BILL ANALYSIS Ó
SB 696
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Date of Hearing: August 19, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
SB 696
(Roth) - As Amended July 16, 2015
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill conforms California law to a national model law by
permitting insurers to use a new methodology, known as principle
based reserving (PBR), for determining the amount of required
reserves for certain life insurance policies. Specifically,
this bill:
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1)Stipulates PBR takes effect on January 1 of the year following
the first July 1 after PBR is adopted by a specified minimum
number of states which must also represent 75% of nationwide
premiums for life, health, and accident insurance policies.
2)Provides that PBR only applies to policies issued on or after
its effective date.
3)Requires all life insurers to annually submit an actuarial
analysis of the company's reserves based on the Valuation
Manual (VM) adopted by the National Association of Insurance
Commissioners (NAIC). Requires companies to provide an annual
certification of the effectiveness of internal controls for
PBR valuation and related data to the commissioner.
4)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 rules issued by the
commissioner.
5)Defines the PBR-related information that is confidential.
6)Permits the commissioner to develop regulations regarding the
actuaries engaged by the commissioner and provides that the
initial regulations may be adopted as emergency regulations.
7)Permits the commissioner to hire staff, as well as a subject
matter expert who is exempt from civil service to lead the
implementation of PBR. Permits the commissioner to set the
salary for the exempt position without approval of the
Department of Human Resources.
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8)Permits the commissioner to assess life insurers for the cost
of implementing PBR. The initial assessment for each life
insurer varies based on the dollar value of life insurance
premiums collect by each insurer, and can be modified if there
is a change to the VM that necessitates a change to the
assessment.
9)Permits the commissioner to conduct an actuarial examination,
at the insurer's expense, of a life insurer's reserves and
reserve methodology.
10)Provides that the bill becomes operative on the date the
commissioner certifies adequate funding has been appropriated
and sufficient staff and resources required to enforce PBR are
in place.
11)Makes numerous technical and clarifying changes to the
Insurance Code, and specifies other substantive provisions
related to PBR.
FISCAL EFFECT:
1)Costs to the California Department of Insurance of $550,000 in
fiscal year (FY) 2015-16, $1.9 million in FY 2016-17 and $1.4
million in FY 2017-18 and ongoing to review and approve all
participating companies' detailed modeling and analysis
justifying their reserve estimates (Insurance Fund).
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2)Projected revenues of $1.2 million annually, based on an
assessment schedule included in the bill for a special
assessment on insurers to support PBR-related regulatory
activities (Insurance Fund).
COMMENTS:
1)Purpose. This bill would apply PBR, a dynamic reserving method
for new life insurance policies based on a model law adopted
by the NAIC. PBR is intended to more precisely determine the
reserve requirements according to the individual
characteristics of each product. This bill is co-sponsored by
CDI and the Association of California Life and Health
Insurance Companies.
2)Background. Existing law requires life insurers to establish
reserves for life insurance policies according to statutory
formulas that incorporate uniform mortality and interest rate
assumptions. It also requires reserves to be funded with high
quality assets, generally low-risk bonds. PBR is a
sophisticated methodology developed by the NAIC. This new
method replaces the current formulaic approach to determining
reserves with an approach that more closely reflects the risks
of highly complex products. The improved calculation is
expected to "right-size reserves," reducing reserves that are
too high for some products and increasing reserves that are
too low for other products.
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The NAIC attempts to standardize many aspects of insurance
industry regulation, and often requires standards to be
adopted by a number of states before implementation. When at
least 42 states (a supermajority), representing 75% of total
U.S. premium, adopt PBR as a standard, it will be implemented
over approximately three years and only for new business. As
of August 4, 2015, 36 states have adopted the revised model
laws.
3)Comment: Special Assessment and Triggers. This bill
authorizes CDI to collect an annual assessment from
participating companies, based on their premium dollar volume,
to offset the cost additional oversight duties required of CDI
pursuant to the bill. The assessment is projected to result
in slightly less ongoing revenue that CDI projects the bill
will cost.
Implementation of PBR in the state, according to this bill,
only occurs when two trigger conditions are met before
implementation. The first is the adoption of PBR by a
sufficient number of states, which will trigger
near-nationwide simultaneous adoption. California does not
control this; however, given adoption by 29 states and pending
legislation in others, it appears highly likely that over the
next 2 years, a sufficient number of states will have adopted
PBR rules, which would meet the first trigger condition.
The second condition embedded in the bill is a provision
stating the act shall become operative on the date the
commissioner certifies resources are available and sufficient
for carrying out the prescribed regulatory duties, prior to
implementation. PBR should benefit the insurance industry and
consumers from, in most cases, lessening reserve requirements.
Given it is a more complicated methodology, however, CDI must
have expert staffing and infrastructure in place prior to
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implementation in order to ensure success and mitigate risk.
Although this appears to be a reasonable condition, staff
notes it may appear resources are being appropriated
prematurely, if the first condition is not yet met. But if
reasonable assurances exist that the first condition will be
met, it also seems reasonable to appropriate funds and begin
preparation for this complex new initiative prior to the first
condition being met. On the other hand, California must adopt
PBR before the first trigger is met (due to its size, inaction
by California precludes nationwide adoption). Thus, the
language could create a legal and budgetary chicken-and-egg
scenario where PBR is not operative until the commissioner
certifies resources are available, but resources are not
appropriated until there is an assurance PBR is operative. It
is unclear what NAIC considers "adoption"-is it enough that
the law conditionally adopts it?
If the intent is that the assessment and the build-up of
resources should not be contingent on whether PBR is operative
nationwide, staff suggests this be clarified. Budget language
related to an appropriation could include an additional
trigger if there are concerns about the first condition being
met at the time an appropriation is considered.
Finally, regardless of the above suggestion, the assessment on
insurers is among the provisions of the bill that is
contingent on certification of adequate resources being in
place. If the intent is to allow the assessment to fund the
build-up of staff resources,the committee may wish to consider
a technical correction to specify the assessment be allowable
prior to the commissioner's certification that resources are
available.
Analysis Prepared by:Lisa Murawski / APPR. / (916)
319-2081
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