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You are here: Home . rules . 2002 . 0214a-059
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Subchapter D. Risk-Based Capital and Surplus

28 TAC §§7.401 and 7.410

The Commissioner of Insurance adopts amendments to §§7.401 and 7.410 concerning risk-based capital and surplus requirements. The amended sections are adopted without changes to the proposed text as published in the November 8, 2002 issue of the Texas Register (27 TexReg 10558) and will not be republished.

The amendments to §§7.401 and 7.410 are necessary to adopt by reference the risk-based capital reports developed by the National Association of Insurance Commissioners (NAIC) that insurers must file with the Department in 2003. The amended sections adopt the 2002 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies, the 2002 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies and the 2002 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies. The Department uses the risk-based capital reports to enhance comparability of financial reports and provide a consistent regulatory environment for insurers that operate in more than one state.

The risk-based capital requirement is a method of ensuring that an insurer has an appropriate level of policyholders surplus after taking into account the underwriting, financial, and investment risks of an insurer. The formulas provided by §§7.401 and 7.410 provide the Department with a widely used regulatory tool to identify the minimum amount of capital and surplus appropriate for an insurance company to support its overall business operations in consideration of its size and risk exposure. The amended sections will enable the Department to more efficiently and effectively utilize existing resources in the review of companies´ financial condition, to more efficiently monitor solvency regulation of the insurers subject to the amended sections, and to implement the most current risk-based capital requirements.

No comments were received regarding adoption of the amendments.

The amended sections are adopted under the Insurance Code Articles 1.10, 1.32, 2.01, 2.02, 2.20, 3.02, 10.30, 21.21, and 22.13 and §36.001. Article 1.10, §5 addresses the duties of the department when an insurer´s solvency is impaired. Article 1.32 authorizes the commissioner to fix standards for evaluating the financial condition of an insurer. Articles 2.01, 2.02 and 2.20 provide that the commissioner may adopt rules to require an insurer to maintain capital and surplus levels in excess of statutory levels to assure financial solvency of insurers for the protection of policyholders and insurers. Article 3.02 authorizes the commissioner to issue rules designed to ensure the financial solvency of companies for the protection of policyholders. Article 10.30 authorizes the commissioner to require fraternal benefit societies to submit reports the commissioner deems necessary. Article 21.21, §13 authorizes the commissioner to adopt rules necessary to regulate trade practices in the business of insurance. Article 22.13 authorizes the commissioner to adopt rules regarding the minimum capital and surplus for certain insurers. Section 36.001 authorizes the commissioner to adopt rules for the conduct and execution of the duties and functions of the department.

§7.401. Minimum Risk-Based Capital and Surplus Requirements for Life, Accident and Health Insurers and Fraternal Insurers.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Annual financial statement -- The annual statement to be used by life insurance companies, as promulgated by the National Association of Insurance Commissioners (NAIC) and as adopted by the Texas Department of Insurance under this chapter (relating to Corporate and Financial Regulation) or any other annual statement blank adopted by the Texas Department of Insurance or requested to be filed by the Texas Department of Insurance.

(2) Authorized control level -- The number determined under the Risk-Based Capital (RBC) formula in accordance with the RBC instructions.

(3) Commissioner -- The commissioner of insurance of the Texas Department of Insurance.

(4) NAIC -- National Association of Insurance Commissioners.

(5) RBC formula -- NAIC risk-based capital formula.

(6) RBC instructions -- NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies or the NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies published by the NAIC.

(7) Total adjusted capital -- An insurer´s statutory capital and surplus as determined in accordance with the statutory accounting applicable to the annual financial statements required to be filed pursuant to the Insurance Code, and such other items, if any, as the RBC instructions provide.

(b) Scope.

(1) This section applies to any insurer authorized to do business in Texas as an insurance company that writes or assumes life insurance, annuity contracts or liability on, or indemnifies any one person for, any risk under a health, accident, sickness, or hospitalization policy, or any combination of those policies, in an amount in excess of $10,000 including: capital stock companies, mutual life companies, fraternal benefit societies, and stipulated premium companies doing business in other states. However, fraternal benefit societies are subject to their own separate risk-based capital instructions as provided in this section.

(2) This section does not apply to stipulated premium companies doing business in Texas only.

(c) Purpose. The purpose of implementing a risk-based capital and surplus provision is to require a minimum level of capital and surplus to absorb the financial, underwriting, and investment risks assumed by an insurer.

(d) Adoption of RBC formula by reference and filing requirements. The commissioner adopts by reference the 2002 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula and the required diskettes. The commissioner adopts by reference the 2002 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula. All companies subject to this section are required to file the diskettes with the NAIC in accordance with and by the due date specified in the RBC instructions. For Fraternals, there is no NAIC risk-based capital filing software available, so an RBC electronic filing or report does not need to be submitted to the NAIC. A paper copy should be available on request. Life companies that file the Health annual financial statement with the department are required to complete and file the NAIC Health RBC Report adopted by reference in §11.809 of this title (relating to Risk-Based Capital for HMOs and Insurers Filing the NAIC Health Blank)

(e) Conflicts. In the event of a conflict between the Insurance Code, any rule of the department or any specific requirement of this section, and the RBC formula and/or the RBC instructions, the Insurance Code, rule or specific requirement of this section shall take precedence and in all respects control. It is the express intent of this section that the adoption by reference of the NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies and NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies in subsection (d) of this section does not repeal or modify or amend any rule of the department or any provision of the Insurance Code.

(f) Actions of commissioner. The commissioner of insurance may take the following actions against an insurer who fails to maintain, at a minimum, 70% of the authorized control level risk-based capital in the RBC Report as calculated in accordance with the RBC instructions:

(1) place the insurer in supervision or conservation;

(2) determine the insurer 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;

(3) determine the insurer to be impaired as provided by the Insurance Code Article 3.60; or

(4) subject the insurer to any other applicable sanctions provided by rules of the department.

(g) Prohibition on announcements. Except as otherwise required under the provisions of this section, the making, publishing, disseminating, circulating or placing before the public, or causing, directly or indirectly to be made, published, disseminated, circulated or placed before the public, in a newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio or television station, or in any other way, an advertisement, announcement or statement containing an assertion, representation or statement with regard to any component derived in the calculation, by any insurer, agent, broker or the person engaged in any manner in the insurance business would be misleading and is, therefore, prohibited. Any violation of this subsection may be considered a violation of Insurance Code, Article 21.21 §(4)(2).

(h) Prohibition on use in ratemaking. The RBC instructions and any related filings are intended solely for use by the commissioner in monitoring the solvency of insurers subject to this section and in taking corrective action with respect to insurers and shall not be used by the commissioner for ratemaking nor considered or introduced as evidence in any rate proceeding nor used by the commissioner to calculate or derive any elements of an appropriate premium level or rate of return for any line of insurance which an insurer or any affiliate is authorized to write.

(i) Limitations. In no event shall the requirements of this section reduce the amount of capital and surplus otherwise required by provisions of the Insurance Code or the Texas Administrative Code, or by authority of the commissioner of insurance.

§7.410. Minimum Risk-Based Capital and Surplus Requirements for Property/Casualty Insurers.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Annual financial statement -- The annual financial statement (association edition) to be used by fire and casualty (property/casualty) insurance companies, as promulgated by the NAIC and as adopted by the commissioner under this chapter.

(2) Authorized control level -- The number determined under the RBC formula in accordance with the RBC instructions.

(3) Commissioner -- The commissioner of insurance of the Texas Department of Insurance.

(4) NAIC -- National Association of Insurance Commissioners.

(5) RBC formula -- NAIC risk-based capital formula.

(6) RBC instructions ­ NAIC Property and Casualty Risk-Based Capital Report including Overview and Instructions for Companies published by the NAIC.

(7) Total adjusted capital -- An insurer´s statutory capital and surplus as determined in accordance with the statutory accounting applicable to the annual financial statements required to be filed pursuant to the Insurance Code, and such other items, if any, as the RBC instructions provide.

(b) Scope. This section applies to all domestic, foreign, and alien property/casualty companies subject to the provisions of the Insurance Code, Articles 2.02, 2.20, and 21.44, excluding those insurers that are only authorized to write mortgage guaranty insurance in all states in which they are licensed and excluding those insurers that write business only in this state and are not required by law to have capital stock.

(c) Purpose. The purpose of implementing this risk-based capital and surplus provision is to require a minimum level of capital and surplus appropriate to the underwriting, financial, investment risks and other business and relevant risks assumed by an insurer.

(d) Adoption of RBC formula by reference and filing requirements. The commissioner adopts by reference the 2002 NAIC Property and Casualty Risk-Based Capital Report including Overview and Instructions for Companies which includes the RBC formula and the required diskettes. All companies subject to this section are required to file the diskettes with the NAIC in accordance with and by the due date specified in the RBC instructions.

(e) Conflicts. In the event of a conflict between the Insurance Code, any currently existing rule of the department or any specific requirement of this section, and the RBC formula and/or the RBC instructions, the Insurance Code, rule or specific requirement of this section shall take precedence and in all respects control. It is the express intent of this section that the adoption by reference of the RBC instructions not repeal or modify or amend any rule of the department or the Insurance Code.

(f) Actions of commissioner. The commissioner may take the following actions against an insurer who fails to maintain, at a minimum, 70% of authorized control level as calculated in accordance with the RBC instructions:

(1) order the insurer to cease writing new business;

(2) place the insurer in supervision or conservation;

(3) determine the insurer 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);

(4) determine the insurer to be impaired as provided by the Insurance Code, Article 1.10, §5; or

(5) apply any other sanctions provided by the Insurance Code or Title 28 of the Texas Administrative Code.

(g) Prohibition on Announcements. Except as otherwise required under the provisions of this section, the making, publishing, disseminating, circulating or placing before the public, or causing, directly or indirectly to be made, published, disseminated, circulated or placed before the public, in a newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio or television station, or in any other way, an advertisement, announcement or statement containing an assertion, representation or statement with regard to any component derived in the calculation, by any insurer, agent, broker or the person engaged in any manner in the insurance business would be misleading and is, therefore, prohibited.

(h) Prohibition on use in Ratemaking. The RBC instructions and any related filing are intended solely for use by the commissioner in monitoring the solvency of property/casualty insurers subject to this section and in taking corrective action with respect to insurers and shall not be used by the commissioner for ratemaking nor considered or introduced as evidence in any rate proceeding nor used by the commissioner to calculate or derive any elements of an appropriate premium level or rate of return for any line of insurance which an insurer or any affiliate is authorized to write.

(i) Limitations. In no event shall the requirements of this section reduce the amount of capital and surplus otherwise required by provisions of the Insurance Code or Texas Administrative Code, or by authority of the commissioner.



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