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You are here: Home . rules . 2002 . 1212-059
Archived File – for Reference Use.
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Subchapter A. Examination and Financial Analysis

28 TAC §7.18

The Commissioner of Insurance adopts amendments to §7.18 concerning the adoption by reference of the Accounting Practices and Procedures Manual (Manual). The amended section is adopted without changes to the proposed text as published in the November 8, 2002, issue of the Texas Register (27 TexReg 10556) and will not be republished.

The amendments to §7.18 are necessary to update the version of the Manual previously adopted by the Department. The Manual is designed to provide a nationwide standard method of accounting which most insurers, including health maintenance organizations, will be required to use for statutory financial reporting guidance, thus creating a more consistent regulatory environment. The section adopts the Manual by reference with deference to Texas statutes, regulations and to exceptions enumerated in the section.

The adopted section provides more efficient regulation of insurance and a decrease in costs to insurers that are currently required to file multiple financial statements in multiple states. The adoption of the March 2002 version of the Manual will provide for a more consistent regulatory environment and will provide a single source for accounting guidance. The amended section updates the adoption by reference of the Manual by adopting the March 2002 version of the Manual. There are four new Statements of Statutory Accounting Principles (SSAP) in the March 2002 version of the Manual: SSAP No. 81 concerning software revenue recognition; SSAP No. 82 concerning the costs of computer software developed or obtained for internal use and Web site development costs; SSAP No. 83 concerning mezzanine real estate loans; and SSAP No. 84 concerning health care receivables and receivables under government insured plans. The Commissioner adopted these new SSAPs in conjunction with the adoption of the March 2001 version of the Manual since they are considered part of the March 2001 version of the Manual under the NAIC procedures for the adoption of SSAPs. Since the new SSAPs are now in the 2002 Manual, the amended section deletes them from §7.18(c)(1). The adopted section also adopts SSAP No. 85 concerning claim adjustment expenses, SSAP No. 86 concerning accounting for derivatives and hedging activities and SSAP No. 87 which amends SSAP Nos. 4, 19, 29, 73, 79 and 82 to provide specific predefined thresholds to be established for capitalization. While SSAP Nos. 85, 86 and 87 are not included in the March 2002 version of the Manual, they are considered part of the March 2002 version of the Manual under the NAIC procedures for the adoption of SSAPs. Subsection (c)(8) is deleted since the time for exemption has expired. Finally, the March 2002 version of the Manual also contains nonsubstantive modifications to SSAP Nos. 2, 10, 13, 21, 22, 25, 26, 41, 51, 52, 54, 56, 59, 61, 62, 68, and 80 which clarify language or change reference material.

No comments were received regarding adoption of the amendments.

The amendments are adopted under the Insurance Code articles 1.11, 1.15, 1.32, 3.01, 3.33, 5.61, 6.12, 8.07, 20A.22, 21.28-A, 21.39, and 21.49-1, and §§32.041 and 36.001. Article 1.15 mandates that the Department examine the financial condition of each carrier organized under the laws of Texas or authorized to transact the business of insurance in Texas and, by rule, adopt procedures for the filing and adoption of examination reports. Article 1.11 and §32.041 authorize the Commissioner to provide required financial statement forms. Article 21.39 authorizes the Commissioner to adopt rules for establishing reserves applicable to each line of insurance recommended by the NAIC. Article 1.32 authorizes the Commissioner to establish standards for evaluating the financial condition of an insurer. Article 20A.22 authorizes the Commissioner to promulgate rules as necessary to carryout the provisions of the Texas Health Maintenance Organization Act. Article 5.61 provides that reserves shall be computed in accordance with rules adopted by the Commissioner for the purpose of adequately protecting insureds. Article 21.28-A authorizes the Commissioner to adopt rules necessary to accomplish the purposes of the act. Articles 6.12, 8.07 and 3.01 authorize the Commissioner to adopt rules defining electronic machines and systems, office equipment, furniture, machines and labor saving devices and the maximum period for which each such class may be amortized. Article 3.33 authorizes the Commissioner to adopt such rules, minimum standards, or limitations as may be appropriate for the implementation of the article. Article 21.49-1 authorizes the Commissioner to issue rules and orders necessary to implement the provisions of the article. Section 36.001 provides that the Commissioner may adopt rules to execute the duties and functions of the Department as authorized by statute.

§7.18 NAIC Accounting Practices and Procedures Manual.

(a) The purpose of this section is to adopt statutory accounting principles, which will provide independent accountants, industry accountants and department analysts and examiners guidance as to how to properly record business transactions for the purpose of accurate statutory reporting. The March 2002 version of the National Association of Insurance Commissioners Accounting Practices and Procedures Manual (Manual) will be utilized as the guideline for statutory accounting principles in Texas to the extent the Manual does not conflict with provisions of the Texas Insurance Code or rules of the department. The Commissioner reserves all authority and discretion to resolve any accounting issues in Texas. When making a determination on the proper accounting treatment for an insurance or health plan transaction the Commissioner shall refer to the sources in paragraphs (1)-(6) of this subsection in the respective order of priority listed. Furthermore, §§ 3.1501-3.1505, 3.1605, 3.1606, 3.7004, 7.7, 7.85 and 11.803 of this title (relating to Annuity Mortality Tables, General Requirements, Required Opinions, Contract Reserves, Subordinated Indebtedness, Audited Financial Reports and Investments, Loans and Other Assets), preempt any contrary provisions in the Manual.

(1) Texas statutes;

(2) department rules;

(3) directives, instructions and orders of the Commissioner;

(4) the Manual;

(5) other NAIC handbooks, manuals, and instructions, adopted by the department; and

(6) Generally Accepted Accounting Principles.

(b) The Commissioner adopts by reference the March 2002 version of the Accounting Practices and Procedures Manual published by the National Association of Insurance Commissioners, with the exceptions and additions set forth in subsections (c) and (d) of this section, as the source of accounting principles for the department when examining financial reports and for conducting statutory examinations and rehabilitations of insurers and health maintenance organizations licensed in Texas, except where otherwise provided by law. This adoption by reference shall be applied to examinations conducted as of January 1, 2003 and thereafter and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2003.

(c) The Commissioner adopts the following exceptions and additions to the Manual:

(1) In addition to the statements of statutory accounting principles in the Manual, Statement of Statutory Accounting Principles number 85 concerning claim adjustment expenses, finalized June 10, 2002, Statement of Statutory Accounting Principles number 86 concerning accounting for derivatives and hedging activities, finalized May 14, 2002, and Statement of Statutory Accounting Principles number 87 concerning capitalization policy, finalized September 11, 2002, are adopted by reference.

(2) Retrospective premiums must be billed within 60 days of computation and audit premiums must be billed within 60 days of the completion of the audit in determining the beginning date from which the ninety day period is calculated to determine admissibility of uncollected premium balances under Statement of Statutory Accounting Principles number 6.

(3) Electronic machines, constituting a data processing system or systems and operating systems software used in connection with the business of an insurance company acquired after December 31, 2000, may be an admitted asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law and shall be amortized as provided by the Manual . All such property acquired prior to January 1, 2001, may be an admitted asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law, and shall be amortized in full over a period not to exceed ten years.

(4) Furniture, labor-saving devices, machines, and all other office equipment may be admitted as an asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law and, for such property acquired after December 31, 2000, depreciated in full over a period not to exceed five years. All such property acquired prior to January 1, 2001, may be an admitted asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law, and shall be depreciated in full over a period not to exceed ten years.

(5) Written premiums for all property and casualty contracts, other than contracts for workers´ compensation, shall be recorded as of the effective date of the contract rather than on the effective date of the contract as stated in Statement of Statutory Accounting Principles number 53.

(6) Goodwill, as reported on a regulated entity´s statutory financial statements as of December 31, 2000, and any additional goodwill acquired thereafter, beginning January 1, 2001, shall be admitted as an asset and accounted for as permitted by Statements of Statutory Accounting Principles numbers 61 and 68. All other amounts of goodwill, including, but not limited to, such amounts that may have been previously expensed, shall not be allowed as an admitted asset. However, notwithstanding the provisions of Statements of Statutory Accounting Principles numbers 61 and 68, all methods of non-insurer subsidiary and affiliate valuation permitted by Article 21.49-1 §6A may be used for the purposes of goodwill calculation.

(7) All certificates of deposit, of any maturity, may be classified as cash and are subject to the accounting treatment contained in Statement of Statutory Accounting Principles number 2, notwithstanding the provisions of Statement of Statutory Accounting Principles number 26.

(d) A farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association that has less than $5 million in annual direct written premiums need not comply with the Manual.

(e) This section shall not be construed to either broaden or restrict the authority provided under the Texas Insurance Code to insurers, including health maintenance organizations.



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