28 TAC §7.401
1. INTRODUCTION. The Commissioner of Insurance adopts amendments to §7.401, concerning risk-based capital and surplus requirements for insurers and health maintenance organizations. The section is adopted without changes to the proposal published in the February 1, 2008 issue of the Texas Register (33 TexReg 860).
2. REASONED JUSTIFICATION. The amendments, which are necessary to regulate the 2006 risk-based capital and surplus requirements for insurers and health maintenance organizations (HMOs), adopt by reference the 2006 National Association of Insurance Commissioners (NAIC) Life Risk-Based Capital Report Including Overview and Instructions for Companies, the 2006 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies, the 2006 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies, and the 2006 NAIC Health Risk-Based Capital Report including Overview and Instructions for Companies. The adoption in §7.401(b)(3) clarifies that the health Risk Based Capital rule applies to insurers that file the Annual Statement Health Blank. This is necessary because life companies and property and casualty companies may also be authorized to write health insurance, and if such business constitutes 95 percent or more of their total business then the carriers are required to file the Health Blank. The section applies to 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 Commissioners (NAIC) Health Blank. These insurers and HMOs are referred to collectively as "carriers" in this adoption. 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 adopted section will 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 and provide for specific actions by the Commissioner or the reporting entity when the total adjusted capital of the reporting entity falls to certain levels. The adopted section also provides for specific actions by the Commissioner or the reporting entity when the total adjusted capital of the reporting entity falls to certain levels specified in the section. Finally, the adopted section is necessary to effect the consolidation of the existing risk-based capital rules.
3. HOW THE SECTION WILL FUNCTION. Adopted §7.401(b)(1) deletes fraternal benefit societies because they are subject to their own separate risk-based capital instructions as provided in §7.401(d)(2). Adopted §7.401(b)(2) deletes monoline financial guaranty insurers, monoline mortgage guaranty insurers and title insurers because the Risk Based Capital guidelines specifically exclude these types of insurers. Adopted §7.401(b)(3) clarifies that the health Risk Based Capital rule applies to insurers that file the Annual Statement Health Blank. Adopted §7.401(d) adopts by reference the 2006 formulas, including the 2006 NAIC Life Risk-Based Capital Report including Overview and Instructions for Companies, the 2006 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies, the 2006 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies, and the 2006 NAIC Health Risk-Based Capital Report Including Overview and Instructions for Companies. Adopted §7.401(g)(5) clarifies that the calculation of the trend test is in the RBC formula itself, not any other. Adopted §7.401(g)(4)(B) and (C) and (h) update the Insurance Code references for consistency with the revised Insurance Code enacted by the Texas Legislature.
4. SUMMARY OF COMMENTS. The Department did not receive any comments on the published proposal.
5. STATUTORY AUTHORITY. The amendments are adopted 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 a 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 ensure 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 assure 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 of Insurance 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.
§7.401. Risk-Based Capital and Surplus Requirements for Year-End 2006.
(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.
(1) Life companies. 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, 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 formula--NAIC risk-based capital formula.
(5) RBC instructions--NAIC Risk-Based Capital Report Including Overview and Instructions for Companies.
(6) 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 2006 NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.
(2) The 2006 NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.
(3) The 2006 NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies which includes the RBC formula.
(4) The 2006 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 do 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% to 200% 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. After review the commissioner will notify the company if the plan is 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% to 150% 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, 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% to 100% 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% 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% and 250%. Any life insurer that trends below 190% of total adjusted capital to authorized control level risk-based capital would trigger 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% and 300%. If the result of the trend test as determined by the formula is "YES", the insurer triggers regulatory attention at the Company Action Level on the trend test. For the year 2006, the trend test will be for information purposes only.
(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.
(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 which 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 provisions of the Insurance Code or the Texas Administrative Code, or by authority of the commissioner of insurance