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SUBCHAPTER E. TEXAS WINDSTORM INSURANCE ASSOCIATION Division 1., PLAN OF OPERATION Plan of Operation 28 TAC §5.4001

The Texas Department of Insurance (department) proposes amendments to 28 TAC §5.4001, the plan of operation of the Texas Windstorm Insurance Association (association or TWIA). The purpose of the association is to provide windstorm and hail insurance coverage to coastal residents who are unable to obtain such coverage in the voluntary market. In 1993, the Legislature established the catastrophe reserve trust fund to protect the policyholders of the association and to reduce the potential for payments by members of the association that give rise to premium tax credits in the event of a catastrophic loss. The proposed amendments are necessary to update §5.4001 (referred to as the plan of operation or the plan) to conform to amendments to Article 21.49 of the Insurance Code enacted by the 76th Texas Legislature in HB 2253.

In HB 2253, the legislature in its declaration of legislative intent stated that the catastrophe reserve trust fund was formed to shelter the state´s general revenue fund from dissipation through the loss of premium taxes in the event of catastrophic hurricane losses and as part of the state´s planning and provision for relief from catastrophic hurricane losses. Clearly, the more funds that are on deposit in the catastrophe reserve trust fund, the less likely the need for the association to make assessments which result in a loss of general revenue.

In support of the sound public policy of maintaining and protecting the catastrophe reserve trust fund to prevent losses to the general revenue fund and to provide for payment of catastrophic excess losses, the legislature declared that each year the association is required by Article 21.49 §8(i)(3) to pay the net equity of the association members into the catastrophe reserve trust fund or use the net equity to purchase reinsurance approved by the commissioner. Consistent with the required uses of each year´s net equity, the legislature declared that it was the purpose of HB 2253 to further clarify the permitted uses of the assets of the association and the distribution of those assets upon dissolution of the association. HB 2253 amended Article 21.49 §4 to add subsections (c) and (d) which clarify the purposes for which the assets of the association may be used. Subsection (c) states that no part of the net earnings of the association may benefit any private shareholder or individual. Subsection (c) further specifies the purposes for which the assets of the association may be used and they are as follows: (1) satisfy a claim on a policy written by the association, (2) make investments as authorized by law, (3) pay reasonable and necessary administrative expenses including operating and claims processing expenses, and (4) make remittances under the laws of this state to be used by the state to pay claims, purchase reinsurance, and prepare for or mitigate the effects of catastrophic natural events. Subsection (d) establishes that on dissolution of TWIA, all assets of TWIA revert to the state. Article 21.49 §8(i) was amended by HB 2253 to replace the provision authorizing TWIA to enter into a written agreement with the department, with a new provision which states that under rules promulgated by the commissioner the member insurers are required, through the TWIA, to relinquish their net equity by making payments to the trust fund directly. All references to the written agreement were deleted. Accordingly, the trust fund is no longer maintained pursuant to the written agreement between TWIA, the department, and the comptroller. Moreover, these amendments specify that all money deposited in the trust fund is state money to be held by the comptroller outside of the state treasury on behalf of, and with legal title in, the department, until disbursements are made in accordance with §5.9903(c). The amendments to Article 21.49 by HB 2253 are intended to clarify the legislature´s original intent, that monies in the trust fund are state funds.

In accordance with the statement of legislative intent and the amendments to Article 21.49 enacted by HB 2253, the department proposes the following amendments to the TWIA plan of operation. It is proposed that subsection (c)(3) of the plan, concerning distributions to the members, be deleted in its entirety. As a result of changes to Article 21.49 by HB 2253 there is no authorization to make distributions of the association´s assets to individual member insurers of TWIA. The uses of the association´s assets have been clearly defined with the addition of new subsections (c) and (d) to Article 21.49 §4 and none of the specified uses of the association´s assets include making distributions to member insurers.

Subsection (c)(4) entitled "Use of funds" has been renumbered as (c)(3), and other references changed as necessary. Proposed subsection (c)(3)(A) of the plan specifies that the assets of the association may be used to pay operating expenses, claims, and reinsurance premiums and that the net equity of the association members must be paid into the trust fund annually. Proposed subsection (c)(3)(B) of the plan specifies that funds are to be disbursed from the trust fund in accordance with §5.9903(c). The proposed amendments to subsection (c)(3)(B) of the plan also specify that funds disbursed from the trust fund may not be distributed to members of the association and that if any funds remain unspent after payment of losses and loss adjustment expenses those funds must be remitted to the comptroller for redeposit in the trust fund. Subsection (c)(3)(B) also proposes to delete the provision concerning reimbursement of members for their payment of amounts reallocated from insolvent insurers´ inability to pay because HB 2253 does not authorize the disbursement of association assets to member insurers. Subsections (c)(4)(C), (D), and (G) of the plan are proposed to be deleted, as the amendments made by HB 2253 do not authorize disbursements to members. Subsection (c)(4)(E) of the plan contains two separate provisions: (1) relating to use of association funds for payment of reinsurance premiums and (2) concerning the payment of net equity into the trust fund. For better organization of the subsection, the provision concerning the use of association funds to purchase reinsurance has been proposed as new subsection (c)(3)(A)(i), and the provision concerning the payment of net equity into the trust fund has been proposed as new subsection (c)(3)(A)(ii). Subsection (c)(4)(F) of the plan, concerning the establishment of a reserve fund for catastrophe losses, is no longer necessary because the catastrophe reserve trust fund was established in 1993. Therefore, subsection (c)(4)( F) i s proposed to be deleted.

The department will consider the adoption of amendments to §5.4001 in a public hearing under Docket Number 2486, scheduled for 9:30 a.m. on July 17, 2001, in Room 100 of the William P. Hobby, Jr. State Office Building, 333 Guadalupe Street, Austin, Texas.

Marilyn Hamilton, Associate Commissioner, Personal and Commercial Lines Division, has determined that for each year of the first five years the proposed amendments are in effect, there will be no fiscal implications for state government or local government as a result of enforcing or administering the proposed amendments. Ms. Hamilton has also determined that for each year of the first five years the proposed amendments will be in effect, there will be no adverse effect on local employment or the local economy.

Ms. Hamilton has further determined that for each year of the first five years the proposed amendments are in effect, the public benefit anticipated as a result of enforcing the section will be to protect and maintain the assets of the catastrophe reserve trust fund in order to shelter the state´s general revenue fund from dissipation through the loss of premium taxes in the event of catastrophic hurricane losses. Any economic costs to persons (including small businesses and micro-businesses) required to comply with this section are the result of legislative enactment of amendments to Article 21.49 of the Insurance Code and not as a result of the adoption, enforcement, or administration of the proposed amendments. The department does not believe it is legal or feasible to waive the requirements of these rules for any insurers which are small or micro-businesses because the requirements are mandated by legislative enactment.

To be considered, written comments on the proposed amendments must be submitted no later than 5:00 p.m. on July 9, 2001 to Lynda H. Nesenholtz, General Counsel and Chief Clerk, MC 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas, 78714-9104. An additional copy of the comment should be simultaneously submitted to Marilyn Hamilton, Associate Commissioner, Personal and Commercial Lines Division, MC 104-PC, Texas Department of Insurance, P. O. Box 149104, Austin, Texas, 78714-9104.

The amendments are proposed pursuant to the Insurance Code Article 21.49 and §36.001. Article 21.49, §5(c) of the Insurance Code provides that the Commissioner of Insurance by rule shall adopt the TWIA plan of operation with the advice of the TWIA board of directors. Section 5(f) of Article 21.49 provides that any interested person may petition the Commissioner to modify the plan of operation in accordance with the Administrative Procedure Act. Insurance Code §36.001 authorizes the Commissioner of Insurance to adopt rules for the conduct and execution of the duties and functions of the Texas Department of Insurance only as authorized by statute.

The following statute is affected by this proposal: Insurance Code, Article 21.49

§5.4001. Plan of Operation.

(a)-(b) (No change.)

(c) Financial Operation of the Association.

(1) Collection, investment, and allocation of funds.

(A) (No change.)

(B) Investment. All funds collected by the association which are not otherwise required to be expended as provided in paragraph (3)[ (4)] of this subsection may be retained in a checking account or accounts in any bank or banks doing business in the State of Texas and/or may be invested only in the following:

(i)-(iv) (No change.)

(C) (No change.)

(2) (No change.)

[ (3) Distributions to the members.]

[ (A) The only distributions to members which may be made on or after May 1, 1985, without the prior approval of the Commissioner are for the recovery of assessments made on or after May 1, 1985, which are not recoverable as a tax credit by the members under the Insurance Code, Article 21.49, §19. Any other distribution shall be for the sole purpose of paragraph (4)(C) or (4)(G) of this subsection and requires the prior approval of the Commissioner. The Commissioner may not unreasonably refuse to approve a request to distribute funds. In making any distribution, the board of directors may offset amounts otherwise due to a member with amounts then due from that member.]

[ (B) If the association obtains a disbursement of funds from the catastrophe reserve trust fund maintained by the Department pursuant to Section 8 (i) of the Act, the funds disbursed to the association may be spent by the association only to pay losses and loss adjustment expenses of policyholders in the event of an occurrence or a series of occurrences within the defined catastrophe area that results in insureds losses and operating expenses of the association greater than $100 million. Funds disbursed from the catastrophe reserve trust fund maintained by the Department may not be distributed to any member of the association for any purpose, and any of these amounts disbursed to the association from the catastrophe reserve trust fund that remain unspent after payment of all losses and loss adjustment expenses arising out of such occurrence or series of occurrences shall be remitted to the Department or to the Treasurer of the State of Texas for deposit in the catastrophe reserve trust fund.]

(3)[ (4)] Use of funds.

(A) All monies collected or received by the association [ on or after May 1, 1985,] are required to be expended in the following ways and in the following sequence:

(i) [ (A)] first, to pay the expenses and claims of the association and to pay premiums for reinsurance under any reinsurance program approved by the Commissioner;

(ii) second, to make payment of the net equity of association members on an annual basis, including all premium and other revenue of the association in excess of incurred losses and operating expenses, directly to the comptroller for deposit in the catastrophe reserve trust fund to be held by the comptroller outside the state treasury on behalf of, and with legal title in, the Texas Department of Insurance.

(B) Funds are to be disbursed from the catastrophe reserve trust fund in accordance with §5.9903(c) of this title (relating to Operation of the Trust Fund). Funds disbursed from the catastrophe reserve trust fund may not be distributed to any member of the association for any purpose, and any funds disbursed to the association from the catastrophe reserve trust fund that remain unspent after payment of all losses and loss adjustment expenses arising out of an occurrence or series of occurrences shall be remitted to the comptroller for redeposit in the catastrophe reserve trust fund. [ second, to reimburse members for amounts reallocated from insolvent insurers´ inability to pay, as provided in paragraph (2)(E) of this subsection, to the extent such amounts are not recoverable as a tax credit under the Insurance Code, Article 21.49;]

[ (C) third, to reimburse members for assessments made on or after May 1, 1985, which are not recoverable as a tax credit by the members under the Insurance Code, Article 21.49;]

[ (D) fourth, to reimburse members for the time value of money for the period of time between the assessment date on or after May 1, 1985, and the distribution date;]

[ (E) fifth, to either pay premiums for reinsurance under a reinsurance program approved by the Commissioner to cover some or all of the claims liabilities of the association, or to make payment of the net equity of a member,

including all premium and other revenue of the association in excess of incurred losses and operating expenses, to a catastrophe reserve trust fund to be held by the Texas Department of Insurance;]

[ (F) sixth, to establish a reserve for catastrophe losses;]

(G) seventh, as distribution to members of the association after approval by the Commissioner.]

(d)-(e) (No change.)



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