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You are here: Home . rules . 2008 . 0407A-059

SUBCHAPTER A. Examination and Financial Analysis

28 TAC §7.18

1. INTRODUCTION. 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 with a nonsubstantive change to the proposed text published in the January 25, 2008, issue of the Texas Register (33 TexReg 655).

2. REASONED JUSTIFICATION. The adopted amendments are necessary to clarify in §7.18(a) that Texas statutes; Department rules; and directives, instructions, and orders of the Commissioner preempt any contrary provisions in the Manual, and to clarify which Department rules specifically preempt any contrary provisions in the Manual. The amendments are also necessary to adopt in §7.18(c)(1) the new Statements of Statutory Accounting Principle (SSAP) No. 97 as an addition to the Manual. SSAP No. 97 is the only single substantive SSAP adopted by the National Association of Insurance Commissioners (NAIC) in calendar year 2007; it became effective on January 1, 2008. SSAP No. 97 replaces SSAP No. 88 and establishes accounting principles for investments in subsidiary, controlled and affiliated entities (SCA entities). The Manual, which is adopted and published by the NAIC, is a comprehensive guide to statutory accounting principles and contains SSAPs that provide guidance to insurers and health maintenance organizations (HMOs), including accountants employed or retained by these entities, on how to properly record business transactions for the purpose of accurate statutory reporting. SSAPs provide a nationwide standard method of accounting, which most insurers and HMOs are required to use for statutory financial reporting guidance, thus providing a more consistent reporting of financial information for insurers and HMOs. SSAPs provide the source of statutory accounting principles for the Department when examining and analyzing financial reports and for conducting statutory examinations and rehabilitations of insurers and HMOs licensed in Texas, except where otherwise provided by law. Thus, the adopted amendments provide for more consistent and efficient regulation of insurance by providing a single source for accounting guidance. However, SSAPs do not preempt individual state legislative or regulatory authority.

The amendments to §7.18 also adopt in new subsection (c)(2) nonsubstantive modifications to SSAP Nos. 1, 10, 22, 26, 55, 56, 61, 62, 72, and 80. These nonsubstantive modifications, which were made by the NAIC in calendar year 2007, clarify language or change disclosures, appendices, or other material referenced in SSAPs already included in the March 2007 version of the Manual. The amendment to §7.18(c)(3) is necessary to clarify the exception to SSAP No. 96 by specifying that intercompany balances must be settled within 90 days of the period for which the services are being billed; otherwise, such balances shall be nonadmitted. The amendments also delete §7.18(c)(5) because it is a transitional provision that relates to certain items expensed on or before December 31, 2000, and thus, is no longer necessary. The amendment to §7.18(d) increases from less than $5 million to less than $6 million the amount of annual direct written premiums that will qualify a farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association for exemption from compliance with the Manual. This expanded exemption makes the threshold for the exemption consistent with the "less than $6 million in annual gross receipts" threshold for defining a small business in accordance with the Government Code §2006.001(2) (Agency Actions Affecting Small Businesses), as amended in HB 3430, 80th Legislature, effective October 1, 2007.

While the Department did not receive any comments on the proposal, the Department, for purposes of clarity, has made a nonsubstantive change to the proposed text as adopted to remove a redundant phrase in §7.18(a). As adopted, subsection (a) has been revised to remove the language "preempt any contrary provisions in the Manual" that is on the last line of subsection (a) preceding the listing of paragraphs (1) - (6). This language, which is in the existing rule, is redundant of the proposed amendment to subsection (a) that reads: "The department rules that preempt any contrary provisions in the Manual include, but are not limited to. . . ." This minor change, however, does not materially alter issues raised in the proposed rule, introduce new subject matter, or affect persons other than those previously subject to the proposal as originally published.

3. HOW THE SECTION WILL FUNCTION. The adopted amendments to §7.18(a) adopt by reference the March 2007 version of the Manual with deference to Texas statutes and regulations. The adopted version of the Manual includes all SSAPs adopted by the NAIC through December 31, 2006. The adopted amendments to §7.18(c) adopt new SSAP No. 97 in new paragraph (1). The adopted amendments to §7.18(c) also adopt nonsubstantive modifications to the SSAPs in new paragraph (2). Adopted amendments to §7.18(c)(3) clarify the exception to SSAP No. 96 regarding the statutory accounting principles for settlement of intercompany balances. The adopted amendments to §7.18(c) also delete in paragraph (5) the transitional provision that relates to certain items expensed on or before December 31, 2000, because they are no longer necessary. As a result of the addition of new paragraphs (1) and (2) to the existing subsection (c) and the deletion of existing paragraph (5) of subsection (c), the adopted amendments to §7.18(c) redesignate the provisions in existing paragraphs (1) - (6) as paragraphs (3) - (7). The adopted amendment to §7.18(d) increases from less than $5 million to less than $6 million the amount of annual direct written premiums that will qualify a farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association for exemption from compliance with the Manual.

4. SUMMARY OF COMMENTS AND AGENCY RESPONSE. The Department did not receive any comments on the published proposal.

5. STATUTORY AUTHORITY. The amendments are adopted under the Insurance Code Chapters 32, 401, 404, 421, 425, 426, 441, 802, 823, 841, 843, 861, 862, and §36.001. Sections 401.051 and 401.056 mandate 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 adopt by rule procedures for the filing and adoption of examination reports. Section 404.005(a)(2) authorizes the Commissioner to establish standards for evaluating the financial condition of an insurer. Section 421.001(c) authorizes the Commissioner to adopt each current formula recommended by the NAIC for establishing reserves for each line of insurance. Section 425.162 authorizes the Commissioner to adopt rules, minimum standards, or limitations that are fair and reasonable as appropriate to supplement and implement the Insurance Code Chapter 425 Subchapter C. Section 426.002 provides that reserves required by §426.001 must be computed in accordance with any rules adopted by the Commissioner to adequately protect insureds, secure the solvency of the workers' compensation insurance company, and prevent unreasonably large reserves. Section 441.005 authorizes the Commissioner to adopt reasonable rules as necessary to implement and supplement Chapter 441 of the Insurance Code (Supervision and Conservatorship). Section 32.041 requires the Department to furnish to the companies the required financial statement forms. Section 802.001 authorizes the Commissioner, as necessary to obtain an accurate indication of the company's condition and method of transacting business, to change the form of any annual statement required to be filed by any kind of insurance company. Section 823.012 authorizes the Commissioner to issue rules and orders necessary to implement the provisions of Chapter 823 of the Insurance Code (Insurance Holding Company Systems). Section 843.151 authorizes the Commissioner to promulgate rules as are necessary to carry out the provisions of Chapter 843 of the Insurance Code (Health Maintenance Organizations). Section 843.155 requires a health maintenance organization to file an annual report with the Commissioner, which shall include a financial statement of the health maintenance organization. Sections 841.004(b), 861.255(b), and 862.001(c) 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. Section 36.001 provides that the Commissioner of Insurance may 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.

6. TEXT.

§7.18. National Association of Insurance Commissioners Accounting Practices and Procedures Manual.

(a) The purpose of this section is to adopt statutory accounting principles, which will provide insurers and health maintenance organizations, including accountants employed or retained by these entities, guidance as how to properly record business transactions for the purpose of accurate statutory reporting. The March 2007 version of the Accounting Practices and Procedures Manual (Manual) published by the National Association of Insurance Commissioners (NAIC) will be utilized as the guideline for statutory accounting principles in Texas to the extent the Manual does not conflict with provisions of the 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. The sources in paragraphs (1) - (3) preempt any contrary provisions in the Manual. The department rules that preempt any contrary provisions in the Manual include, but are not limited to: §§3.1501 - 3.1505, 3.1601 - 3.1608, 3.4505(f), 3.6101, 3.6102, 3.7001 - 3.7009, 3.9101 - 3.9106, 3.9401 - 3.9404, 7.7, 7.85 and 11.803 of this title (relating to Annuity Mortality Tables, Actuarial Opinion and Annuities, General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves, Minimum Reserve Standards for Individual and Group Accident and Health Insurance, 2001 CSO Mortality Table, Preferred Mortality Tables, Subordinated Indebtedness, Surplus Debentures, Surplus Notes, Premium Income Notes, Bonds, or Debentures, and Other Contingent Evidences of Indebtedness, Audited Financial Reports, and Investments, Loans, and Other Assets).

(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 Practices.

(b) The Commissioner adopts by reference the March 2007 version of the Manual, 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, 2008 and thereafter, and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2008.

(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 (SSAP) No. 97 regarding accounting for investments in subsidiary, controlled and affiliated entities, adopted by the NAIC on December 2, 2007 and effective January 1, 2008, are adopted by reference and shall be used to prepare all financial statements filed with the department for periods after January 1, 2008. This adoption of SSAP No. 97 effectively replaces SSAP No. 88.

(2) Nonsubstantive modifications to SSAP Nos. 1, 10, 22, 26, 55, 56, 61, 62, 72, and 80 made by the NAIC in calendar year 2007, as follows:

(A) Ref. No. 2006-09: Accounting for the Gain or Loss on Sale of Real Estate Included in a Leaseback Transition;

(B) Ref. No. 2007-16: Clarification of SSAP No. 26 for Reporting Investments in Commercial Paper;

(C) Ref. No. 2007-17: Disclosure of Information about Capital Structure;

(D) Ref. No. 2005-15: Move INT 03-17 Disclosure to SSAP No. 55;

(E) Ref. No. 2006-11: Multi-Cendant Reinsurance Agreements;

(F) Ref. 2006-24: SSAP No. 61 Ceding Commissions;

(G) Ref. No. 2006-27: Clarify SSAP No. 56, paragraph 20;

(H) Ref. No. 2006-28: Consider Inclusion of Model Regulation 815 into Appendix A - Excerpts of Model Laws;

(I) Ref. No. 2006-31: Disclosure Amendment to SSAP No. 10 for Protective Tax Deposits;

(J) Ref. No. 2007-06: Quarterly Disclosure of Note 25;

(K) Ref. No. 2007-07: Additional Dividend Disclosure;

(L) Ref. No. 2007-13: Subsequent Events;

(M) Ref. No. 2007-15: Disclosures; and

(N) Ref. No. 2007-33: Subprime Mortgage Disclosure.

(3) Settlement requirements for intercompany transactions are subject to the accounting treatment in Statement of Statutory Accounting Principles (SSAP) No. 96, except that amounts owed to the reporting entity shall be settled by the due date in accordance with the written agreement and the requirements of §7.204 of this title (relating to Commissioner's Approval Required). Intercompany balances shall be settled within 90 days of the period for which the services are being billed; otherwise such balances shall be nonadmitted.

(4) 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 90 day period is calculated to determine admissibility of uncollected premium balances under SSAP No. 6.

(5) 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 Insurance Code §§841.004, 861.255, 862.001, 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 Insurance Code §§841.004, 861.255, 862.001, and any other applicable law, and shall be amortized in full over a period not to exceed ten years.

(6) Furniture, labor-saving devices, machines, and all other office equipment may be admitted as an asset as permitted by the Insurance Code §§841.004, 861.255, 862.001, 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 Insurance Code §§841.004, 861.255, 862.001, and any other applicable law, and shall be depreciated in full over a period not to exceed ten years.

(7) All certificates of deposit, of any maturity, may be classified as cash and are subject to the accounting treatment contained in SSAP No. 2, notwithstanding the provisions of SSAP No. 26.

(d) A farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association that has less than $6 million in annual direct written premiums need not comply with the Manual .

(e) In the event a domestic insurer desires to deviate from the accounting guidance in a Texas statute or any applicable regulation, the insurer shall file a written request for a permitted accounting practice. Such filing shall be made with the Senior Associate Commissioner, Texas Department of Insurance, Mail Code 305-2A, P.O. Box 149104, Austin, Texas 78714-9104 at least 30 days before filing the financial statement affected by the deviated accounting practice. Insurers shall not use deviated accounting practice without the department's prior approval.

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



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