BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                        SB 696|
          |Office of Senate Floor Analyses   |                              |
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                                UNFINISHED BUSINESS 


          Bill No:  SB 696
          Author:   Roth (D)
          Amended:  8/28/15  
          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

           SENATE FLOOR:  38-1, 6/1/15
           AYES:  Allen, Anderson, Bates, Beall, Berryhill, Block,  
            Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall,  
            Hancock, Hernandez, Hertzberg, Hill, Huff, Jackson, Lara,  
            Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning,  
            Moorlach, Morrell, Nielsen, Pan, Pavley, Roth, Runner, Stone,  
            Vidak, Wieckowski, Wolk
           NOES:  Nguyen
           NO VOTE RECORDED:  Hueso

           ASSEMBLY FLOOR:  78-0, 9/8/15 - See last page for vote
           
           SUBJECT:   Insurance: principle-based valuation


          SOURCE:   Association of California Life & Health Insurance  
                    Companies 








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                    California Department of Insurance
          
          DIGEST:   This bill conforms California law to the model  
          Standard Valuation Law, adopted by the National Association of  
          Insurance Commissioners (NAIC), and replaces the current method  
          of calculating reserves for most life insurance products with a  
          new method known as Principle-Based Reserving (PBR) applicable  
          to contracts issued on or after the effective date, as  
          specified.

          Assembly Amendments (1) delay the effective date of some  
          definitions specific to PBR until the operative date of the  
          valuation manual (VM); (2) authorize the Insurance Commissioner  
          (IC) to adjust the initial assessment amount based on revisions  
          to the VM; (3) make the effective date of the VM contingent on  
          certification by the IC to the Senate and Assembly Committees on  
          Insurance that the California Department of Insurance (CDI) has  
          sufficient resources to implement the standards established by  
          the VM; (4) create the Office of Principle-Based Reserving  
          headed by an officer selected by the IC and appointed by the  
          Governor; and (5) clarify provisions related to the confidential  
          treatment of data, documents, and materials provided to the IC  
          for the purpose of  complying with the valuation requirements. 

          ANALYSIS: 
          
          Existing law:

           1) Requires every life insurer doing business in California to  
             annually submit to the 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.








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           3) Sets minimum benefit values when policies are surrendered or  
             lapsed (referred to as "nonforfeiture benefits").


          This bill:

           1) Requires insurers to calculate reserves according to  
             specified manual of valuation instructions as adopted by the  
             NAIC, known as the VM,  that incorporates a new method known  
             as PBR to be used for most policies issued on or after the  
             operative date of the VM.


           2) Provides that the VM goes into effect on January 1 of the  
             year following the first July 1 by which states representing  
             greater than 75 percent of the direct premiums written and at  
             least 42 of the 55 NAIC jurisdictions have enacted laws that  
             conform to the model Standard Valuation Law as amended by the  
             NAIC in 2009. 


           3) Provides that the VM shall not be operative until the IC  
             certifies to the Chairs of the Assembly and Senate Insurance  
             Committees that funding and other resources are available to  
             carry out the duties imposed by this bill. 


           4) Establishes a process for amending the VM and for  
             determining the effective date of the amended version of the  
             VM.


           5) Requires that the VM include minimum valuation standards,  
             establish criteria to determine whether the PBR method  
             applies, and provide for standards for products not subject  
             to PBR that are either consistent with the minimum standard  
             of valuation prior to the operative date of the VM or that  
             satisfy other criteria designed to ensure funding under  
             reasonably unfavorable conditions. 









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           6) Requires an insurer to annually submit an actuarial opinion  
             governed by the VM and other applicable standards as to  
             whether the reserves are calculated appropriately and as to  
             whether the reserves held in support of the policies make  
             adequate provision for the insurer's obligations.  


              a)    Requires the insurer to submit a memorandum in support  
                of each actuarial opinion.


              b)    Provides that the actuary is liable for negligent or  
                tortious conduct.


              c)    Authorizes the IC to define disciplinary action  
                against the company or actuary by regulation.


           7) Authorizes the IC to engage an actuary, at the expense of  
             the insurer, to perform an independent actuarial examination  
             of the insurer.  


           8) 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. 


           9) Requires an insurer to submit mortality, morbidity,  
             policyholder behavior, or expense experience, and other data  
             as prescribed in the VM.


           10)Describes appropriate sources of data acceptable when  
             establishing assumptions not otherwise prescribed in the VM.


           11)Requires an insurer to establish reserves subject to PBR  
             that meet specified conditions in the VM, establish  
             procedures for corporate governance and oversight of the  








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             actuarial valuation function consistent with the VM, submit  
             an annual certification to the IC on the effectiveness of  
             internal controls with respect to PBR, and file with the IC,  
             upon request, a principle-based valuation report that  
             complies with standards prescribed in the VM.


           12)Exempts specified documents and information submitted in  
             accordance with the valuation process, with some exceptions,  
             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. 


           13)Creates the Office of Principle-Based Reserving within the  
             CDI and authorizes the IC to hire and assign staff, including  
             one exempt position selected, and whose salary is fixed, by  
             the IC and appointed by the Governor to head the office.


           14)Authorizes the IC to retain outside actuaries and other  
             consultants to assist in the implementation of PBR.  


           15)Establishes an annual assessment on each participating  
             insurer 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.


          Background

          In order to make sure that life insurers have sufficient funds  
          to pay future claims, they are required by law to set aside  








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          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 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 method, a new process 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  
          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 CDI,  








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          this bill establishes an assessment on each participating  
          insurer, set 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 the VM goes into effect,  
          which would not occur 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 and the IC  
          certifies that CDI is ready to implement it.  According to the  
          NAIC, as of August 4, 2015, 36 jurisdictions have adopted the  
          model act totaling about 60% of the national premium.   Most of  
          the non-PBR related provisions, including the assessment and  
          IC's authority to hire staff, would go into effect with this  
          bill.

          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No

          According to the Assembly Appropriations Committee:

          1)Costs to CDI 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). 

          2)Projected revenues of $1.2 million annually, based on an  
            assessment schedule included in this bill for a special  
            assessment on insurers to support PBR-related regulatory  








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            activities (Insurance Fund).


          SUPPORT:   (Verified 9/8/15)

          Association of California Life & Health Insurance Companies  
          (co-source)
          California Department of Insurance (co-source)
          Affordable Life Insurance Alliance
          American Council of Life Insurers
          Pacific Life Insurance Company
          United Services Automobile Association


          OPPOSITION:   (Verified9/8/15)


          Department of Finance


          ARGUMENTS IN SUPPORT:     The Association of California Life &  
          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.



          ARGUMENTS IN OPPOSITION:According to the Department of Finance  
          (DOF), the Legislature had already approved 4.0 positions and  
          $463,000 in 2015-16 and ongoing to implement the new PBR  
          methodology.  While this bill represents the implementing  
          legislation, it does not appropriate the additional funds to  
          make up the difference between the estimated costs to CDI in  
          2014-15 and today's estimated costs.  DOF opposes this bill  
          because it results in costs not included in the Administration's  
          fiscal plan.

          ASSEMBLY FLOOR:  78-0, 9/8/15








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          AYES:  Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,  
            Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,  
            Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd,  
            Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo  
            Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove,  
            Hadley, Harper, Roger Hernández, Holden, Irwin, Jones,  
            Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low,  
            Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,  
            Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,  
            Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago,  
            Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,  
            Wilk, Williams, Wood, Atkins
          NO VOTE RECORDED:  Chávez, Eggman



          Prepared by:Hugh Slayden / INS. / (916) 651-4110
          9/8/15 21:55:22


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