28 TAC §§5.3001-5.3004
The Texas Department of Insurance adopts the repeal of §§5.3001-5.3004,
relating to the prohibition against regulated and nonregulated insurers entering
into guaranty agreements, indemnity agreements, or reinsurance agreements
designed to circumvent the application of Article 5.26 to regulated insurers.
The repeal of §§5.3001-5.3004 is necessary because the enactment
of Articles 18.23A and 19.12A adequately address the problems these sections
were designed to address and therefore have rendered §§5.3001-5.3004
unnecessary. Sections 5.3001 and 5.3002 describe certain practices that insurers
were engaging in to circumvent the promulgated rating system established by
Article 5.26. These sections focused on the practice of nonregulated insurers
issuing policies at rates less than those authorized for use by regulated
insurers and these blocks of policies were being assumed by the rate regulated
insurers through guaranty, indemnity, or reinsurance agreements. Through these
arrangements, the regulated insurers were charging rates that were inadequate
and not actuarially sound and the board was concerned that such practices
could lead to insurer insolvency. The board was particularly concerned with
the practice of regulated insurers establishing affiliated Lloyds companies
and reciprocal exchanges expressly for the purpose of writing policies below
the promulgated rate and then ceding those policies to the regulated affiliate.
Section 5.3002 specified these practices to be in violation of Articles 5.26
and 5.41, issued a mandate to insurers to cease and desist from such practices,
and issued a directive to the commissioner to investigate insurers engaging
in such practices. Sections 5.3003 and 5.3004 included multi-peril policies
under the prohibitions described in §§5.3001 and 5.3002 if the multi-peril
policy included coverage that was regulated under Article 5.26. In 1991, Articles
5.26 and 5.41 were amended to reflect that a new benchmark rating system,
outlined in Subchapter M, would be used to regulate residential property insurance
rates instead of the promulgated rating system. Simultaneous with these amendments
to Articles 5.26 and 5.41, Article 5.101 was enacted to establish the benchmark
rating system. The effect of these legislative changes was that the benchmark
rating system supplanted the promulgated rating system for residential property
insurance rates. Also in 1991, Articles 18.23A and 19.12A were enacted to
address the problem of affiliated Lloyds and reciprocal exchanges being used
to circumvent the promulgated rating system. These statutes mandate that an
insurer who is subject to rate regulation through the benchmark rating system
may not assume a risk written by an affiliated Lloyds or reciprocal exchange
if the risk is written at a lower rate in the affiliated Lloyds or reciprocal
exchange than the rate charged by the regulated company that would be assuming
the risk. The problem that the sections are designed to address is addressed
by the statutes by prohibiting the reinsurer from assuming a risk written
by the affiliated company at a rate below the reinsurer's filed flex rate.
Since the problem of circumventing rate regulation through the use of affiliated
companies has been adequately addressed by the enactment of Articles 18.23A
and 19.12A, §§5.3001-5.3004 are unnecessary and are being repealed.
The adoption of the repeals will result in the elimination of sections
that are unnecessary and no longer serve a useful purpose. Moreover, the repeals
will contribute generally to a streamlining of Chapter 5 of the Texas Administrative
Code by elimination of sections which have become obsolete.
The agency did receive comments from one commentor, however, these comments
were subsequently withdrawn.
The repeals are adopted under the Insurance Code, Articles 5.98
and 1.03A; and the Government Code §§2001.001 et seq. Article 5.98
provides that the Commissioner of Insurance may adopt reasonable rules that
are appropriate to accomplish the purposes of Chapter 5, Texas Insurance Code
entitled Rating and Policy Forms, and which contains statutes governing fire
insurance and allied lines. Article 1.03A authorizes the commissioner to adopt
rules and regulations for the conduct and execution of the duties and functions
of the department as authorized by statute. The Government Code §§2001.001
et seq. (Administrative Procedure Code) authorizes and requires each state
agency to adopt rules of practice setting forth the nature and requirements
of available procedures and to prescribe the procedure for adoption of rules
by a state administrative agency.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on February
18, 1999.
TRD-9901008
Lynda H. Nesenholtz
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: March 10, 1999
Proposal publication date: August 28, 1998
For further information, please call: (512) 463-6327