BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 1448 (Calderon) Hearing Date: April 25, 2012
As Amended:April 16, 2012
Fiscal: Yes
Urgency: No
SUMMARY: Conforms California law to the recently revised
Insurance Company System Regulatory Act ("Model Act") drafted by
National Association of Insurance Commissioners (NAIC).
DIGEST
Existing law
1. Governs the business of insurance and authorizes the
Insurance Commissioner to provide oversight over the
insurance industry, including conducting investigations and
bringing enforcement actions;
a. Provides that any officer, director, or employee of an
insurance holding company who willfully and knowingly
subscribes to, makes, or causes to be made materially
false statements, reports, or filings, as specified, that
involves the deliberate perpetration of a fraud upon the
commissioner is guilty of a misdemeanor or a felony;
b. Prohibits a person from making a tender offer for, or
a request or invitation for tenders of, or from entering
into an agreement to exchange securities for or acquire in
the open market, any voting security, or any security
convertible into a voting security, of a domestic insurer
or of any other person controlling a domestic insurer, if
the other person is not substantially engaged either
directly or through its affiliates in any businesses other
than that of insurance, if, as a result of the
consummation thereof, the person would, directly or
indirectly, acquire control of the insurer;
c. Prohibits a person from entering into an agreement to
merge with or otherwise acquire control of a domestic
SB 1448 (Calderon), Page 2
insurer, unless, at the time copies of the offer,
purchase, request, or invitation are first published,
sent, or given to security holders or the agreement or
transaction is entered into, the person has filed with the
commissioner, and has sent to the insurer, a statement
containing the specified information, including, among
other things, information regarding the background and
identity of all persons by whom or on whose behalf the
purchases or the exchange, merger, or other acquisition of
control are to be effected, and any additional information
as the commissioner may by rule or regulation prescribe as
necessary or appropriate in the public interest or for the
protection of policyholders or shareholders;
2. Prohibits purchases, exchanges, mergers, or other
acquisitions of control from being made until the
commissioner approves those acquisitions, and requires the
commissioner to approve or disapprove the transaction within
60 days after the filing of that statement;
3. Requires every insurer authorized to do business in this
state to register with the commissioner and to file a
registration statement containing specified information,
including the identity and relationship of every member of
the IHC system;
4. Authorizes domestic insurers and commercially domiciled
insurers to enter into specified transactions, including
sales, loans, and reinsurance agreements, only if the insurer
has notified the commissioner in writing of its intention to
enter into the transactions at least 30 days prior thereto,
or a shorter period as the commissioner may permit, and the
commissioner has not disapproved it within that period;
5. Requires that information reported to the commissioner in
the registration statement, and information disclosed in the
course of an examination or investigation of the registration
statement, be exempt from subpoena or public disclosure,
except as specified.
This bill
1. Would authorize the commissioner to hold a noticed public
hearing after a statement containing specified information
regarding the acquisition of a domestic insurer is filed and
SB 1448 (Calderon), Page 3
would provide the person filing the statement with the right
to present evidence, to examine witnesses, and to offer oral
and written arguments; Would also provide for a consolidated
hearing before the commissioner and commissioners from other
states, as specified;
2. Would require any controlling person of a domestic insurer
seeking to divest its controlling interest in the domestic
insurer to file with the commissioner a confidential notice
of its proposed divestiture at least 30 days prior to the
cessation of control;
3. Would require the commissioner to determine those instances
in which an insurer under those circumstances would be
required to file for and obtain approval of the transaction;
4. Would require the information submitted to the commissioner
to remain confidential unless the commissioner makes a
specified determination;
5. Would require that the ultimate controlling person of every
insurer subject to registration file an annual enterprise
risk report;
6. Would define "enterprise risk" for purposes of these
provisions to mean any activity, circumstance, or event or
series of events involving directly or indirectly one or more
affiliates of an insurer that, if not remedied promptly, is
likely to have a material adverse effect upon the financial
condition or liquidity of the insurer or its IHC system as a
whole;
7. Would authorize the commissioner to ascertain the enterprise
risk to which an insurer is subjected by the ultimate
controlling party or by any entity or combination of entities
within the IHC system, or by the IHC system on a consolidated
basis, and to order an insurer to produce an enterprise risk
report;
8. Would provide that whenever it appears to the commissioner
that any person has committed a violation of the registration
requirements that prevents the full understanding of the
enterprise risk to the insurer by affiliates of the insurance
company holding system, the violation may serve as an
independent basis for disapproving dividends or distribution
or placing the insurer under an order of supervision;
SB 1448 (Calderon), Page 4
9. Would require the commissioner to approve or disapprove an
acquisition of control on or before the latter of 60 days
after the statement has been filed with the commissioner or
30 days after the close of the hearing;
10.Would require the registration statement to specify that the
insurer's board of directors is responsible for overseeing
corporate governance and internal controls, and that the
insurer's officers or senior management have approved,
implemented, and continue to maintain and monitor corporate
governance and internal control procedures;
11.Would require the insurer to include in the registration
statement, if requested by the commissioner, financial
statements, as described, of or within an IHC system,
including all affiliates;
12.Would authorize the commissioner to participate in a
supervisory college for any domestic insurer that is part of
an IHC system with international operations in order to
determine compliance with specified provisions and would
require the insurer to pay for the reasonable expenses of the
commissioner's participation;
13.Would also authorize the commissioner to establish the
supervisory college, clarify its membership, and establish a
crisis management plan;
14.Would clarify that information disclosed in the course of an
examination or investigation of specified transactions
between registered insurers and their affiliates is exempt
from subpoena or public disclosure;
15.Would specify that information disclosed in the course of an
examination or investigation of specified transactions
between registered insurers and their affiliates and the
registration statement information is not subject to
disclosure pursuant to the California Public Records Act, but
would authorize the commissioner to share the information
with other state, federal, and international regulatory and
enforcement entities if specified requirements are met;
16.Would authorize the commissioner to receive documents from
the National Association of Insurance Commissioners (NAIC)
and regulatory and enforcement entities and to enter into
SB 1448 (Calderon), Page 5
agreements with the NAIC governing the sharing and use of
that information, as specified.
17.Would revise the required content of statements, filings,
and reports, and require additional statements and reports,
and because it would be a crime for an officer, director, or
employee of an IHC to willfully or knowingly engage in
specified acts relative to those statements, filings, and
reports, the bill would impose a state-mandated local
program. This bill would provide that no reimbursement is
required by this act for a specified reason.
COMMENTS
1. Purpose of the bill . According to the author, this bill
conforms California law to the Model Law prepared by the
NAIC.
2. Background
a. History of the Model Act. According to the Insurance
Commissioner ("Commissioner"), the National Association of
Insurance Commissioners ("NAIC") is an organization of
state insurance regulators for all 50 states, Washington
D.C., and five U.S. territories. Its primary mission is
to promote uniform practices in regulating multi-state
insurers. To support this effort, the NAIC maintains an
insurance regulator accreditation program and develops
uniform standards known as model laws. Commonality in
regulating insurers is critical toward maintaining
effective state-based consumer protections.
The Commissioner explains that in December 2010, the
NAIC adopted significant revisions to the Model Act in
response to concerns that insurance regulators lacked the
necessary authority to adequately understand the risks and
activities of non-insurance entities within a holding
company system that could pose a risk to an insurer. The
argument for new tools to evaluate risks within insurance
groups was intensified by the financial difficulties
experienced by certain affiliates of the AIG insurance
holding company system during the 2008 financial crisis.
The NAIC designed these models to provide
SB 1448 (Calderon), Page 6
inter-jurisdictional uniformity and cooperation among
regulators in a manner that builds in quality control.
This approach should allow one jurisdiction to comfortably
rely on another NAIC accredited jurisdiction since, by
statute, the regulatory processes and standards applied
would be substantially similar.
b. Insurance Holding Company Systems. SB 1448 conforms
California law to recent revisions the NAIC made to its
model Insurance Holding Company System Regulatory Act. An
insurance holding company system ("IHC system") consists
of two or more affiliated persons, one or more of which is
an insurer. But these systems can be far more complex
than that and involve transactions that shift control and
apparent accountability from the actor to a remote person.
In this context, person includes business entities such
as a corporation or partnership, as well as individuals
(Ins. Code � 1215); SB 1448 would also add limited
liability companies to that list.
From a top-down perspective, an entity within a holding
company system may be likened to a remote-controlled car,
both may be controlled by someone far removed. But the
remote-control may be held by another remote-controlled
instrument, and so on and so forth. But the analogy
changes when viewed horizontally in that the controlling
authority in a business entity may be spread around and
decisions are ultimately made by the person or persons who
have the controlling interest, not just a person who owns
an interest - several remotes might share control of the
same instrument or car. The person with, or persons
sharing, the most powerful remote-control drives the car.
An IHC system can become a vast network of drones,
remotes and decision-makers; the problem is identifying
who is what. SB 1448 would give regulators tools designed
to provide the information necessary to track down the
ultimate controlling person or persons - who has the most
powerful remote and what are they doing with it.
The Act and SB 1449 would create or provide
enhancements to mechanisms that help to monitor IHC
systems:
Registration of Insurers
Enterprise Risk Examinations
Acquisition of Insurers Examinations
SB 1448 (Calderon), Page 7
Transactions within Holding Company
Systems Examinations
Supervisory Colleges
a. Registration. Currently, every insurer authorized to
do business in this state, that is also a member of an IHC
system, must file an initial registration statement and
every year thereafter on a form prescribed by the NAIC
(with narrow exception for certain foreign insurers).
(Ins. Code � 1415.4.) Registration requires disclosure of
pertinent information regarding the operations and
governance of the holding company system. (Ins. Code �
1415.4(b).)
SB 1448 expands the financial statements requirements,
if requested by the Commissioner, to include annual
audited financial statements filed with the U.S.
Securities and Exchange Commission (SEC) or the most
recently filed parent corporation financial statements
filed with the SEC. Additionally, the bill would require
statements that the insurer's board of directors is
responsible for overseeing corporate governance and
internal controls and that the insurer's officers or
senior management have approved, implemented, and continue
to maintain and monitor corporate governance and internal
control procedures.
i. Disclaimer. Existing law allows a person to
disclaim affiliation with any authorized insurer to
relieve an insurer of any duty to register or report
based on that relationship. The disclaimer is
effective unless and until the Commissioner disallows
it. SB 1448 grants the Commissioner the power to
disallow the disclaimer at any time if the
Commissioner determines that the information disclosed
in the disclaimer is incomplete or inacurate.
ii. New Cause for Sanctions. This bill also
provides that acts that violate the registration
provisions preventing the full understanding of the
enterprise risk to the insurer by affiliates or the
holding company system may serve as an independent
basis for discipline. That means that acts or
omissions, taken as a whole, designed to evade
scrutiny, constitute a reason for discipline against
the actor separate and apart from the individual acts
SB 1448 (Calderon), Page 8
or omissions (for instance, submitting an incomplete
report may constitute a violation of Section 1215.4
relating to disclosure, but under SB 1448, may also
constitute a separate cause for interference with the
monitoring of an insurance holding company).
b. Enterprise Risk Examinations. SB 1448 defines an
enterprise risk as any activity, circumstance, or event or
series of events that could adversely impact the financial
condition or liquidity of the insurer or its IHC system as
a whole. The bill also incorporates the concept into the
regulatory scheme.
i. Reporting. This bill would require the
ultimate controlling person (the person holding the
most powerful remote) of every insurer to file an
annual enterprise risk report with the insurance
commissioner of the lead state of the IHC system that
identifies the potential enterprise risks to the
insurer. (The lead state is determined by procedures
established in the Financial Analysis Handbook adopted
by the NAIC.) If the IHS system has an insurer
domiciled in California but has a lead state
elsewhere, its respective holding company must file a
copy of that report with the Commissioner as well.
The first enterprise risk report would be filed with
the insurer's registration statement, but would not be
due until after July 1, 2013, although the
Commissioner would be able to extend the date.
ii. Examination. The Commissioner already has the
authority to examine the financial condition of
insurers and must do so at least every five years.
(Ins. Code � 730 et seq.) Under SB 1448, if the
Commissioner performs an examination that proves
inadequate, or determines the policyholders are being
adversely affected, he or she would have additional
investigative powers. These new powers allow the
Commissioner to evaluate enterprise risks related to
the entities within and ultimately the controlling
parties of the holding company system. The
Commissioner may require the ultimate controlling
party or entity to produce records in the possession
of the insurer or its affiliates, as well as retain
advisory professional assistance such attorneys,
SB 1448 (Calderon), Page 9
actuaries, accountants, etc., to assist the
Commissioner at the registered insurer's expense.
e. Acquisition of Insurers. Acquisition of insurers
requires disclosure statements regarding the parties and
the sale. (Ins. Code � 1215.2(g).) The Commissioner may
only disapprove an acquisition for specified reasons.
(Ins. Code � 1215.2(d).) SB 1448 adds provisions related
to
i. Public Hearings. Under SB 1448, the
Commissioner may hold to hold a public hearing subject
to the Administrative Procedure Act (Govt. Code �
11500 et seq.). At the hearing, the filer, insurer,
persons designated by the Commissioner, and any other
person whose interest may be affected, may present
evidence and arguments.
ii. Consolidated Hearings. SB 1448 would allow
for consolidated hearings at the request of the filer,
when two or more commissioners must approve the
transaction. A commissioner may opt out or attend by
telecommunication.
iii. Divestment. This bill also requires
disclosure when a controlling person seeks to divest
its controlling interest in a domestic insurer, unless
a statement is filed under Section 1215.2, at least 30
days prior to the cessation of control. Information
provided would remain confidential until the
conclusion of the transaction, unless the Commissioner
determines that otherwise.
a. Transactions within a Holding Company System.
Existing law provides that the Commissioner will review
certain transactions (such as sales, purchases, exchanges,
loans, extensions of credit, management agreement, etc.)
within an IHC system to determine whether the terms are
fair and reasonable and to monitor a one-sided gift of
assets - the transaction should not be a way of
transferring profits. (Ins. Code � 1215.5.) The insurer
must notify the Commissioner within 30 days prior to
entering into the transaction.
SB 1448 would require that insurers notify and seek
approval for amendments and modification to any affiliate
SB 1448 (Calderon), Page 10
agreements previously filed, with an explanation for the
change and the financial impact on the domestic or
commercially domiciled insurer. It also would require
that, along with reinsurance agreements, insurers disclose
pooling agreements and modifications and changes in the
insurer's reinsurance premium or liabilities projected
with the following three years.
b. Supervisory Colleges. Holding companies with an
international presence pose additional challenges to
regulators. SB 1448 codifies the authority for the
Commissioner to participate in supervisory colleges that
provide for cooperation among regulatory jurisdictions in
order to examine a domestic insurer that is part of an IHC
system with international operations. Under the bill,
supervisory colleges may be convened on a temporary or
permanent bases and used to assess the business strategy,
financial position, legal and regulatory position, risk
exposure, risk management, and governance processes.
Other regulators may participate as well if charged with
supervision of the insurer or its affiliates (such as
regulators from other states, the federal government, and
international regulatory agencies). The Commissioner may
enter into agreements providing the basis for cooperation
between college participants so long the confidentiality
and evidentiary privilege provisions are also respected.
i. Expenses. SB 1448 provides that the
Commissioner may charge the insurer for reasonable
expenses of the Commissioner's participation in a
supervisory college related to the regulation of the
insurer's business.
ii. Confidentiality of Materials Examined. Under
existing law, materials provided to the Commissioner
and other regulators must remain confidential unless
otherwise provided. (Ins. Code � 1215.7) SB 1448
would expressly exempt these materials from the Public
Records Act and subpoena. SB 1448 provides that the
Commissioner may receive or share confidential
materials with other agencies so long as the
commissioners of other states are subject to statutes
or regulation similar to California and recipients
verify that he or she has the legal authority to
maintain confidentiality and agree in writing to do
SB 1448 (Calderon), Page 11
so.
SB 1448 also permits the Commissioner to enter into
written agreements with the NAIC that govern sharing
and use of information, and requires NAIC to consent
to intervention by an insurer in a proceeding where
confidential information may be required to be
disclosed (intervention would allow the insurer to
defend against disclosure or subpoena in that
proceeding).
a. Authorizes the Commissioner to Issue Rules and
Regulations Relative to the Provisions of the Bill.
b. Exception for Home Protection Companies. SB 1448
exempts specified home protection companies (that sell
home warranties) as insurers for the purposes of the
revised Act if the IHC system invested in the home
protection companies on or before December 31, 1978.
1. Summary of Arguments in Support
a. The Commissioner explains that adoption of the Model
Act's revisions is pivotal in providing uniform standards
for corporate governance and holding company supervision.
It is anticipated that the Act's revisions will be an NAIC
accreditation issue; consequently, enactment of SB 1448 is
critical for California to retain its accreditation
status.
b. The Commissioner supports SB 1448 because it provides
for an enterprise risk filing with CDI when California is
not the lead state of the holding company, but the holding
company system includes an insurer domiciled in
California. This ensures that if CDI is examining the
enterprise risk of an insurer, which is permitted under
current law, then CDI is entitled to a copy of the
enterprise risk report prepared by the controlling party
of the holding company system.
c. The Commissioner also supports SB 1448 provision that
avoid the automatic granting of a disclaimer of
SB 1448 (Calderon), Page 12
affiliation filing in 30 days when no action is taken by
the commissioner, and provides for the disclaimer to be
withdrawn if the commissioner determines that it is no
longer factually accurate.
1. Summary of Arguments in Opposition
None received (as of April 22, 2012)
2. Questions
a. The NAIC is comprised of insurance commissioners and
the Model Act, and SB 1448, provides the Commissioner with
a discretion on several key points.
i. Are the decisions of the commissioners subject
to judicial review or some type of oversight?
ii. How might an insurer or entity in a holding
company challenge a decision of the Commissioner on
questions such as disallowed disclaimers, sanctions
for registration requirements, release of confidential
information, etc.?
a. "Enterprise risk" means any activity, circumstance, or
event or series of events involving directly or indirectly
one or more affiliates of an insurer that, if not remedied
promptly, is likely to have a material adverse effect upon
the financial condition or liquidity of the insurer or its
insurance holding company system as a whole. How would
the department determine which enterprise risks are
threatening enough to require reporting under the directly
or indirectly standard?
1. Suggested Amendments
Amend page 21, lines 27 - 34, to read:
(c) An insurer registered under Section 1215.4 that is
SB 1448 (Calderon), Page 13
subject to this section shall be liable for and shall pay the
reasonable expenses of the commissioner's participation in a
supervisory college pursuant to this section, including
reasonable travel expenses, limited to those expenses
reasonably related to the regulation of the insurer's
business in this state. The commissioner may establish a
regular assessment on the insurer for the payment of these
expenses.
SB 1448 (Calderon), Page 14
2. Prior and Related Legislation
AB 299 (Committee on Insurance) (enacted as Chapter 234,
Statutes of 2009) created filing and notice requirements for
specified transactions involving holding company systems and
persons therein.
AB 109 (Committee on Budget) (enacted as Chapter 15, Statutes
of 2011) created civil and criminal penalties for directors
or officers of insurance holding company systems that engage
in transactions or make investments which have not been
properly reported or submitted.
POSITIONS
Support
California Department of Insurance/Sponsor
Opposition
None received (as of April 22, 2012)
Consultant: Hugh Slayden, (916) 651-4773