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California implementing new life insurance regulations, PBR on the horizon

Life Insurance and Annuities
by Naomi Kloeppersmith
Several consumer protection and industry-strengthening laws are going into effect in California.
Several consumer protection and industry-strengthening laws are going into effect in California.

The State of California implemented four new insurance regulations effective January 1, 2016, and more are expected to be approved later this year. The bills were "crafted to offer more protections ... for consumers, seniors and hard-working families," as well as strengthen the industry, according to Dave Jones, California's Insurance Commissioner, in a press release.

Senate Bill 426 requires annuity death benefits to be at least the annuity's account value, without surrender charges or penalties applied. Assembly Bill 1515 clarifies some of the consumer protections in California's Insurance Code. For example, the requirement to pay interest on claims paid more than 30 days after receipt of the claim has been restored for non-health disability policies.

Some of the bills were meant to streamline the market, both on the front-end and back-end. Assembly Bill 1131 allows insurers to offer electronic management of policies to insureds, accommodating consumers who prefer e-commerce for their insurance transactions. Assembly Bill 387 allows the Commissioner to develop new guidelines to streamline the insurance department's review of life and disability insurance forms. The bill also extends the amount of time the department has to review such policy forms from 30 to 120 days, allowing for a more thorough review of the forms and associated risks and premium rates.

Principles-based reserving could soon come to California.Principle-based reserving could soon come to California.

What's Next?
Two more laws are in the pipeline. The most highly anticipated by actuaries is Senate Bill 696, which would allow principles based reserving (PBR) for life insurance products. PBR is a new approach to calculating reserves that moves away from the formulaic methods currently used. It allows for more use of professional judgment in modeling, as well as the incorporation of company-specific experience, if credible. The goal is to "right-size" reserve levels and better reflect the different risks inherent in increasingly complex life insurance products.

The National Association of Insurance Commissioners (NAIC) has developed model regulation regarding PBR, and once at least 42 states representing 75% of total US premium adopt the regulation (or similar regulation), PBR will take effect nationwide for new business. The NAIC is close to having the approvals needed for implementation.

Senate Bill 575 will go into effect on July 1, 2016. It requires annual notification of available non-forfeiture benefits and contingent benefits for long term care policies to both the insured and the insured's designated backup contact. It was designed specifically to protect the elderly and their caregivers.

Assembly Bill 553 went into effect August 17, 2015, and enhanced corporate governance policies for insurers, keeping up with the national trend toward more structured oversight. It enhanced the department's oversight of corporate governance policies and practices, and it clarified the role of regulators as group-wide supervisors, as opposed to supervising only subsidiaries in their jurisdiction.

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