Background:

In 1982 the Legislature enacted two model acts of the National Association of Insurance Commissioners (NAIC): the Standard Valuation Law and the Standard Nonforfeiture Law. They have not been amended since that time.

Standard Valuation.

The Office of the Insurance Commissioner (Commissioner) must annually value the reserve liabilities for outstanding life insurance policies, annuity, and pure endowment contracts of every life insurance company doing business in this state. Life insurance is a payment to a beneficiary upon the death of the insured. An "annuity" is an insurance contract that pays a periodic income benefit to one or more persons while they are living. An "endowment" contract is one where the face value of the policy is payable only if the insured lives to the end of a stated endowment period. Life insurers set aside reserves to ensure they will be able to pay all expected claims.

Life insurance companies must annually submit the opinion of a qualified actuary regarding whether the required reserve amounts have been appropriately determined. The insurance companies must rely on standard mortality tables to determine the minimum standard valuation of the policies and contracts issued.

Nonforfeiture Standard.

Nonforfeiture provisions entitle an insured to relinquish a life insurance policy for its cash surrender value, to take a "reduced paid-up" policy, to take an "extended term" policy, or to borrow from the company using the cash value as collateral. A "paid-up" policy is one in which the premiums have already been paid. Under the option of the "extended term" policy, the cash value of the policy being relinquished may be used to purchase term life insurance in the amount of the original policy.

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Summary of Bill:

The Standard Valuation and Standard Nonforfeiture Laws are amended.

Standard Valuation.

Principle-based reserves is an approach to calculating reserves that requires life insurance companies to determine appropriate amounts based upon factors such as mortality, policy holder behavior, and expenses, under various economic conditions.

Valuation Manual.

The NAIC Valuation Manual (Manual), once operative, will be the basis upon which reserves are calculated. The operative date of the Manual is January 1 of the calendar year following July 1 of the year that the Manual has been adopted. The Manual is adopted when: it has been adopted by the NAIC by an affirmative vote of at least three-fourths of the voting members; the standard valuation law has been enacted by states representing greater than 75 percent of the direct premiums written; and the standard valuation law has been enacted by at least 42 of the 55 members of the NAIC, which includes the 50 states, American Samoa, the American Virgin Islands, the District of Columbia, Guam, and Puerto Rico.

A company must establish reserves using a principle-based valuation that meets the conditions specified in the Manual. The company must also establish procedures for corporate governance and oversight of the actuarial valuation function and provide the Commissioner and the board of directors with an annual certification of the effectiveness of the internal controls with respect to the principle-based valuation. The controls must be designed to assure that all material risks inherent in the liabilities and associated assets are included in the valuation.

Valuation of Reserve Liabilities.

The Commissioner must annually value the reserves for all outstanding life insurance, annuity and endowment, disability, and deposit-type contracts of every company, where those contracts were issued on or after the operative date of the Manual. A deposit term policy is one where a premium (the deposit) is paid in the first policy year, in addition to regular premiums. The deposit is left to accumulate at an interest rate for a specified number of years. After that time, the policy owner may receive the deposit plus interest or may renew the policy without having to furnish evidence of insurability. Under a disability contract, income is paid under a policy that is not covered under worker's compensation benefits, usually as a percentage of the insured's income prior to the disability.

The Commissioner may accept a valuation made by the insurance supervisory official of any state, or other jurisdiction when the valuation complies with the minimum standards required under Washington law.

Opinion of Appointed Actuary and Memorandum.

Insurance companies subject to regulation by the Commissioner and that have life insurance, accident and health, or deposit-type contracts must annually submit the opinion of the appointed actuary whether reserves and other actuarial items in support of those contracts are computed appropriately, based on assumptions that satisfy contractual provisions, are consistent with prior reported amounts, and comply with law. A memorandum must also be submitted in support of the opinion.

Unless exempt from the requirements of the Manual, the annual opinion must include whether the reserves made adequate provision for the company's obligations under the policies and contracts. If an insurance company fails to provide an opinion that meets the required standards, the Commissioner may engage a qualified actuary at the expense of the company to review the opinion and prepare the supporting memorandum required.

Principle-Based Valuation Report.

A company must also develop a principle-based valuation report that complies with the standards in the Manual. Upon request, the company must file the report with the Commissioner.

Confidentiality.

With certain exceptions, the memorandum in support of the opinion submitted to the Commissioner; any other material provided by the insurance company in connection with the memorandum; documents regarding the effectiveness of an insurer's internal controls; an insurer's assumptions regarding its reserves; and an insurer's experience data are confidential and privileged. They are not subject to the Public Records Act, nor subject to subpoena or discovery, and are not admissible as evidence in any private civil action.

The Commissioner may use the documents, material or other information submitted in the furtherance of any regulatory or legal action brought as part of the Commissioner's official duties. However, neither the Commissioner nor any other person who received the documents is permitted or required to testify in any private civil action concerning the documents.

The Commissioner may enter into agreements to share the documents with other state, federal, and international regulatory agencies; with the NAIC and its affiliates and subsidiaries; and with law enforcement authorities. The recipient of the documents must agree to maintain their confidentiality and privileged status. Sharing of the documents pursuant to the authority of these statutory provisions does not result in the waiver of confidentiality or privilege.

Exceptions to Confidentiality.

The memorandum and other materials provided in support of the opinion of the actuary may be subject to subpoena for the purpose of defending an action seeking damages from the actuary submitting the memorandum. A memorandum and its attendant materials may be released by the Commissioner with the written consent of the company or to the American Academy of Actuaries upon a request for the purpose of professional disciplinary proceedings and on the condition that procedures are set forth to preserve confidentiality.

All portions of a memorandum will no longer be confidential if: the company cites any portion in its marketing, if it is cited before a governmental agency other than the Commissioner, or if it is released to the news media by the company.

Standard Nonforfeiture.

For policies issued after the operative date of the Manual, the Manual must provide the Commissioner's standard mortality for use in determining the minimum nonforfeiture standard to replace existing mortality tables. The Commissioner may, by rule, adopt a Commissioner's standard mortality table adopted by the NAIC after 1980, and that standard would supersede the standard provided by the Manual.

Staff Summary of Public Testimony:

(In support) Under this bill insurers will have more flexibility to better market products to military families and to allow reserves to be right-sized so that those products may become more readily available. Nothing in this bill would take away the ability of the insurer to make sure that its reserves are sufficient. The regulators will receive a lot more information than required under current law. It is important to keep the Washington legislation the same as the NAIC model act. Under this bill, consumers will pay an appropriate price for products and the regulators will have more tools. The life insurance industry is enthusiastic to provide the required detailed information. Much of that information is deeply proprietary and deeply competitive, and it should not be available to others who have interests that have nothing to do with the interest of the regulator. The legislation has been enacted in 20 states and is pending in 24 states, including Washington.

(Opposed) The bill requires a lot more information to be supplied by insurers, and that information will be both proprietary and nonproprietary. Someone in the agency should make a determination of what is proprietary and what is not. The bill does not address the needs of the public. Only 20 states have adopted this bill, and it would be premature for Washington to adopt it. New York has decided not to adopt this and they have developed their own version. The reason that most states have not adopted it is due, in part, to the disclosure provisions. The information in the rating proceedings is available to the public now but would be confidential under this bill. The confidentiality provisions should be limited to proprietary information or trade secrets. This broad standard in this bill is not necessary. This model law is not required by the NAIC for accreditation.