PART 1. TEXAS DEPARTMENT OF INSURANCE
CHAPTER 7. CORPORATE AND FINANCIAL REGULATION
The Texas Department of Insurance proposes amendments to §7.202(b), concerning insurance holding company systems, and to §7.402, concerning risk-based capital and surplus requirements for insurers and health maintenance organizations (HMOs). Section 7.402 regulates risk-based capital and surplus requirements for (i) property and casualty insurers, (ii) life insurance companies, (iii) fraternal benefit societies, (iv) stipulated premium companies that do business in other states, (v) HMOs, and (vi) 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 7.402(d) adopts by reference the NAIC risk-based capital formulas. The proposed amendments to §7.402(d) are necessary to adopt by reference the 2008 NAIC risk-based capital formulas to be used for year-end 2008. These formulas include (i) the 2008 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies, (ii) the 2008 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies, (iii) the 2008 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies, and (iv) the 2008 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 office of the Texas Department of Insurance, Financial Analysis, William P. Hobby Jr. State Office Building, Tower Number III, Third Floor, MC 303-1A, 333 Guadalupe, Austin, Texas.
Chapter 823 of the Insurance Code regulates insurance holding company systems. Subchapter B, Chapter 7, of Title 28 of the Texas Administrative Code sets forth the administrative regulations for implementing the Insurance Code Chapter 823. Section 823.015 authorizes the Commissioner to exempt from the provisions of Chapter 823 of the Insurance Code and the administrative regulations in Subchapter B, except the registration requirement, any commercially domiciled insurer if the Commissioner determines that the insurer has assets physically located in this state or an asset to liability ratio sufficient to justify the conclusion that there is no reasonable danger that the operations or conduct of the business of the insurer could present a danger of loss to the policyholders of this state. Section 7.202(b) implements §823.015. Amendments are proposed to the title of Subchapter B and to §7.202(b) to make minor, nonsubstantive changes. These changes are necessary to (i) update references to the "Insurance Holding Company System Regulatory Act," the "Act," and Insurance Code references to be consistent with the nonsubstantive Insurance Code revision enacted in Acts 2001, 77th Legislature, Chapter 1419, §1, effective June 1, 2003; (ii) update obsolete Texas Administrative Code references; and (iii) correct the name of the Department's Financial Analysis Division. Specifically, the proposed amendments amend the title of Subchapter B by changing the word "System" to "Systems" and deleting the words "Regulatory Act." The proposed amendments to §7.202(b)(1) replace two statutory references to the "Act" with "the Insurance Code Chapter 823." The Insurance Holding Company System Regulatory Act, formerly Article 21.49-1 of the Insurance Code, was repealed in the nonsubstantive Insurance Code revision, Acts 2001, 77th Legislature, Chapter 1419, §1, effective June 1, 2003. The Act was re-adopted as Chapter 823 in the same nonsubstantive Insurance Code revision. The proposed amendments to §7.202(b)(1) replace the statutory reference to the "Act, §2(s)" with "the Insurance Code §823.015." The Act, §2(s) was repealed in the nonsubstantive Insurance Code revision, Acts 2001, 77th Legislature, Chapter 1419, §1, effective June 1, 2003. The Act, §2(s) was re-adopted as §823.015 in the same nonsubstantive Insurance Code revision. The proposed amendments to §7.202(b)(1)(B)(iii) add a reference to §7.402 (relating to Risk-Based Capital and Surplus Requirements for Insurers and HMOs) and remove the obsolete references to §7.401 and §7.410. The proposed amendment to §7.202(b)(2) replaces the statutory reference to "Article 21.49-2C" with "Chapter 827." Article 21.49-2C was repealed in the nonsubstantive Insurance Code revision, Acts 2001, 77th Legislature, Chapter 1419, §1, effective June 1, 2003. Article 21.49-2C was re-adopted as Chapter 827 in the same nonsubstantive Insurance Code revision.
Simultaneously with this proposal the Department is proposing the repeal of §7.401, concerning risk-based capital and surplus requirements for insurers and HMOs for year-end 2006, and §11.809, concerning risk-based capital for HMOs and insurers filing the NAIC health blank for year-end 2006. The repeal of §7.401 and §11.809 are necessary to delete the obsolete year-end 2006 risk-based capital requirements. The repeal of §11.809 is also necessary because the sole purpose of §11.809 is to direct all HMOs and insurers filing the NAIC Health Blank to comply with the requirements of §7.401. The proposed amendments to §7.402 address in a single section the risk-based capital requirements for all insurers and HMOs for year-end 2008. The repeal of §7.401 and §11.809 are also published in this issue of the Texas Register.
FISCAL NOTE. Mr. Danny Saenz, 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 proposed amendments. The proposal will have no effect on local employment or local economy.
PUBLIC BENEFIT/COST NOTE. Mr. Saenz also has determined that for each year of the first five years the proposed amendments are in effect, the anticipated public benefit will be that the Department will be able to more efficiently and effectively utilize existing resources in the review of the operations and financial condition of carriers, to more efficiently monitor solvency of the carriers subject to the proposal, and to implement the most current risk-based capital requirements. The proposed amendments will enable the Department to administer appropriate and proactive regulatory actions to protect the interests of the public against carriers whose financial condition may potentially be hazardous. 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 considering its size and risk exposure.
The Department does not anticipate any additional potential cost to persons for compliance with the proposed amendments to §7.202(b). These proposed amendments do not impose any additional requirements on any regulated person. The proposed amendments are nonsubstantive and simply update obsolete Insurance Code references and Texas Administrative Code references and correct the name of the Department's Financial Analysis Division. The Department has determined that the proposed amendments to §7.402 contain three separate sets of requirements that must be analyzed in order to determine costs to carriers required to comply with the proposal. All of the requirements in the existing §7.402 continue to apply but the compliance with the requirements will be based on the use of the 2008 risk-based capital formulas. Therefore, while these requirements in the existing rule were adopted for risk-based capital and surplus requirements for year-end 2007 using the 2007 risk-based capital formulas, the same requirements are also applicable to the risk-based capital and surplus requirements for year-end 2008 using the 2008 risk-based capital formulas. Therefore, the same types of costs that were incurred for year-end 2007 to comply with these requirements will also be incurred for year-end 2008. The Department believes that the cost of compliance with this proposal are the same as those costs for existing §7.402 that are currently in effect. This is because both the existing §7.402 and this proposal have the same three separate sets of requirements. Therefore, those estimated costs for these three separate sets of requirements, which are described below, are consistent with the year-end 2007 estimated compliance costs. The Department does not anticipate any new, incremental costs as a result of the proposed amendments.
As previously indicated, there are three separate sets of requirements resulting from these proposed amendments that must be analyzed in order to determine costs to small and micro business carriers required to comply with the proposed requirements. First, §7.402(b), (d) and (e) require, regardless of size, certain property and casualty insurers, certain life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the National Association of Insurance Commissioners (NAIC) Health blank (the term carriers refers to all of these entities) to complete a risk-based capital report and reflect the results of that report in their financial statements filed with the Department. Section 7.402 does not apply to certain types of specified insurers and certain specified insurers with limited operations. Specifically, §7.402(b)(1) provides that §7.402 does not apply to any insurance company that writes or assumes a life insurance or annuity contract or assumes liability on or indemnifies one person for any risk under an accident and health insurance policy, or any combination of these policies, in an amount that is $10,000 or less. Further, the scope indicated in §7.402(b)(1) does not include certain carriers regulated by the Department, such as a statewide mutual assessment association, a local mutual aid association, a mutual burial association, an exempt association, and a stipulated premium company only doing business in Texas. Second, certain carriers that have business subject to §7.402(d)(1) are also required to perform risk-based capital calculations pursuant to the 2008 life risk-based capital C-3 Phase II instructions. This requirement relates to certain unique types of business that is generally written only by large carriers. Third, regardless of size, carriers specified in §7.402(b) that fail to maintain capital and surplus in accordance with the specified levels in §7.402(g)(1), (2), (5) and (6) are required to prepare and implement a comprehensive financial plan under §7.402(g)(1), (2), (5) and (6).
§7.402(b), (d) and (e). Any carrier specified in §7.402(b) is required to comply with the requirements in §7.402(d) and (e) to prepare a risk-based capital report and reflect the results of the report in the carrier's financial statements filed with the Department. These costs will vary from carrier to carrier based on the size and type of the carrier, the character of its investments, the kinds and nature of the risks insured, the type of software used by the carrier to complete its annual statement, and employee compensation expenses. Under the amendment, each carrier subject to proposed §7.402(b), (d) and (e), regardless of size, is required to acquire NAIC risk-based capital software at a cost of approximately $650 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; the transfer by larger carriers and carriers with more complex investments will generally take longer. 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 carriers. It is anticipated that a carrier, regardless of size, will utilize an employee who is familiar with the accounting records of the carrier and accounting practices in general. The Department estimates that the compensation for this employee will range from approximately $20 to $40 an hour. After the completion of the transfer of information, the resulting risk-based capital report will likely be reviewed by an officer of the carrier who is responsible for the preparation of the financial reports of the carrier. The Department estimates that such officers are compensated at a range from approximately $40 per hour to approximately $100 per hour, or more. The Department also estimates that large carriers generally will compensate these officers at the higher end of the salary range. Therefore, based on the Department's experience, the cost of review of the risk-based capital report for small carriers will be less than the cost for large carriers.
The Department does not expect the 2008 risk-based capital formulas to require a level of capital that is significantly different from the capital requirements for 2007. Carriers have been required by the Department to comply with the risk-based capital requirements 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 requirements in Insurance Code Chapter 404 and §§441.051, 822.210, 822.211, 841.205, 841.206, 843.404, and 884.206.
§7.402(d)(1). Carriers performing risk-based capital calculations pursuant to the 2008 life risk-based capital C-3 Phase II instructions required in §7.402(d)(1) will incur costs that vary by the size of the carriers and the amount and complexity of the business subject to these calculations. Less than 10 large domestic carriers and no small or micro business carriers in Texas are expected to have business subject to these calculations. A number of foreign carriers have business subject to these calculations as well. Business subject to these calculations is specified in the 2008 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies. It includes primarily variable annuity business, but also business that contains guarantees similar to those found in variable annuity business such as guaranteed minimum death benefits or guaranteed minimum living benefits. The C-3 Phase II calculations are considered a more appropriate measure of the capital requirement for the interest rate risks and market risks associated with this type of business, by requiring carriers to evaluate how various guarantees react to changes in equity markets and interest rates. The less than 10 large domestic carriers expected to be affected by the 2008 life risk-based capital C-3 Phase II instructions will incur ongoing annual actuarial and computer personnel costs to perform the C-3 Phase II calculations. The Department estimates that these actuarial personnel costs will range from $25 per hour to approximately $300 per hour. Computer personnel costs are estimated to range from $25 per hour to approximately $150 per hour. The annual costs for each of these few large domestic carriers in Texas are estimated to range from one-half of one percent to one percent of the annual costs of administering each of the carrier's business affected by the C-3 Phase II requirements. The Department anticipates that such annual costs per carrier are believed to be similar for each foreign carrier in Texas with business subject to these requirements. The Department's estimations are based upon discussions with industry representatives familiar with resources and costs needed for these computations. Discussions with industry representatives involved several of the large domestic carriers in Texas estimated to have over half of the domestic carrier variable annuity business in Texas as measured on the basis of accumulation value for this business.
§7.402(g)(1), (2), (5), and (6). A few carriers (estimated to be less than one percent of the total carriers doing business in Texas) may need to prepare and file additional reporting with the Department at the company action level, as provided in §7.402(g)(1), (2), (5) and (6). The costs of this reporting will vary by company size and complexity but will generally involve an employee who is familiar with the accounting records of the carrier and is compensated at an estimated rate from $20 to $40 per hour. Assistance from actuarial staff may be required, and actuarial personnel costs is estimated to range from $25 per hour to approximately $300 per hour. The additional reporting requirements typically will involve the chief financial officer or other similar officer responsible for preparing the financial reports; such officers are generally compensated at hourly rates that may range from $40 per hour to approximately $300 per hour. The Department also estimates that large carriers generally will compensate these officers at the higher end of the salary range. Therefore, based on the Department's experience, the costs of preparation and filing of the additional reporting to the Department at the company action level are estimated to be relatively less for small and micro business carriers compared to large business carriers. Company action level reporting and its associated costs are intended to stave off other, higher costs that impacted carriers will likely incur absent their timely action to address the underlying concerns. Company action level reporting enables the Department to administer appropriate and proactive regulatory actions in order to protect the interests of the public against carriers whose financial condition may potentially be hazardous.
ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS FOR SMALL AND MICRO BUSINESSES. In accordance with the Government Code §2006.002(c), the Department has determined that the proposed amendments to §7.202(b) will not have an adverse economic effect on small or micro businesses. As explained in the Cost Note part of this proposal, the proposed amendments do not impose any new requirements or costs on any individuals or entities. The proposed amendments to §7.202(b) are nonsubstantive and simply update obsolete Insurance Code references and Texas Administrative Code references and correct the name of the Department's Financial Analysis Division. In accordance with the Government Code §2006.002(c), the Department has therefore determined that a regulatory flexibility analysis is not required because the proposed amendments to §7.202(b) will not have an adverse impact on small or micro businesses.
The Department has determined that the proposed amendments to §7.402 contain three separate sets of requirements that must be analyzed in order to determine costs to small and micro business carriers required to comply with this proposal. As previously stated in the Cost Note part of this proposal, all of the requirements in the existing §7.402 continue to apply, but the compliance with the requirements will be based on the use of the 2008 risk-based capital formulas. Therefore, while all of the requirements in the existing rule were adopted for risk-based capital and surplus requirements for year-end 2007, the same requirements are also applicable to the risk-based capital and surplus requirements for year-end 2008. Therefore, the same types of costs that were incurred by small and micro business carriers for year-end 2007 to comply with these requirements will also be incurred for year-end 2008. The Department does not anticipate any change in these estimated costs from those estimated for compliance with the year-end 2007 requirements. The Department also does not anticipate any difference in the economic impact on small and micro business carriers from that determined for compliance with the year-end 2007 requirements. Therefore, the Department's economic impact statement and regulatory flexibility analysis for compliance with the year-end 2008 requirements is consistent with the economic impact statement and regulatory flexibility analysis for the year-end 2007.
As previously indicated, there are three separate sets of requirements resulting from these proposed amendments that must be analyzed in order to determine costs to small and micro business carriers required to comply with this proposal. First, §7.402(b), (d), and (e) require, regardless of size, certain property and casualty insurers, certain life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the National Association of Insurance Commissioners (NAIC) Health blank (the term carriers refers to all of these entities) to complete a risk-based capital report and reflect the results of that report in their financial statements filed with the Department. Separate and apart from any requirements of the Government Code §2006.002(c), §7.402(b)(1) excludes certain insurers from compliance with the §7.402 requirements. These insurers are more likely to be small or micro business carriers because of the insurers' types or methods of operation. Under §7.402(b)(1), the risk-based capital requirements in §7.402 do not apply to any insurance company that writes or assumes a life insurance or annuity contract or assumes liability on or indemnifies one person for any risk under an accident and health insurance policy, or any combination of these policies, in an amount that is $10,000 or less. Further, under §7.402(b)(1), certain insurers are excluded entirely from compliance with the §7.402 requirements. These include statewide mutual assessment associations, local mutual aid associations, mutual burial associations, exempt associations, and stipulated premium companies only doing business in Texas. Second, §7.402(d) and (e) require carriers specified in §7.402(b), regardless of size, to maintain capital and surplus in accordance with the specified levels. The failure to do so triggers the requirement in §7.402(g) that the carrier prepare and implement a comprehensive financial plan. Third, certain carriers that have business subject to §7.402(d)(1) are required to perform risk-based capital calculations pursuant to the proposed 2008 life risk-based capital C-3 Phase II instructions. The C-3 Phase II requirement relates to certain unique types of business that are generally written only by large carriers and will therefore, not have an adverse economic effect on small or micro businesses.
§7.402(b), (d), and (e). As required by the Government Code §2006.002(c), the Department has determined that approximately 50 to 100 of the carriers specified in §7.402(b) are small or micro-business carriers that will be required to comply with the requirements in §7.402(d) and (e) to prepare a risk-based capital report and reflect the results of the report in the carrier's financial statements filed with the Department. These small or micro business carriers will incur routine costs associated with completing the risk-based capital report and reflecting the results in their financial statements filed with the Department. Also, as required by the Government Code §2006.002(c), the Department has determined that these routine costs will not have an adverse economic effect on the approximately 50 to 100 small or micro business carriers. These routine costs of compliance will vary between large business carriers and small or micro-business carriers based upon the carrier's type and size and other factors, including the character of the carrier's investments, the kinds and nature of the risks insured, the type of software used by the carrier to complete its annual statement, and employee compensation expenses. The Department's cost analysis and resulting estimated routine costs for carriers in the Public Benefit/Cost Note portion of this proposal are equally applicable to small and micro-businesses. As indicated in the Public Benefit/Cost Note analysis, these routine costs will be less for small or micro business carriers. This is primarily because small or micro business carriers will incur less labor costs in transferring information from their records to the risk-based capital reports due to their smaller and less complex investment portfolios than large business carriers. Also, small or micro business carriers may compensate officers who review risk-based capital reports at a lower salary than large business carriers.
Under the Government Code §2006.002(c), before adopting a rule that may have an adverse economic effect on small or micro businesses, an agency is required to prepare in addition to an economic impact statement a regulatory flexibility analysis that includes the agency's consideration of alternative methods of achieving the purpose of the proposed rule. Because the Department has determined that the routine costs to comply with this amendment, i.e., completing the risk-based capital report and reflecting the results in the carrier's financial statements filed with the Department, will not have an adverse economic effect on small or micro businesses, the Department is not required to consider alternative methods of achieving the purpose of these requirements in the proposed rule.
§7.402(g)(1), (2), (5) and (6). As required by the Government Code §2006.002(c), the Department has determined that the costs to comply with §7.402(g)(1), (2), (5) and (6) may have an adverse economic effect on no more than one or two small or micro-business carriers. Such costs will only be incurred by these relatively few small or micro-business carriers because of the failure of the individual carrier to maintain capital and surplus in accordance with the levels required in §7.402(g)(1), (2), (5) and (6). This failure will trigger the requirement in §7.402(g)(1), (2), (5) and (6) that the carrier prepare and implement a comprehensive financial plan. This plan will be necessary to identify the conditions that contribute to the carrier's financial condition. The plan must contain proposals to correct areas of substantial regulatory concern and projections of the carrier's financial condition, both with and without the proposed corrections, including plans to restore its capital and surplus to acceptable levels. The total cost of compliance with §7.402(g)(1), (2), (5) and (6) for preparing and implementing comprehensive financial plans will depend on the size and type of the small or micro-business carrier and several other factors. These other factors include the character of the carrier's investments, the kinds and nature of the risks insured, the type of software used by the carrier to complete its annual statement, and employee compensation expenses. The Department's cost analysis and resulting estimated costs for carriers who will be required to prepare and implement a comprehensive financial plan in the Public Benefit/Cost Note portion of this proposal are equally applicable to small or micro-businesses. As indicated in the Public Benefit/Cost Note analysis, these costs will be less for small or micro-business carriers, primarily because small or micro business carriers will incur less labor costs in transferring information from their records to the risk-based capital reports due to their smaller and less complex investment portfolios than large business carriers and because small or micro business carriers may compensate officers that review risk-based capital reports at a lower salary than large business carriers. The function of the risk-based capital formulas in §7.402(d) is to protect policyholders, enrollees, and carriers from the effects of carrier insolvency. Therefore, carriers, regardless of size, that are required to submit comprehensive financial plans may also be required 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 requirements in the Insurance Code Chapter 404 and §§441.051, 822.210, 822.211, 841.205, 841.206, 843.404, and 884.206. These statutes authorize or require the Commissioner to order carriers that are operating in a potentially hazardous manner to take action to remedy such hazardous condition, which may include the requirement that the carriers increase their capital and surplus and take other remedial action.
In accordance with the Government Code §2006.002(c-1), the Department has determined that even though §7.402(g)(1), (2), (5) and (6) may have an adverse economic effect on small or micro-businesses that are required to comply with these proposed requirements, the Department is not required to prepare a regulatory flexibility analysis as required in §2006.002(c)(2) of the Government Code. Section 2006.002(c)(2) requires a state agency, before adopting a rule that may have an adverse economic effect on small businesses, to prepare a regulatory flexibility analysis that includes the agency's consideration of alternative methods of achieving the purpose of the proposed rule. Section 2006.002(c-1) of the Government Code requires that the regulatory flexibility analysis ". . . consider, if consistent with the health, safety, and environmental and economic welfare of the state, using regulatory methods that will accomplish the objectives of applicable rules while minimizing adverse impacts on small businesses." Therefore, an agency is not required to consider alternatives that, while possibly minimizing adverse impacts on small and micro-businesses, would not be protective of the health, safety, and environmental and economic welfare of the state.
Section 7.402(g)(1), (2), (5) and (6) are authorized by the following Insurance Code statutes: §§404.003 - 404.005, and §§822.210, 841.205, 843.404, and 884.206. The primary purpose of these statutes is to require a carrier to maintain capital and surplus in amounts that exceed the minimum amounts required by statute because of (i) the nature and kind of risks the carrier underwrites or reinsures; (ii) the premium volume of risks the carrier underwrites or reinsures; (iii) the composition, quality, duration, or liquidity of the carrier's investments; (iv) fluctuations in the market value of securities the carrier holds; (v) or the adequacy of the carrier's reserves. These statutes further require that a rule adopted by the Commissioner be designed to ensure the financial solvency of a carrier for the protection of policyholders, enrollees, creditors, or the general public from the harmful effects of carrier insolvency. Section 441.001(g) provides that for the reasons stated in §441.001, the substance and procedures in Insurance Code Chapter 441 are the public policy of the State of Texas and are necessary to the public welfare. Section 441.001(a) states that insurer delinquencies destroy public confidence in the state's ability to regulate insurers and an insurer delinquency affects other insurers by creating a lack of public confidence in insurance and insurers. Section 441.001(b) states that placing an insurer in receivership often destroys or diminishes, or is likely to destroy or diminish, the value of the insurer's assets. Further, the purpose of Insurance Code §§441.051, 822.211, and 841.206 is to prohibit the impairment of a carrier's minimum required capital or surplus, and these statutes require that the Commissioner take action to remedy the impairment. Sections 441.051, 822.211, and 841.206 further provide that the failure of a carrier to maintain its required capital or surplus at levels required by the Commissioner by rule is considered a prohibited impairment.
The purpose of §7.402(g)(1), (2), (5) and (6) is to protect the economic welfare of (i) carriers, (ii) consumers that purchase insurance policies, annuities and other contracts issued by property and casualty insurers, life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the NAIC Health blank, (iii) other persons and entities that would be adversely affected by a carrier insolvency against the risk that a carrier may become insolvent and unable to pay its insureds' claims and other obligations as they become due, and (iv) the public and the state of Texas generally.
The requirements in §7.402(g) that carriers maintain capital and surplus at acceptable levels or prepare a comprehensive financial plan to restore their capital and surplus to acceptable levels are consistent with and necessary to implement the legislative intent of §§404.003 - 404.005, and §§822.210, 841.205, 843.464, and 884.206 of the Insurance Code. This intent is to ensure the financial solvency of a carrier, regardless of size, for the protection of the economic interests of all policyholders and not just the economic interests of those policyholders insured by large carriers.
Therefore, the Department has determined, in accordance with §2006.002(c-1) of the Government Code, that because the purpose of §7.402(g)(1), (2), (5) and (6) and the authorizing statutes of the Insurance Code is to protect carrier and consumer economic interests and the state's economic welfare, there are no additional regulatory alternatives to the required comprehensive financial plans and increased capital required as a result of the risk-based capital requirements that will sufficiently protect the economic interests of carriers and consumers and the economic welfare of the state.
§7.402(d)(1). As required by the Government Code §2006.002(c), the Department has determined that §7.402(d)(1), relating to the 2008 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula, will not have an adverse economic effect on small or micro businesses. The Department does not anticipate that any small or micro business carriers will have business subject to §7.402(d)(1). Therefore no small or micro business will be required to perform risk-based capital calculations pursuant to the 2008 life risk-based capital C-3 Phase II instructions. The §7.402(d)(1) requirement relates to certain unique types of business that, based upon consultation with industry, is generally written only by large carriers.
TAKINGS IMPACT ASSESSMENT. The Department has determined that no private real property interests are affected by this proposal and that this proposal does not restrict or limit an owner's right to property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking or require a takings impact assessment under the Government Code §2007.043.
REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on August 24, 2009, 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 Danny Saenz, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, 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 before the close of the public comment period. If a hearing is held, written and oral comments presented at the hearing will be considered.
SUBCHAPTER B. INSURANCE HOLDING COMPANY SYSTEMS
28 TAC §7.202
STATUTORY AUTHORITY. The amendments are proposed under
the Insurance Code Chapters 404 and 441 and §§441.005, 441.051,
541.401, 822.210, 841.205, 884.206, 823.012, 843.404, 885.401, 982.105,
982.106, and 36.001. Chapters 404 and 441 address the duties of the
Department when an insurer's solvency is impaired. Chapter 404 authorizes
the Commissioner to set standards for evaluating the financial condition
of an insurer. Chapter 441 addresses the prevention of insurer delinquencies.
Under §441.005, the Commissioner may adopt reasonable rules as
necessary to implement and supplement the purposes of Chapter 441.
Section 441.051 specifies "the circumstances in which an insurer is
considered insolvent, delinquent, or threatened with delinquency"
and includes certain statutorily specified conditions, including if
an insurer's required surplus, capital, or capital stock is impaired
to an extent prohibited by law. 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 823.012 authorizes the Commissioner
to issue rules and orders necessary to implement the provisions of
Chapter 823 of the Insurance Code (Insurance Holding Company Systems).
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 ensure 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 982.105 specifies the capital, stock, and surplus requirements
for foreign or alien life, health, or accident insurance companies.
Section 982.106 specifies the capital, stock, and surplus requirements
for foreign or alien insurance companies other than life, health,
or accident insurance companies. 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.
CROSS REFERENCE TO STATUTE. The following statutes are affected
by this proposal: Insurance Code Chapters 404 and 441 and §§541.401,
822.210, 823.012, 841.205, 843.404, 885.401, 884.206, 982.105, and
982.106.
§7.202.Definitions.
(a) (No change.)
(b) Exemption--Commercially Domiciled Insurer.
(1) The commissioner may exempt from the provisions
of the Insurance Code Chapter 823 [
(A) (No change.)
>(B) Adequacy of policyholder surplus, based upon:
(i) - (ii) (No change.)
(iii) the insurer having capital and surplus equal
to 250% of the minimum risk-based capital described in
§7.402 [
(iv) (No change.)
(C) - (D) (No change.)
(2) The provisions of this subchapter shall not apply
to a foreign or alien insurer if the commissioner has approved a total
withdrawal plan from writing all lines of insurance for such insurer
under the Insurance Code Chapter 827 [
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 July 13, 2009.
TRD-200902847
Brenda Caldwell
Assistant General Counsel
Texas Department of Insurance
Earliest possible date of adoption: August 23, 2009
For further information, please call: (512) 463-6327
28 TAC §7.402
STATUTORY AUTHORITY. The amendments are proposed under
the Insurance Code Chapters 404 and 441 and §§441.005, 441.051,
541.401, 822.210, 841.205, 884.206, 823.012, 843.404, 885.401, 982.105,
982.106, and 36.001. Chapters 404 and 441 address the duties of the
Department when an insurer's solvency is impaired. Chapter 404 authorizes
the Commissioner to set standards for evaluating the financial condition
of an insurer. Chapter 441 addresses the prevention of insurer delinquencies.
Under §441.005, the Commissioner may adopt reasonable rules as
necessary to implement and supplement the purposes of Chapter 441.
Section 441.051 specifies "the circumstances in which an insurer is
considered insolvent, delinquent, or threatened with delinquency"
and includes certain statutorily specified conditions, including if
an insurer's required surplus, capital, or capital stock is impaired
to an extent prohibited by law. 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 823.012 authorizes the Commissioner
to issue rules and orders necessary to implement the provisions of
Chapter 823 of the Insurance Code (Insurance Holding Company Systems).
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 ensure 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 982.105 specifies the capital, stock, and surplus requirements
for foreign or alien life, health, or accident insurance companies.
Section 982.106 specifies the capital, stock, and surplus requirements
for foreign or alien insurance companies other than life, health,
or accident insurance companies. 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.
CROSS REFERENCE TO STATUTE. The following statutes are affected
by this proposal: Insurance Code Chapters 404 and 441 and §§541.401,
822.210, 823.012, 841.205, 843.404, 885.401, 884.206, 982.105, and
982.106.
§7.402.Risk-Based Capital and Surplus Requirements for Insurers and HMOs [
(a) - (c) (No change.)
(d) Adoption of RBC formula by reference. The commissioner
adopts by reference the following:
(1) The 2008 [
(2) The 2008 [
(3) The 2008 [
(4) The 2008 [
(e) - (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 July 13, 2009.
TRD-200902846
Brenda Caldwell
Assistant General Counsel
Texas Department of Insurance
Earliest possible date of adoption: August 23, 2009
For further information, please call: (512) 463-6327
28 TAC §7.401
(Editor's note: The text of the following section proposed
for repeal will not be published. The section may be examined in the
offices of the Texas Department of Insurance or in the Texas Register
office, Room 245, James Earl Rudder Building, 1019 Brazos Street,
Austin, Texas.)
The Texas Department of Insurance proposes
the repeal of §7.401, concerning the minimum risk-based capital
and surplus requirements for insurers and health maintenance organizations
(HMOs) for year-end 2006. The repeal is necessary because the due
dates for filing the year-end 2006 risk-based capital reports and
other filings required under the section have passed. Therefore, the
need for this section no longer exists. Simultaneously with this repeal,
the Department is proposing amendments to §7.202(b), concerning
insurance holding company systems, and amendments to §7.402(d),
concerning risk-based capital and surplus requirements for insurers
and HMOs for year-end 2007. The proposed amendments to §7.402(d)
are necessary to adopt by reference the 2008 NAIC risk-based capital
formulas to be used for year-end 2008. The proposed amendments to §7.202(b)(1)(B)(iii)
add a reference to §7.402 (relating to Risk-Based Capital and
Surplus Requirements for Insurers and HMOs) and remove the obsolete
references to §7.401 and §7.410. The proposed amendments
to §7.202(b) and §7.402(d) are also published in this issue
of the Texas Register.
FISCAL NOTE. Danny Saenz, Senior Associate Commissioner, Financial
Program, has determined that, for the first five years the repeal
of the section will be in effect, there will be no fiscal implications
for state or local government as a result of enforcing or administering
the repeal, and there will be no anticipated effect on local employment
or local economy as result of the proposal.
PUBLIC BENEFIT/COST NOTE. Mr. Saenz also has determined that, for
each year of the first five years the repeal of the section will be
in effect, the public benefit anticipated as a result of the repeal
will be the elimination of obsolete regulations. There will be no
anticipated economic costs to any individuals, or insurers or other
Department regulated entities, regardless of size, as a result of
the proposed repeal.
ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS FOR
SMALL AND MICRO BUSINESSES. In accordance with the Government Code §2006.002(c),
the Department has determined that this proposed repeal will not have
an adverse economic effect on small or micro business carriers because
it is simply a repeal of an obsolete rule. Therefore, in accordance
with the Government Code §2006.002(c), the Department is not
required to prepare a regulatory flexibility analysis.
TAKINGS IMPACT ASSESSMENT. The Department has determined that no
private real property interests are affected by this proposal and
that this proposal does not restrict or limit an owner's right to
property that would otherwise exist in the absence of government action
and, therefore, does not constitute a taking or require a takings
impact assessment under the Government Code §2007.043.
REQUEST FOR PUBLIC COMMENT. To be considered, written comments
on the proposal must be submitted no later than 5:00 p.m. on August
24, 2009, 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 should be simultaneously
submitted to Danny Saenz, Senior Associate Commissioner, Financial
Program, Mail Code 305-2A, Texas Department of Insurance, 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 before
the close of the public comment period. If a hearing is held, oral
and written comments presented at the hearing will be considered.
STATUTORY AUTHORITY. The repeal of the section is proposed
under the Insurance Code Chapters 404 and 441 and §§441.051,
822.210, 841.205, 843.404, 884.206, 885.401, 982.105, 982.106, and
36.001. Chapters 404 and 441 address the duties of the Department
when an insurer's solvency is impaired. Chapter 404 authorizes the
Commissioner to set standards for evaluating the financial condition
of an insurer. Chapter 441 addresses the prevention of insurer delinquencies
and in §441.051 specifies "the circumstances in which an insurer
is considered insolvent, delinquent, or threatened with delinquency"
and includes certain statutorily specified conditions, including if
an insurer's required surplus, capital, or capital stock is impaired
to an extent prohibited by law. Under §441.005, the Commissioner
may adopt reasonable rules as necessary to implement and supplement
the purposes of Chapter 441. 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
ensure 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 982.105 specifies the capital,
stock, and surplus requirements for foreign or alien life, health,
or accident insurance companies. Section 982.106 specifies the capital,
stock, and surplus requirements for foreign or alien insurance companies
other than life, health, or accident insurance companies. Section
36.001 provides that the Commissioner of Insurance may 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.
CROSS REFERENCE TO STATUTE. The following statutes in the Insurance
Code will be affected by this proposed repeal: Chapters 404 and 441
and §§822.210, 841.205, 843.404, 885.401, 884.206, 982.105,
and 982.106.
§7.401.Risk-Based Capital and Surplus Requirements for Year-End 2006.
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 July 13, 2009.
TRD-200902849
Brenda Caldwell
Assistant General Counsel
Texas Department of Insurance
Earliest possible date of adoption: August 23, 2009
For further information, please call: (512) 463-6327
SUBCHAPTER I. FINANCIAL REQUIREMENTS
Act] and
these sections, except the registration requirement, any commercially
domiciled insurer if the commissioner determines that the insurer
has assets physically located in this state or an asset to liability
ratio sufficient to justify the conclusion that there is no reasonable
danger that the operations or conduct of the business of the insurer
could present a danger of loss to the policyholders of this state.
The exemption granted under this subsection shall set forth the specific
criteria under which it is granted and shall be subject to annual
review. The commissioner may, after notice and opportunity for hearing,
rescind an exemption granted to a commercially domiciled insurer under
the provisions of the Insurance Code Chapter 823 [Act
] and these sections. A rescission of an exemption shall set forth the
rationale for the rescission. Requests for an exemption under this
subsection shall be filed with the Financial Analysis
Division [and Examinations
], Mail Code 303-1A, Texas Department
of Insurance, P.O. Box 149099, 333 Guadalupe, Austin, Texas 78714-9099.
The request must contain a signed and notarized affidavit of an executive
officer of the insurer that, should the exemption be granted, the
insurer has agreed to notify the Financial Analysis
Division [and Examinations
] within ten days after it no longer
meets the criteria set out in this section on which the exemption
is based. In determining that a commercially domiciled insurer has
sufficient assets to justify the conclusion that there is no reasonable
danger that the operations or conduct of the business of the insurer
could present a danger of loss to policyholders of this state, the
commissioner shall give consideration to the matters contacted in
subparagraphs (A) - (D) of this paragraph in connection with an exemption
requested under the Insurance Code §823.015 [
Act, §2(s)], and these sections.
7.410 of this title (relating to Minimum Risk-Based Capital and Surplus
Requirements for Stock Property/Casualty Insurers) or §7.401
] of this chapter [title
] (relating to [Minimum]
Risk-Based Capital and Surplus Requirements for
Insurers and HMOs [
Life, Accident and Health Insurers]); or
Article 21.49-2C].
SUBCHAPTER D. RISK-BASED CAPITAL AND SURPLUS Year-End 2007 ]. 2007] NAIC Life
Risk-Based Capital Report Including Overview and Instructions for
Companies which includes the RBC formula.
2007] NAIC Fraternal
Risk-Based Capital Report Including Overview and Instructions for
Companies which includes the RBC formula.
2007] NAIC Property
and Casualty Risk-Based Capital Report Including Overview and Instructions
for Companies which includes the RBC formula.
2007] NAIC Health
Risk-Based Capital Report Including Overview and Instructions for
Companies which includes the RBC formula.
CHAPTER 11. HEALTH MAINTENANCE ORGANIZATIONS