflexible regardless of
future experience, economic conditions, or other risk,
reserves that are calculated utilizing PBR are judged as
the company's risk changes. This calibration of reserves
to risk ensures greater transparency on the company's
balance sheet and more frequent regulatory review, thereby
strengthening consumer protections.
Importantly, reserves will not experience swings from high
to low which have been experienced in the past. Even more
importantly, consumers will experience the pricing benefits
of proper reserving.
Prior Legislation: AB 2384 (Nakano, Chap. 601, Stats. 2004)
requires that all life and annuity contract forms be filed with
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the CDI prior to being issued.
REGISTERED SUPPORT / OPPOSITION:
Support
Association of California Life and Health Insurance Companies
(co-sponsor)
California Department of Insurance (co-sponsor)
Affordable Life Insurance Alliance
USAA
Pacific Life Insurance Company
Opposition
None on file
Analysis Prepared by:Khadijah Hargett / JUD. / (916)
319-2334
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