28 TAC §7.401
The Texas Department of Insurance proposes amendments to §7.401
concerning risk-based capital and surplus requirements for insurers and health
maintenance organizations (HMOs). Section 7.401 regulates risk-based capital
and surplus requirements for property and casualty insurers, life insurance
companies, fraternal benefit societies, mutual life insurance companies, stipulated
premium companies, HMOs and insurers filing the National Association of Insurance
Commissioners (NAIC) Health blank. These insurers and HMOs are referred to
collectively as "carriers" in this proposal. The risk-based capital requirement
is a method of ensuring that a carrier has an appropriate level of policyholders'
surplus after taking into account the underwriting, financial, and investment
risks of a carrier. The NAIC risk-based capital formulas provide the Department
with a widely used regulatory tool to identify the minimum amount of capital
and surplus appropriate for a carrier to support its overall business operations
in consideration of its size and risk exposure. Section 7.401(d) adopts by
reference the NAIC risk-based capital formulas. The proposed amendments to §7.401(d)
are necessary to adopt by reference the 2005 formulas, including the 2005
NAIC Life Risk-Based Capital Report Including Overview and Instructions for
Companies, the 2005 NAIC Fraternal Risk-Based Capital Report Including Overview
and Instructions for Companies, the 2005 NAIC Property and Casualty Risk-Based
Capital Report Including Overview and Instructions for Companies, and the
2005 NAIC Health Risk-Based Capital Report including Overview and Instructions
for Companies. Copies of the documents proposed for adoption by reference
are available for inspection in the Financial Division of the Texas Department
of Insurance, William P. Hobby Jr. State Office Building, Tower Number III,
Third Floor, Mail Code 303-1A, 333 Guadalupe, Austin, Texas. In addition,
an amendment is proposed to §7.401(b)(4)(C) to update the Insurance Code
reference for consistency with the revised code project enacted by the Texas
Legislature.
Ms. Betty Patterson, Senior Associate Commissioner, Financial Program,
has determined that, for each year of the first five years the amendments
will be in effect, there will be no fiscal implications for state or local
government as a result of enforcing or administering the amendments. The proposal
will have no anticipated effect on local employment or local economy.
Ms. Patterson has also determined that for each year of the first five
years the amendments are in effect, the amendments will enable the Department
to more efficiently and effectively utilize existing resources in the review
of the financial condition of carriers, to more efficiently monitor solvency
of the carriers subject to the section, and to implement the most current
risk-based capital requirements. The risk-based capital requirement is a method
of ensuring that a carrier has an appropriate level of policyholders' surplus
after taking into account the underwriting, financial, and investment risks
of a carrier. The NAIC risk-based capital formulas provide the Department
with a widely used regulatory tool to identify the minimum amount of capital
and surplus appropriate for a carrier to support its overall business operations
in consideration of its size and risk exposure. The cost to complete the risk-based
capital report varies from carrier to carrier. Under the proposal, each carrier
subject to the section would be required to acquire NAIC risk-based capital
software at a cost of approximately $600 per entity for each carrier. The
labor cost to transfer the information from a carrier's records to the applicable
report will vary depending on the size of the carrier and the character of
its investments. If a carrier uses the annual statement software that conforms
to NAIC specifications provided by authorized vendors to prepare its annual
report, and if that software is linked to the risk-based capital formula software,
the Department estimates that the information can be transferred and the formula
completed in four hours or less. If the annual statement software is not linked
to the risk-based capital formula, the Department estimates that a carrier
will be able to transfer the information from its records to the risk-based
formula in 8 to 16 hours. The Department's estimations are based upon discussions
with industry representatives who are responsible for maintaining accounting
records for insurers and carriers. Based upon information obtained by the
Department from these industry representatives, a carrier would utilize an
employee who is familiar with the accounting records of the company and accounting
practices in general and who is compensated from $17 to $30 an hour. On the
basis of cost per hour of labor, there is no anticipated difference in the
cost of completing the formula between carriers who are micro, small, and
large businesses. After the completion of the formula, it will likely be reviewed
by an officer of the carrier who is responsible for the preparation of the
financial reports of the carrier. Such officers for small carriers are compensated
at approximately $40 per hour, while such officers for large carriers are
compensated at approximately $100 per hour. Based on the Department's experience,
the cost of compliance for small carriers would be less than the cost of compliance
for large carriers in reviewing the risk-based capital report. Therefore,
the Department anticipates that the proposal will have no adverse economic
effect on small or micro businesses. The Department does not expect the formulas
to require a level of capital that is significantly different from the current
capital requirements since the Department has been using the risk-based capital
levels for several years. For those carriers previously subject to the risk-based
capital requirements, the Department does not anticipate any material increase
in cost resulting from a required capital contribution. However, the function
of the risk-based capital formula is to protect policyholders from the effects
of insolvency, which may require some carriers to increase their capital.
To the extent any carrier must increase its capital as a result of the risk-based
capital requirements, that cost is the amount of capital required and is a
result of the statutory requirement of TEX. INS. CODE ANN. §§822.210,
841.205, 884.206. Regardless of the fiscal effect on an individual carrier,
the requirements of this section are mandated by statute. Although the Department
does not believe that the proposed amendments would have an adverse effect
on small or micro businesses, the Department has considered the purpose of
the applicable statues, which is to protect policyholders and carriers from
the effects of insolvency, and has determined that it is neither legal not
feasible to waive the provisions of the proposed amendments for small or micro
businesses. Additionally, it is the Department's position that to waive or
modify the requirements of the proposed amendments for small and micro businesses
would result in a disparate effect on policyholders and other persons affected
by the amendments.
To be considered, written comments on the proposal must be submitted no
later than 5:00 p.m. on May 22, 2006 to Gene C. Jarmon, General Counsel and
Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P.O. Box 149104,
Austin, Texas 78714-9104. An additional copy of the comments must be simultaneously
submitted to Betty Patterson, Senior Associate Commissioner, Financial Program,
Mail Code 305-2A, P.O. Box 149104, Austin, Texas 78714-9104. Any request for
a public hearing should be submitted separately to the Office of the Chief
Clerk.
The amendments are proposed under the Insurance Code Articles
1.10, 1.32, 21.28-A and §§36.001, 541.401, 822.210, 841.205, 843.404,
885.401, and 884.206. Article 1.10 §5 addresses the duties of the Department
when an insurer's solvency is impaired. Article 1.32 authorizes the Commissioner
to set standards for evaluating the financial condition of an insurer. Article
21.28-A addresses the prevention of insurer delinquencies and in §2(b)
provides that the term "insolvency" of an insurer "and the phrases in further
identity of insurer delinquency and threatened insurer delinquency" mean and
include any one or more of several statutorily specified conditions, including
if a company's required surplus, capital, or capital stock is impaired to
an extent prohibited by law, and in §11 authorizes the Commissioner to
adopt reasonable rules as necessary for augmentation and accomplishment of
Article 21.28-A, including its purposes. Section 541.401 authorizes the Commissioner
to adopt reasonable rules necessary to accomplish the purposes of trade practices
regulation in Chapter 541. Sections 822.210, 841.205, and 884.206 authorize
the Commissioner to adopt rules to require an insurer to maintain capital
and surplus levels in excess of statutory minimum levels to assure financial
solvency of insurers for the protection of policyholders and insurers. Section
843.404 authorizes the Commissioner to adopt rules to require a health maintenance
organization to maintain capital and surplus levels in excess of statutory
minimum levels to assure financial solvency of health maintenance organizations
for the protection of enrollees. Section 885.401 requires each fraternal benefit
society to file an annual report on the society's financial condition, including
any information the Commissioner considers necessary to demonstrate the society's
business and method of operation, and authorizes the Department to use the
annual report in determining a society's financial solvency. Section 36.001
authorizes the Commissioner to adopt any rules necessary and appropriate to
implement the powers and duties of the Texas Department of Insurance under
the Insurance Code and other laws of this state.
The following statutes are affected by this proposal: Insurance Code Articles
1.10, 1.32, and §§541.401, 822.210, 841.205, 843.404, 885.401, 884.206,
982.105, and 982.106.
§7.401.Risk-Based Capital and Surplus Requirements.
(a) - (c)
(No change.)
(d)
Adoption of RBC formula by reference. The commissioner
adopts by reference the following:
(1)
The
2005
[
2003 and 2004
] NAIC Life
Risk-Based Capital Report Including Overview and Instructions for Companies
which includes the RBC formula.
(2)
The
2005
[
2003 and 2004
] NAIC Fraternal
Risk-Based Capital Report Including Overview and Instructions for Companies
which includes the RBC formula.
(3)
The
2005
[
2003 and 2004
] NAIC Property
and Casualty Risk-Based Capital Report Including Overview and Instructions
for Companies which includes the RBC formula.
(4)
The
2005
[
2003 and 2004
] NAIC Health
Risk-Based Capital Report Including Overview and Instructions for Companies
which includes the RBC formula.
(e) - (f)
(No change.)
(g)
Actions of commissioner. The level of risk-based capital
is calculated and reported annually. Depending on the results computed by
the risk-based capital formula, the commissioner of insurance may take a number
of remedial actions, as considered necessary. The ratio result of the total
adjusted capital to authorized control level risk-based capital require the
following actions related to an insurer within the specified ranges:
(1) - (3)
(No change.)
(4)
An insurer reporting total adjusted capital of less than
70% of authorized control level triggers a mandatory control level which subjects
the insurer to one of the following actions:
(A)
being placed in supervision or conservation;
(B)
being determined to be in hazardous financial condition
as provided by the Insurance Code Article 1.32, and §8.3 of this title
(relating to Hazardous Conditions) regardless of percentage of assets in excess
of liabilities;
(C)
being determined to be impaired as provided by the Insurance
Code Articles 1.10, §5 or
§841.206
[
3.60
];
or
(D)
any other applicable sanctions under the Texas Insurance
Code.
(5)
(No change.)
(6)
A property and casualty insurer subject
to this section is subject to a trend test if its total adjusted capital to
authorized control level risk-based capital is between 200% and 300%. If the
result of the trend test as determined by the formula is "YES", the insurer
triggers regulatory attention at the Company Action Level on the trend test.
For the year 2005 only, the first year of this trend test, the trend test
will be for informational purposes only.
(h) - (j)
(No change.)
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State on April 7, 2006.
TRD-200602048
Gene Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Earliest possible date of adoption: May 21, 2006
For further information, please call: (512) 463-6327