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Subchapter A. Examination and Financial Analysis

28 TAC §7.18

The Texas Department of Insurance proposes an amendment to §7.18 concerning the adoption by reference of Statements of Statutory Accounting Principles (SSAP) which provide guidance to independent accountants, industry accountants and department analysts and examiners as to how to properly record business transactions for the purpose of accurate statutory reporting. The proposed amendment is necessary to adopt the changes to the March 2001 version of the Accounting Practices and Procedures Manual (Manual) published by the National Association of Insurance Commissioners (NAIC) which were made by the March 2002 version of the Manual, and to adopt by reference the March 2002 version of the Manual. There are four new SSAPs 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 SSAP. Since the new SSAPs are now in the Manual, a proposed amendment will delete them from §7.18(c)(1). The department also proposes to adopt 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 proposed for deletion 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.

Ms. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that, for the first five years the amended section is in effect, there will be no fiscal implications for state or local government as a result of this amendment, and there will be no effect on local employment or the local economy.

Ms. Patterson has also determined that, for each year of the first five years the amended section is in effect, the public benefit will be the 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 proposed adoption of the March 2002 Manual will provide for a more consistent regulatory environment and will become a single source for accounting guidance. The March 2002 Manual is available from the NAIC at a cost of $200 for a soft-cover manual and $395 on CD-ROM. The cost to comply with the provisions of the Manual will vary from insurer to insurer. Based upon the department´s experience, each company will have to ensure that at least one employee familiar with the company´s accounting practices is instructed in the provisions of the Manual. This instruction will either be accomplished through self-study, attendance at a seminar, or a combination of the two methods. The NAIC offers a self-study course at a cost of $175 per copy. Seminars which offer instruction on the Manual cost approximately $850 per attendee for a two day course. The number of employees sent to training is largely dependent on the size and expertise of the company´s accounting staff, but is not dependent on the overall size of the company. As the size of the accounting staff increases, so does the likelihood that the company will choose to send more than one employee to a seminar for training. The department estimates that companies with five or fewer accounting employees will either require the use of self-study training or send one employee to a seminar. Those companies with six to ten employees on the accounting staff will likely send one to three employees to seminars for instruction and supplement that training with self-study materials. Those companies with eleven or more employees on the accounting staff will likely send three or more employees to seminars and supplement with self-study materials. Each employee is estimated to be compensated at a rate of $17 to $30 an hour. These estimates are based upon the department´s discussions with industry representatives. Implementation of the proposed amendment may also require changes to a company´s electronic accounting system. The cost of changes to accounting systems is dependent on the company´s line of insurance, the complexity of the company´s transactions, and whether the system is proprietary or created by third party vendors. Costs due to system changes increase with the complexity of transactions and the percentage of proprietary computer code in the system. In the department´s experience, small companies do not usually rely upon internally created proprietary systems and do not generally enter complex transactions on a regular basis. Large companies are more likely to have an internally created proprietary system and enter into complex transactions. Accordingly, system change costs will be greater for large companies. Furthermore, implementation of the proposed amendment may lead to increased consultation with outside accounting firms. The cost of the consultation will vary from insurer to insurer and will cost from $100 to $350 per hour. It also appears that a smaller company will incur a lower cost. Also, as the complexity of the transactions a company enters into is reduced, so does the cost of consultation. Thus, based upon all of the foregoing, it is the department´s position that the adoption of the Manual will have no adverse economic effect on small and micro businesses. Farm mutual insurance companies, mutual assessment companies, mutual aid associations, and mutual burial associations will incur no costs as a result of the proposed amendment, as they are specifically excepted from the section. Such companies have traditionally accounted for their business on a cash basis and the department has determined that compliance with the provisions of the Manual is not necessary for these types of companies. Regardless of the fiscal effect, the requirements of the section are mandated by the underlying state statutes, and considering the statutes' purposes, it is neither legal nor feasible to waive or modify the requirements of this section for small and micro businesses, as doing so would result in a disparate effect on enrollees, policyholders, and other persons affected by the section.

To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on December 9, 2002. All comments should be submitted to Gene C. Jarmon, Acting 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 submitted simultaneously to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, P. O. Box 149104, Austin, Texas 78714-9104.

The amendment is proposed 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 of insurance 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 are 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 authorizes the Commissioner to adopt rules for the conduct and execution of the powers and duties of the department only as authorized by statute.

The following provisions of the Insurance Code are affected by this proposal: Articles 1.11(b), 1.15, 3.01, 6.12, 8.07, and 21.39 and §32.041.

§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 [ 2001] 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) - (6) (No change.)

(b) The Commissioner adopts by reference the March 2002 [ 2001] version of the Accounting Practices and Procedures Manual published by the National Association of Insurance Commissioners [ NAIC], 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 [ 2002] and thereafter and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2003 [ 2002].

(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 [ Principle] 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. [ 81 concerning software revenue recognition, finalized March 26, 2001, Statement of Statutory Accounting Principle number 82 concerning the costs of computer software developed or obtained for internal use and web site development costs, finalized March 26, 2001, and Statement of Statutory Accounting Principle number 83 concerning mezzanine real estate loans adopted by the NAIC Accounting Practices and Procedures Task Force dated October 18, 2001, are adopted by reference. Statement of Statutory Accounting Principle number 84, concerning certain health care receivables and receivables under government insured plans, adopted by the NAIC Accounting Practices and Procedures Task Force dated October 18, 2001, is adopted by reference and shall be used to prepare all financial statements for years ending on and after December 31, 2001.]

(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 [ Principle] number 6.

(3) - (7) (No change.)

[ (8) Agents balances of insurers licensed only in Texas that use a managing general agency to produce a majority of their business are not subject to Statement of Statutory Accounting Principles number 6 until January 1, 2002.]

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



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