BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 696|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
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
SB 696
Page 2
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.
SB 696
Page 3
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.
SB 696
Page 4
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
SB 696
Page 5
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
SB 696
Page 6
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,
SB 696
Page 7
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
SB 696
Page 8
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
SB 696
Page 9
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
**** END ****