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Subchapter D. Risk-Based Capital and Surplus

28 TAC §§7.401 and 7.410

The Texas Department of Insurance proposes amendments to §§7.401 and 7.410 concerning risk-based capital and surplus requirements. The proposal addresses the minimum risk-based capital and surplus requirements for property and casualty insurers as well as for all life insurance companies, fraternal benefit societies, mutual life insurance companies, and stipulated premium companies. The proposed amendment to §7.401 is necessary to adopt by reference the 2002 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies and the 2002 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies. The proposed amendment to §7.410 is necessary to adopt by reference the 2002 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies. 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. Copies of the documents proposed for adoption by reference are available for inspection in the Financial Division of the Texas Department of Insurance, William P. Hobby Jr. State Office Building, 333 Guadalupe, Austin, Texas.

Ms. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that, for the first five years the proposed sections are in effect, there will be no fiscal implications for state or local government as a result of the proposal and there will be no measurable effect on local employment or local economy.

Ms. Patterson has also determined that, for each year of the first five years the amended §§7.401 and 7.410 are in effect, the 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. The department does not anticipate any additional costs to industry resulting from the amended sections as companies are currently required to comply with risk-based capital requirements. To the extent any insurer must increase its capital as a result of the risk-based capital requirements, that cost is a result of the statutory requirement. The cost to complete the risk-based capital report varies from insurer to insurer. Each insurer subject to the amended sections would be required to acquire NAIC risk-based capital software at a cost of approximately $350. The labor cost to transfer the information from an insurer´s records to the applicable report will vary depending on the size of the insurer and the character of its investments. If an insurer 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 an insurer can transfer the information from its records to the risk-based formula in 8 - 16 hours. The department´s estimations are based upon discussions with industry representatives who are responsible for maintaining accounting records. Based upon the department´s experience, an insurer would utilize an employee who is familiar with the accounting records of the comp any and accounting practices in general and who is compensated from $17 to $30 an hour. On the basis of cost per hour of labor, there is no anticipated difference in the cost of completing the formula between insurers who are micro, small, and large businesses. After the completion of the formula, it will likely be reviewed by an officer of the insurer who is responsible for the preparation of the financial reports of the insurer. In small insurers such officers are compensated at approximately $40 per hour, while such officers at large insurers are compensated at approximately $100 per hour. Based on the department´s experience, the cost of compliance for small insurers would be less than the cost of compliance for large insurers in reviewing the risk-based capital report. Therefore, it is the department's position that the amended sections will have no adverse economic effect on small or micro businesses. The department does not expect the amended formulas to require a level of capital that is significantly different from the current capital requirements. For those companies 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 formulas´ intended function, to protect policyholders from the effects of insolvency, may require some companies to increase capital. Those companies so required will incur the cost of the additional capital contribution. Regardless of the fiscal effect, the requirements of these rules 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 these sections for small and micro businesses, as doing so would result in a disparate effect on policyholders and other persons affected by these rules.

To be considered, all comments on the proposal must be received in writing 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 simultaneously submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, P. O. Box 149104, Austin, Texas 78714-9104.

The amended sections are proposed 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.

The following statutes are affected by this proposal: 1.32, 3.02, 10.30 and 22.13.

Insurance Code Articles 1.10, 1.32, 2.01, 2.02, 2.20, 21.21, and 21.44.

§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) - (5) (No change.)

(6) RBC instructions -- [ The 2000] NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies or the [ 2000] NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies published by the NAIC.

(7) (No change.)

(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. [ In determining the adequacy of its capital and surplus, an insurer that establishes an asset valuation reserve and an interest maintenance reserve will be allowed credit for these reserves.]

(d) Adoption of RBC formula by reference and filing requirements. The commissioner adopts by reference the 2002 [ 2000] 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 [ 2000] NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula [ and any available 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. 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 [ 2000] NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies and [ 2000] 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) - (i) (No change.)

§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) ­ (5) (No change.)

(6) RBC instructions ­ [ 2000] NAIC Property and Casualty Risk-Based Capital Report including Overview and Instructions for Companies published by the NAIC.

(7) (No change.)

(b) ­ (c) (No change.)

(d) Adoption of RBC formula by reference and filing requirements. The commissioner adopts by reference the 2002 [ 2000] 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) ­ (i) (No change.)



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