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You are here: Home . rules . 2007 . 1119C-059

SUBCHAPTER D. Risk-Based Capital and Surplus

28 TAC §7.402

1. INTRODUCTION. The Texas Department of Insurance proposes new §7.402, concerning risk-based capital and surplus requirements for insurers and health maintenance organizations (HMOs) for year-end 2007. Section 7.402 is proposed to regulate the 2007 risk-based capital and surplus requirements for property and casualty insurers, life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the National Association of Insurance Commissioners (NAIC) Health blank. These insurers and HMOs are referred to collectively as "carriers" in this proposal. The risk-based capital requirement is a method of ensuring that a carrier has an appropriate level of policyholders' surplus after taking into account the underwriting, financial, and investment risks of a carrier. The NAIC risk-based capital formulas provide the Department with a widely used regulatory tool to identify the minimum amount of capital and surplus appropriate for a carrier to support its overall business operations in consideration of its size and risk exposure.

The proposed new §7.402 is necessary to adopt by reference the 2007 NAIC risk-based capital formulas to be used for year-end 2007, including the 2007 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies, the 2007 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies, the 2007 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies, and the 2007 NAIC Health Risk-Based Capital Report Including Overview and Instructions for Companies. Copies of the documents proposed for adoption by reference are available for inspection in the Financial Analysis and Examinations Division of the Texas Department of Insurance, William P. Hobby Jr. State Office Building, Tower Number III, Third Floor, 333 Guadalupe, Austin, Texas.

Proposed new §7.402 in subsection (g)(6) imposes a new substantive requirement for year-end 2007 that subjects property and casualty insurers to a trend test if total adjusted capital to authorized control level risk-based capital is between 200 percent and 300 percent, and that if the result of the trend test as determined by the formula is "YES", the property and casualty insurers will be subject to the company action level requirements and will need to file additional reporting with the Department as a result of the trend test. This new requirement is necessary because it will allow early identification of insurers that are likely to reach a company action level in the following year. This requirement is based on research by the NAIC's Property and Casualty RBC (E) Working Group that showed a strong correlation between the trend test's criteria and the triggering of at least the company action level in the following year. By triggering a company action level sooner, insurers can plan better for their capital needs. The Department required the trend test in 2005 and 2006; however, the results were for informational purposes only. The proposed new §7.402 also is necessary to specify filing requirements for the various types of carriers, provide direction in the event of conflict between statutory and rule requirements and the adopted instructions, specify actions available to the Commissioner depending on the results computed by the risk-based capital formula, mandate prohibitions on misleading public announcements and prohibitions on the use of the risk-based capital instructions and any related filings for ratemaking, and set forth limitations of the proposed new section relating to the otherwise required amount of capital and surplus.

Proposed subsection (a) explains the purpose of the section. Proposed subsection (b) specifies the scope of the section. Proposed subsection (c) specifies definitions of certain terms when used in the section. Proposed subsection (d) adopts the 2007 risk-based capital formulas by reference. Proposed subsection (e) describes the filing requirements for the various types of carriers. Proposed subsection (f) provides that in the event of a conflict between the Insurance Code, any rule of the Department or any specific requirement of the proposed new section, and the risk-based capital formula and/or the risk-based capital instructions, the Insurance Code, rule, or specific requirement of the proposed new section controls. Proposed subsection (g) specifies the remedial actions that the Commissioner of Insurance may take depending on the results computed by the risk-based capital formula, including the proposed new subsection (g)(6) requirement that subjects property and casualty insurers to a trend test under certain specified circumstances. Proposed subsection (h) prohibits announcements that would be misleading. Proposed subsection (i) prohibits the use of the risk-based capital instructions and any related filings for ratemaking. Proposed subsection (j) mandates that the requirements of the proposed new section shall not reduce the amount of capital and surplus otherwise required by the provisions of the Insurance Code, Department rules, or by the authority of the Commissioner of Insurance as provided by law.

2. FISCAL NOTE. Mr. Danny Saenz, Senior Associate Commissioner, Financial Program, has determined that, for each year of the first five years the proposed section will be in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed section. The proposal will have no effect on local employment or local economy.

3. PUBLIC BENEFIT/COST NOTE. Mr. Saenz has also determined that for each year of the first five years the proposed section is in effect, the anticipated public benefit will be that the Department will be able to more efficiently and effectively utilize existing resources in the review of the financial condition of carriers, to more efficiently monitor solvency of the carriers subject to the proposal, and to implement the most current risk-based capital requirements. The proposal will enable the Department to administer appropriate and proactive regulatory actions to protect the interests of the public against carriers whose financial condition may potentially be hazardous. The risk-based capital requirement is a method of ensuring that a carrier has an appropriate level of policyholders' surplus after taking into account the underwriting, financial, and investment risks of a carrier. The NAIC risk-based capital formulas provide the Department with a widely used regulatory tool to identify the minimum amount of capital and surplus appropriate for a carrier to support its overall business operations considering its size and risk exposure.

The Department has determined that this proposal contains three separate sets of requirements that must be analyzed in order to determine costs to carriers required to comply with the proposal. First, proposed §7.402(b), (d) and (e) require certain property and casualty insurers, certain life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the National Association of Insurance Commissioners (NAIC) Health blank (the term carriers refers to all of these entities), regardless of size, to complete a risk-based capital report and reflect the results of that report in their financial statements filed with the Department. Although not required by the Government Code §2006.002(c), certain insurers are not subject to proposed §7.402, and because of the types or methods of operation of these insurers, they are more likely to be small or micro business carriers. These carriers have historically posed relatively insubstantial insolvency-related risk to consumers, other carriers and the state's general economic welfare. Specifically, proposed §7.402(b)(1) provides that proposed §7.402 does not apply to any insurance company that writes or assumes a life insurance or annuity contract or assumes liability on or indemnifies one person for any risk under an accident and health insurance policy, or any combination of these policies, in an amount that is $10,000 or less. Further, the scope indicated in proposed §7.402(b)(1) does not include a stipulated premium company only doing business in Texas and certain other carriers regulated by the Department, such as a statewide mutual assessment association, a local mutual aid association, a mutual burial association, or an exempt association. Second, certain carriers that have business subject to proposed §7.402(d)(1) are also required to perform risk-based capital calculations pursuant to the proposed 2007 life risk-based capital C-3 Phase II instructions; this requirement relates to certain unique types of business that the Department believes is written only by large carriers. Third, carriers specified in proposed §7.402(b) that fail to maintain capital and surplus in accordance with the specified levels in proposed §7.402(g)(1), (2), (5) and (6) are required under proposed §7.402(g)(1), (2), (5) and (6) to prepare and implement a comprehensive financial plan, regardless of the size of the carrier.

Proposed §7.402(b), (d) and (e). Any carrier specified in proposed §7.402(b) is required to comply with the requirements in proposed §7.402(d) and (e) to prepare a risk-based capital report and reflect the results of the report in the carrier's financial statements filed with the Department. These costs will vary from carrier to carrier based on the size and type of the carrier, the character of its investments, the kinds and nature of the risks insured, the type of software used by the carrier to complete its annual statement, and employee compensation expenses. Under the proposal, each carrier subject to proposed §7.402(b), (d) and (e), regardless of size, is required to acquire NAIC risk-based capital software at a cost of approximately $650 per entity for each carrier. The labor cost to transfer the information from a carrier's records to the applicable report will vary depending on the size of the carrier and the character of its investments; the transfer by larger carriers and carriers with more complex investments will generally take longer. If a carrier 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 that a carrier will be able to transfer the information from its records to the risk-based formula in 8 to 16 hours. The Department's estimations are based upon discussions with industry representatives who are responsible for maintaining accounting records for carriers. It is anticipated that a carrier, regardless of size, will utilize an employee who is familiar with the accounting records of the carrier and accounting practices in general, and the Department estimates that the employee is compensated from approximately $20 to $40 an hour. After the completion of the transfer of information, the resulting risk-based capital report will likely be reviewed by an officer of the carrier who is responsible for the preparation of the financial reports of the carrier. The Department estimates that such officers are compensated at a range from approximately $40 per hour to approximately $100 per hour, or more. The Department also estimates that large carriers generally will compensate these officers at the higher end of the salary range; therefore, based on the Department's experience, the cost of review of the risk-based capital report for small carriers will be less than the cost for large carriers.

The Department does not expect the proposed risk-based capital formulas to require a level of capital that is significantly different from the current capital requirements in §7.401 of this title. Carriers have been required by the Department to comply with the risk-based capital requirements for several years. For those carriers 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 function of the risk-based capital formula is to protect policyholders from the effects of insolvency, which may require some carriers to increase their capital. To the extent any carrier must increase its capital as a result of the risk-based capital requirements, that cost is the amount of capital required and is a result of the statutory requirements in Insurance Code Chapter 404 and §§441.051, 822.210, 822.211, 841.205, 841.206, 843.404, and 884.206.

Proposed §7.402(d)(1). Carriers performing risk-based capital calculations pursuant to the proposed 2007 life risk-based capital C-3 Phase II instructions required in subsection (d)(1) of the proposed new section will incur costs that vary by the size of the carriers and the amount and complexity of the business subject to these calculations. Less than 10 large domestic carriers and no small or micro business carriers in Texas are expected to have business subject to these calculations. A number of foreign carriers have business subject to these calculations as well. Business subject to these calculations is specified in the 2007 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies, and includes primarily variable annuity business, but also business which contains guarantees similar to those found in variable annuity business such as guaranteed minimum death benefits or guaranteed minimum living benefits. The C-3 Phase II calculations measure a more appropriate and potentially less redundant capital for the interest rate risk for this business, especially when complex guarantees are present. The less than 10 large domestic carriers expected to be affected by the proposed 2007 life risk-based capital C-3 Phase II instructions will incur ongoing annual actuarial and computer personnel costs to perform the C-3 Phase II calculations. The Department estimates that these actuarial personnel costs will range from $25 per hour to approximately $300 per hour. Computer personnel costs are estimated to range from $25 per hour to approximately $150 per hour. The annual costs for each of these few large domestic carriers in Texas are estimated to range from one-half of one percent to one percent of the annual costs of administering each of the carrier's business affected by the C-3 Phase II requirements. The Department anticipates that such annual costs per carrier are believed to be similar for each foreign carrier in Texas with business subject to these requirements. The Department's estimations are based upon discussions with industry representatives familiar with resources and costs needed for these computations. Discussions with industry representatives involved several of the large domestic carriers in Texas estimated to have over half of the domestic carrier variable annuity business in Texas as measured on the basis of accumulation value for this business.

Proposed §7.402(g)(1), (2), (5), and (6). A few carriers (estimated to be less than one percent of the total carriers doing business in Texas) may need to prepare and file additional reporting with the Department at the company action level, as provided in proposed new §7.402(g)(1), (2), (5) and (6). The costs of this reporting will vary by company size and complexity but will generally involve an employee who is familiar with the accounting records of the carrier and is compensated at a rate from $20 to $40 per hour. Assistance from actuarial staff may be required, and actuarial personnel costs range from $25 per hour to approximately $300 her hour. The additional reporting requirements typically will involve the chief financial officer or other similar officer responsible for preparing the financial reports; such officers are generally compensated at hourly rates that may range from $40 per hour to approximately $300 per hour. The Department also estimates that large carriers generally will compensate these officers at the higher end of the salary range. Therefore, based on the Department's experience, the cost of preparation and filing of the additional reporting to the Department at the company action level, are estimated to be relatively less for smaller carriers compared to larger carriers. Company action level reporting and its associated costs are intended to stave off other, higher costs that impacted carriers will likely incur absent their timely action to address the underlying concerns that generated the trend test results. Company action level reporting enables the Department to administer appropriate and proactive regulatory actions in order to protect the interests of the public against carriers whose financial condition may potentially be hazardous.

4. ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS FOR SMALL AND MICRO BUSINESSES. The Department has determined that this proposal contains three separate sets of requirements that must be analyzed in order to determine costs to small and micro business carriers required to comply with this proposal. First, proposed §7.402(b), (d), and (e) require certain property and casualty insurers, certain life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the National Association of Insurance Commissioners (NAIC) Health blank (the term carriers refers to all of these entities), regardless of size, to complete a risk-based capital report and reflect the results of that report in their financial statements filed with the Department. Although not required by the Government Code §2006.002(c), certain insurers are already not subject to proposed §7.402, and because of the types or methods of operation of these insurers, they are more likely to be small or micro business carriers. These carriers have historically posed relatively insubstantial insolvency-related risk to consumers, other carriers and the state's general economic welfare. Specifically, proposed §7.402(b)(1) provides that proposed §7.402 does not apply to any insurance company that writes or assumes a life insurance or annuity contract or assumes liability on or indemnifies one person for any risk under an accident and health insurance policy, or any combination of these policies, in an amount that is $10,000 or less. Further, the scope indicated in proposed §7.402(b)(1) does not include a stipulated premium company only doing business in Texas and certain other carriers regulated by the Department, such as a statewide mutual assessment association, a local mutual aid association, a mutual burial association, or an exempt association. Second, proposed §7.402(d) and (e) require carriers specified in proposed §7.402(b), regardless of size, to maintain capital and surplus in accordance with the specified levels, and the failure to do so triggers the requirement in proposed §7.402(g) that the carrier prepare and implement a comprehensive financial plan. Third, certain carriers that have business subject to proposed §7.402(d)(1) are required to perform risk-based capital calculations pursuant to the proposed 2007 life risk-based capital C-3 Phase II instructions; the C-3 Phase II requirement relates to certain unique types of business that the Department believes is written only by large carriers and will therefore, not have an adverse economic effect on small or micro businesses.

Proposed §7.402(b), (d), and (e). As required by the Government Code §2006.002(c), the Department has determined that approximately 50 to 100 of the carriers specified in proposed §7.402(b) are small or micro-business carriers that will be required to comply with the requirements in proposed §7.402(d) and (e) to prepare a risk-based capital report and reflect the results of the report in the carrier's financial statements filed with the Department. These small or micro business carriers will incur routine costs associated with completing the risk-based capital report and reflecting the results in their financial statements filed with the Department. Also, as required by the Government Code §2006.002(c), the Department has determined that these routine costs will not have an adverse economic effect on the approximately 50 to 100 small or micro business carriers. These routine costs of compliance will vary between large business carriers and small or micro-business carriers based upon the carrier's type and size and other factors, including the character of the carrier's investments, the kinds and nature of the risks insured, the type of software used by the carrier to complete its annual statement, and employee compensation expenses. The Department's cost analysis and resulting estimated routine costs for carriers in the Public Benefit/Cost Note portion of this proposal are equally applicable to small and micro-businesses. As indicated in the Public Benefit/Cost Note analysis, these routine costs will be less for small or micro business carriers, primarily because small or micro business carriers will incur less labor costs in transferring information from their records to the risk-based capital reports due to their smaller and less complex investment portfolios than large business carriers and because small or micro business carriers may compensate officers who review risk-based capital reports at a lower salary than large business carriers.

Under the Government Code §2006.002(c), before adopting a rule that may have an adverse economic effect on small or micro businesses, an agency is required to prepare in addition to an economic impact statement a regulatory flexibility analysis that includes the agency's consideration of alternative methods of achieving the purpose of the proposed rule. Because the Department has determined that the routine costs to comply with this proposal, i.e., completing the risk-based capital report and reflecting the results in the carrier's financial statements filed with the Department, will not have an adverse economic effect on small or micro businesses, the Department is not required to consider alternative methods of achieving the purpose of these requirements in the proposed rule.

Proposed §7.402(g)(1), (2), (5) and (6). As required by the Government Code §2006.002(c), the Department has determined that the costs to comply with proposed §7.402(g)(1), (2), (5) and (6) may have an adverse economic effect on no more than one or two small or micro-business carriers. Such costs will only be incurred by these relatively few small or micro-business carriers because of the failure of the individual carrier to maintain capital and surplus in accordance with the levels required in proposed §7.402(g)(1), (2), (5) and (6). This failure will trigger the requirement in proposed §7.402(g)(1), (2), (5) and (6) that the carrier prepare and implement a comprehensive financial plan. This plan will be necessary to identify the conditions that contribute to the carrier's financial condition and must contain proposals to correct areas of substantial regulatory concern and projections of the carrier's financial condition, both with and without the proposed corrections, including plans to restore its capital and surplus to acceptable levels. The total cost of compliance with proposed §7.402(g)(1), (2), (5) and (6) for preparing and implementing comprehensive financial plans will depend on the size and type of the small or micro-business carrier and other factors, including the character of the carrier's investments, the kinds and nature of the risks insured, the type of software used by the carrier to complete its annual statement, and employee compensation expenses. The Department's cost analysis and resulting estimated costs for carriers who will be required to prepare and implement a comprehensive financial plan in the Public Benefit/Cost Note portion of this proposal are equally applicable to small or micro-businesses. As indicated in the Public Benefit/Cost Note analysis, these costs will be less for small or micro-business carriers, primarily because small or micro business carriers will incur less labor costs in transferring information from their records to the risk-based capital reports due to their smaller and less complex investment portfolios than large business carriers and because small or micro business carriers may compensate officers that review risk-based capital reports at a lower salary than large business carriers. Because the function of the risk-based capital formulas in proposed §7.402(d) is to protect policyholders, enrollees, and carriers from the effects of carrier insolvency, carriers, regardless of size, that are required to submit comprehensive financial plans may also be required to increase their capital. To the extent any carrier must increase its capital as a result of the risk-based capital requirements, that cost is the amount of capital required and is a result of the statutory requirements in the Insurance Code Chapter 404 and §§441.051, 822.210, 822.211, 841.205, 841.206, 843.404, and 884.206. These statutes authorize or require the Commissioner to order carriers that are operating in a potentially hazardous manner to take action to remedy such hazardous condition, which may include the requirement that the carriers increase their capital and surplus and take other remedial action.

In accordance with the Government Code §2006.002(c-1), the Department has determined that even though proposed §7.402(g)(1), (2), (5) and (6) may have an adverse economic effect on small or micro-businesses that are required to comply with these proposed requirements, the Department is not required to prepare a regulatory flexibility analysis as required in §2006.002(c)(2) of the Government Code. Section 2006.002(c)(2) requires a state agency, before adopting a rule that may have an adverse economic effect on small businesses, to prepare a regulatory flexibility analysis that includes the agency's consideration of alternative methods of achieving the purpose of the proposed rule. Section 2006.002(c-1) of the Government Code requires that the regulatory flexibility analysis "consider, if consistent with the health, safety, and environmental and economic welfare of the state, using regulatory methods that will accomplish the objectives of applicable rules while minimizing adverse impacts on small businesses." Therefore, an agency is not required to consider alternatives that, while possibly minimizing adverse impacts on small and micro-businesses, would not be protective of the health, safety, and environmental and economic welfare of the state.

The primary purpose of §§404.003 - 404.005, 822.210, 841.205, 843.404, and 884.206 of the Insurance Code, which authorize proposed §7.402(g)(1), (2), (5) and (6), is to require a carrier to maintain capital and surplus in amounts that exceed the minimum amounts required by statute because of the nature and kind of risks the carrier underwrites or reinsures; the premium volume of risks the carrier underwrites or reinsures; the composition, quality, duration, or liquidity of the carrier's investments; fluctuations in the market value of securities the carrier holds; or the adequacy of the carrier's reserves. These statutes further require that a rule adopted by the Commissioner be designed to ensure the financial solvency of a carrier for the protection of policyholders, enrollees, creditors, or the general public from the harmful effects of carrier insolvency. Section 441.001(g) provides that for the reasons stated by this section, the substance and procedures in Insurance Code Chapter 441 are the public policy of the State of Texas and are necessary to the public welfare. Section 441.001(a) states that insurer delinquencies destroy public confidence in the state's ability to regulate insurers and an insurer delinquency affects other insurers by creating a lack of public confidence in insurance and insurers. Section 441.001(b) states that placing an insurer in receivership often destroys or diminishes, or is likely to destroy or diminish, the value of the insurer's assets. Further, the purpose of Insurance Code §§441.051, 822.211, and 841.206 is to prohibit the impairment of a carrier's minimum required capital or surplus, and these statutes require that the Commissioner take action to remedy the impairment. Sections 441.051, 822.211, and 841.206 further provide that the failure of a carrier to maintain its required capital or surplus at levels required by the Commissioner by rule is considered a prohibited impairment.

The purpose of proposed §7.402(g)(1), (2), (5) and (6) is to protect the economic welfare of (i) carriers, (ii) consumers that purchase insurance policies, annuities and other contracts issued by property and casualty insurers, life insurance companies, fraternal benefit societies, stipulated premium companies that do business in other states, HMOs, and insurers filing the NAIC Health blank, (iii) other persons and entities that would be adversely affected by a carrier insolvency against the risk that a carrier may become insolvent and unable to pay its insureds' claims and other obligations as they become due, and (iv) the public and the state of Texas generally.

The requirements in proposed §7.402(g) that carriers maintain capital and surplus at acceptable levels or prepare a comprehensive financial plan to restore their capital and surplus to acceptable levels are consistent with and necessary to implement the legislative intent of §§404.003 - 404.005, 822.210, 841.205, 843.464, and 884.206 of the Insurance Code. This intent is to ensure the financial solvency of a carrier, regardless of size, for the protection of the economic interests of all policyholders and not just the economic interests of those policyholders insured by large carriers.

Therefore, the Department has determined, in accordance with §2006.002(c-1) of the Government Code, that because the purpose of proposed §7.402(g)(1), (2), (5) and (6) and the authorizing statutes of the Insurance Code, is to protect carrier and consumer economic interests and the state's economic welfare, there are no additional regulatory alternatives to the required comprehensive financial plans and increased capital required as a result of the risk-based capital requirements that will sufficiently protect the economic interests of carriers and consumers and the economic welfare of the state.

Proposed §7.402(d)(1). As required by the Government Code §2006.002(c), the Department has determined that proposed §7.402(d)(1), relating to the 2007 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula, will not have an adverse economic effect on small or micro businesses. The Department does not anticipate that any small or micro business carriers will have business subject to proposed §7.402(d)(1), and therefore no small or micro business will be required to perform risk-based capital calculations pursuant to the proposed 2007 life risk-based capital C-3 Phase II instructions. The proposed §7.402(d)(1) requirement relates to certain unique types of business that the Department believes, based upon consultation with industry, is written only by large carriers.

5. TAKINGS IMPACT ASSESSMENT. The Department has determined that no private real property interests are affected by this proposal and that this proposal does not restrict or limit an owner's right to property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking or require a takings impact assessment under the Government Code §2007.043.

6. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on December 31, 2007 to Gene C. Jarmon, 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 must be simultaneously submitted to Danny Saenz, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, P. O. Box 149104, Austin, Texas 78714-9104. Any request for a public hearing should be submitted separately to the Office of the Chief Clerk before the close of the public comment period. If a hearing is held, written and oral comments presented at the hearing will be considered.

7. STATUTORY AUTHORITY. The new section is proposed under the Insurance Code Chapters 404 and 441 and §§441.051, 541.401, 822.210, 841.205, 884.206, 843.404, 885.401, 982.105, 982.106, and 36.001. Chapters 404 and 441 address the duties of the Department when an insurer's solvency is impaired. Chapter 404 authorizes the Commissioner to set standards for evaluating the financial condition of an insurer. Chapter 441 addresses the prevention of insurer delinquencies and in §441.051 specifies "the circumstances in which an insurer is considered insolvent, delinquent, or threatened with delinquency" and includes certain statutorily specified conditions, including if an insurer's required surplus, capital, or capital stock is impaired to an extent prohibited by law. Under §441.005, the Commissioner may adopt reasonable rules as necessary to implement and supplement the purposes of Chapter 441. Section 541.401 authorizes the Commissioner to adopt reasonable rules necessary to accomplish the purposes of trade practices regulation in Chapter 541. Sections 822.210, 841.205, and 884.206 authorize the Commissioner to adopt rules to require an insurer to maintain capital and surplus levels in excess of statutory minimum levels to assure financial solvency of insurers for the protection of policyholders and insurers. Section 843.404 authorizes the Commissioner to adopt rules to require a health maintenance organization to maintain capital and surplus levels in excess of statutory minimum levels to ensure financial solvency of health maintenance organizations for the protection of enrollees. Section 885.401 requires each fraternal benefit society to file an annual report on the society's financial condition, including any information the Commissioner considers necessary to demonstrate the society's business and method of operation, and authorizes the Department to use the annual report in determining a society's financial solvency. Section 982.105 specifies the capital, stock, and surplus requirements for foreign or alien life, health, or accident insurance companies. Section 982.106 specifies the capital, stock, and surplus requirements for foreign or alien insurance companies other than life, health, or accident insurance companies. Section 36.001 authorizes the Commissioner to adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.

8. CROSS REFERENCE TO STATUTE. The following statutes are affected by this proposal: Insurance Code Chapters 404 and 441 and §§541.401, 822.210, 841.205, 843.404, 885.401, 884.206, 982.105, and 982.106.

9. TEXT.

§7.402. Risk-Based Capital and Surplus Requirements for Year-End 2007

(a) 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 or a health maintenance organization.

(b) Scope.

(1) Life companies. This section applies to any insurer authorized to do business in Texas as an insurance company that writes or assumes a life insurance or annuity contract or assumes liability on or indemnifies one person for any risk under an accident and health insurance policy, or any combination of these policies, in an amount that exceeds $10,000 including: capital stock companies, mutual life companies, and stipulated premium companies doing business in other states. Fraternal benefit societies are subject to their own separate risk-based capital instructions as provided in subsection (d)(2) of this section. This section does not apply to stipulated premium companies only doing business in Texas .

(2) Property and casualty companies. This section applies to all domestic, foreign, and alien property and casualty companies subject to the provisions of the Insurance Code §§822.210 and 982.106, excluding monoline financial guaranty insurers, monoline mortgage guaranty insurers, title insurers, and those insurers that write business only in this state and are not required by law to have capital stock.

(3) Health Maintenance Organizations. This section applies to all domestic and foreign health maintenance organizations subject to the provisions of Insurance Code Chapter 843 and insurers that file the NAIC Health Annual Statement Blank with the department under department filing requirements.

(c) 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 blank to be used by insurance companies, as promulgated by the NAIC and as adopted by the commissioner.

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

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

(4) RBC-Risk-based capital.

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

(6) RBC instructions--NAIC Risk-Based Capital Report Including Overview and Instructions for Companies.

(7) Total adjusted capital--An insurer's adjusted statutory capital and surplus as determined under the RBC formula in accordance with the RBC instructions.

(d) Adoption of RBC formula by reference. The commissioner adopts by reference the following:

(1) The 2007 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.

(2) The 2007 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.

(3) The 2007 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.

(4) The 2007 NAIC Health Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.

(e) Filing requirements.

(1) All companies, except fraternals, subject to this section are required to file both a paper copy and an electronic version with the NAIC in accordance with and by the due date specified in the RBC instructions.

(2) Fraternals shall maintain a paper copy of the report for review by the department.

(f) 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 Risk-Based Capital Reports Including Overview and Instructions for Companies does not repeal or modify or amend any rule of the department or any provision of the Insurance Code.

(g) Actions of commissioner. The level of risk-based capital is calculated and reported annually. Depending on the results computed by the risk-based capital formula, the commissioner of insurance may take a number of remedial actions, as considered necessary. The ratio result of the total adjusted capital to authorized control level risk-based capital require the following actions related to an insurer within the specified ranges:

(1) An insurer reporting total adjusted capital of 150 percent to 200 percent of authorized control level risk-based capital institutes a company action level under which the insurer must prepare a comprehensive financial plan that identifies the conditions that contribute to the company's financial condition. The plan must contain proposals to correct areas of substantial regulatory concern and projections of the company's financial condition, both with and without the proposed corrections. The plan must list the key assumptions underlying the projections and identify the concerns associated with the insurer's business. The RBC plan is to be submitted within 45 days of filing the RBC report with the NAIC. After review, the commissioner will notify the company if the plan is satisfactory or not satisfactory. In the event the commissioner notifies the company that the plan is not satisfactory, the company shall prepare a revised plan and submit it to the commissioner. Failure to file this comprehensive financial plan triggers the next lower action level described in this subsection.

(2) An insurer reporting total adjusted capital of 100 percent to 150 percent of authorized control level risk-based capital triggers a regulatory action level initiative. At this action level, an insurance company is also required to file an RBC plan or revised RBC plan within 45 days of filing the RBC report with the NAIC, and the commissioner is required to perform any examinations or analyses to the insurer's business and operations that is deemed necessary. The commissioner may issue orders specifying corrective actions to be taken or may require other appropriate action.

(3) An insurer reporting total adjusted capital of 70 percent to 100 percent of authorized control level risk-based capital triggers an authorized control level. In addition to the remedies available at the higher action levels, the commissioner may take other action deemed necessary, including initiating a regulatory intervention to place an insurer under regulatory control.

(4) An insurer reporting total adjusted capital of less than 70 percent of authorized control level triggers a mandatory control level which subjects the insurer to one of the following actions:

(A) being placed in supervision or conservation;

(B) being determined to be in hazardous financial condition as provided by the Insurance Code Chapter 404 and §8.3 of this title (relating to Hazardous Conditions) regardless of percentage of assets in excess of liabilities;

(C) being determined to be impaired as provided by the Insurance Code §§404.051 and 404.052 or 841.206; or

(D) any other applicable sanctions under the Texas Insurance Code.

(5) A life insurer subject to this section is subject to a trend test described in the RBC formula, if its total adjusted capital to authorized control level risk-based capital is between 200 percent and 250 percent. Any life insurer that trends below 190 percent of total adjusted capital to authorized control level risk-based capital triggers the company action level.

(6) A property and casualty insurer subject to this section is subject to a trend test if its total adjusted capital to authorized control level risk-based capital is between 200 percent and 300 percent. If the result of the trend test as determined by the formula is "YES", the insurer triggers regulatory attention at the company action level.

(h) 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 Chapter 541, regulating unfair methods of competition and unfair or deceptive acts or practices.

(i) 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 that an insurer or any affiliate is authorized to write.

(j) Limitations. In no event shall the requirements of this section reduce the amount of capital and surplus otherwise required by the Insurance Code, Department rules, or by authority of the commissioner of insurance as provided by law.



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