By: Harris of Dallas S.B. No. 1246
A BILL TO BE ENTITLED
AN ACT
1-1 relating to the regulation of certain business and insurance
1-2 transactions by entities involved in the insurance industry;
1-3 providing penalties.
1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-5 SECTION 1. Section 4, Article 3.33, Insurance Code, is
1-6 amended to read as follows:
1-7 Sec. 4. Authorized Investments and Loans. Subject to the
1-8 limitations and restrictions herein contained, the investments and
1-9 loans described in the following subsections, and none other, are
1-10 authorized for the insurers subject hereto:
1-11 (a) United States Government Bonds. Bonds, evidences of
1-12 indebtedness or obligations of the United States of America, or
1-13 bonds, evidences of indebtedness or obligations guaranteed as to
1-14 principal and interest by the full faith and credit of the United
1-15 States of America, and bonds, evidences of indebtedness, or
1-16 obligations of agencies and instrumentalities of the government of
1-17 the United States of America;
1-18 (b) Other Governmental Bonds. Bonds, evidences of
1-19 indebtedness or obligations of governmental units in the United
1-20 States, Canada, or any province or city of Canada, and of the
1-21 instrumentalities of such governmental units; provided:
1-22 (1) such governmental unit or instrumentality is not
1-23 in default in the payment of principal or interest in any of its
2-1 obligations; and
2-2 (2) investments in the obligations of any one
2-3 governmental unit or instrumentality may not exceed 20 percent of
2-4 the insurer's capital and surplus;
2-5 (c) Obligations of Business Entities. Obligations,
2-6 including bonds or evidences of indebtedness, or participations
2-7 therein, issued, assumed, guaranteed, or insured by any business
2-8 entity which includes but is not limited to a sole proprietorship,
2-9 a corporation, an association, a general or limited partnership, a
2-10 joint-stock company, a joint venture, a trust, or any other form of
2-11 business organization whether for-profit or not-for-profit,
2-12 organized under the laws of the United States of America or its
2-13 states or Canada or any state, district, province, or territory of
2-14 Canada, subject to the following conditions:
2-15 (1) no insurer shall acquire obligations in any one
2-16 business entity rated one or two by the Securities Valuation Office
2-17 of the National Association of Insurance Commissioners that exceed
2-18 20 percent of the insurer's statutory capital and surplus;
2-19 (2) no insurer shall acquire obligations rated three
2-20 or lower by the Securities Valuation Office if, after giving effect
2-21 to any such acquisition, the aggregate amount of all obligations
2-22 rated three or lower then held by the domestic insurer would exceed
2-23 20 percent of its admitted assets, and provided further that no
2-24 more than 10 percent of its admitted assets shall consist of
2-25 obligations rated four, five, or six by the Securities Valuation
3-1 Office, no more than three percent of its admitted assets shall
3-2 consist of obligations rated five or six by the Securities
3-3 Valuation Office, and no more than one percent of its admitted
3-4 assets shall consist of obligations rated six by the Securities
3-5 Valuation Office. Attaining or exceeding the limit of any one
3-6 category shall not preclude an insurer from acquiring obligations
3-7 in other categories subject to the specific and multicategory
3-8 limits;
3-9 (3) no insurer may invest more than an aggregate of
3-10 one percent of its admitted assets in obligations rated three by
3-11 the Securities Valuation Office which are issued, assumed,
3-12 guaranteed, or insured by any one business entity, nor may it
3-13 invest more than one-half of one percent of its admitted assets in
3-14 obligations rated four, five, or six by the Securities Valuation
3-15 Office which are issued, assumed, guaranteed, or insured by any one
3-16 business entity. In no event may an insurer invest more than one
3-17 percent of its admitted assets in any obligations rated three,
3-18 four, five, or six by the Securities Valuation Office which are
3-19 issued, assumed, guaranteed, or insured by any one business entity;
3-20 (4) nothing contained in this subsection shall
3-21 prohibit an insurer from acquiring any obligation which it has
3-22 committed to acquire if the insurer would have been permitted to
3-23 acquire that obligation pursuant to this subsection on the date on
3-24 which such insurer committed to purchase that obligation;
3-25 (5) notwithstanding the foregoing, an insurer may
4-1 acquire an obligation of a business entity in which the insurer
4-2 already has one or more obligations if the obligation is acquired
4-3 in order to protect an investment previously made in the business
4-4 entity, provided that all such acquired obligations shall not
4-5 exceed one-half of one percent of the insurer's assets;
4-6 (6) nothing in this subsection shall prohibit an
4-7 insurer from acquiring an obligation as a result of a restructuring
4-8 of a previously held obligation rated three or lower by the
4-9 Securities Valuation Office;
4-10 (7) nothing in this subsection shall require an
4-11 insurer to sell or otherwise dispose of any obligation:
4-12 (A) legally acquired prior to October 1, 1993;
4-13 or
4-14 (B) if acquired after October 1, 1993, that
4-15 satisfied all conditions of this subsection when acquired but which
4-16 subsequently fails to satisfy those conditions <Corporate Bonds.
4-17 Bonds, evidences of indebtedness or obligations of corporations
4-18 organized under the laws of the United States of America or its
4-19 states or Canada or any state, district, province, or territory of
4-20 Canada; provided:>
4-21 <(1) any such corporation must be solvent with at
4-22 least $1,000,000 of net worth as of the date of its latest annual
4-23 or more recent certified audited financial statement or will have
4-24 at least $1,000,000 of net worth after completion of a securities
4-25 offering which is being subscribed to by the insurer, or the
5-1 obligation is guaranteed as to principal and interest by a solvent
5-2 corporation meeting such net worth requirements which is organized
5-3 under the laws of the United States of America or one of its states
5-4 or Canada or any state, district, province, or territory of Canada;>
5-5 <(2) investments in the obligations of any one
5-6 corporation may not exceed 20 percent of the insurer's capital and
5-7 surplus; and>
5-8 <(3) the aggregate of all investments under this
5-9 subsection may not exceed:>
5-10 <(A) one hundred percent of the insurer's assets
5-11 (excluding, however, those assets representing the minimum capital
5-12 required for the insurer), but only if more than 75 percent of the
5-13 total amount invested by the insurer in such bonds, evidences of
5-14 indebtedness, or obligations of any such corporations qualifying
5-15 under Subdivision (1) of this subsection are rated either: (i) AA
5-16 or better by Standard and Poor's Bond Ratings service; or (ii) Aa
5-17 or better by Moody's Bond Ratings service; or>
5-18 <(B) eighty percent of the insurer's assets
5-19 (excluding, however, those assets representing the minimum capital
5-20 required for the insurer), but only if more than 50 percent of the
5-21 total amount invested by the insurer in such bonds, evidences of
5-22 indebtedness or obligations of any such corporations qualifying
5-23 under Subdivision (1) of this subsection are rated either: (i) BBB
5-24 or better by Standard and Poor's Bond Ratings service; or (ii) Baa
5-25 or better by Moody's Bond Ratings service; or>
6-1 <(C) fifty percent of the insurer's assets>;
6-2 (d) International Market. Bonds issued, assumed, or
6-3 guaranteed by the Interamerican Development Bank, the International
6-4 Bank for Reconstruction and Development (the World Bank), the Asian
6-5 Development Bank, the State of Israel, the African Development
6-6 Bank, and the International Finance Corporation; provided:
6-7 (1) investments in the bonds of any one of the
6-8 entities specified above may not exceed 20 percent of the insurer's
6-9 capital and surplus; and
6-10 (2) the aggregate of all investments made under this
6-11 subsection may not exceed 20 percent of the insurer's assets;
6-12 (e) Policy Loans. Loans upon the security of the insurer's
6-13 own policies not in excess of the amount of the reserve values
6-14 thereof;
6-15 (f) Time and Savings Deposits. Any type or form of savings
6-16 deposits, time deposits, certificates of deposit, NOW accounts, and
6-17 money market accounts in solvent banks, savings and loan
6-18 associations, and credit unions and branches thereof, organized
6-19 under the laws of the United States of America or its states, when
6-20 made in accordance with the laws or regulations applicable to such
6-21 entities; provided the amount of the deposits in any one bank,
6-22 savings and loan association, or credit union will not exceed the
6-23 greater of:
6-24 (1) twenty percent of the insurer's capital and
6-25 surplus;
7-1 (2) the amount of federal or state deposit insurance
7-2 coverage pertaining to such deposit; or
7-3 (3) ten percent of the amount of capital, surplus, and
7-4 undivided profits of the entity receiving such deposits;
7-5 (g) Equipment Trusts. Equipment trust obligations or
7-6 certificates; provided:
7-7 (1) any such obligation or certificate is secured by
7-8 an interest in transportation equipment that is in whole or in part
7-9 within the United States of America <and the amount of the
7-10 obligation or certificate may not exceed 90 percent of the value of
7-11 the equipment>;
7-12 (2) the obligation or certificate provides a right to
7-13 receive determined portions of rental, purchase, or other fixed
7-14 obligatory payments for the use or purchase of the transportation
7-15 equipment;
7-16 (3) the obligation is deemed an obligation of a
7-17 business entity and is subject to the quantitative limitations on
7-18 obligations of business entities provided in Subsection (c) of this
7-19 section <investment in any one equipment trust obligation or
7-20 certificate may not exceed 10 percent of the insurer's capital and
7-21 surplus>; and
7-22 (4) the aggregate of all investments made under this
7-23 subsection may not exceed 10 percent of the insurer's assets;
7-24 (h) Common Stock. Common stock of any corporation organized
7-25 under the laws of the United States of America or any of its
8-1 states, shares of mutual funds doing business under the Investment
8-2 Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), and shares
8-3 in real estate investment trusts as defined in the Internal Revenue
8-4 Code of 1954 (26 U.S.C. Section 856); provided:
8-5 (1) any such corporation, other than a mutual fund,
8-6 must be solvent with at least $1,000,000 net worth as of the date
8-7 of its latest annual or more recent certified audited financial
8-8 statement or will have at least $1,000,000 of net worth after
8-9 completion of a securities offering which is being subscribed to by
8-10 the insurer;
8-11 (2) mutual funds and real estate investment trusts
8-12 must be solvent with at least $1,000,000 of net assets as of the
8-13 date of its latest annual or more recent certified audited
8-14 financial statement;
8-15 (3) investments in any one corporation, mutual fund,
8-16 or real estate investment trust may not exceed 10 percent of the
8-17 insurer's capital and surplus; and
8-18 (4) the aggregate of all investments made under this
8-19 subsection may not exceed 20 percent of the insurer's assets;
8-20 (i) Preferred Stock. Preferred stock of corporations
8-21 organized under the laws of the United States of America or any of
8-22 its states; provided:
8-23 (1) such corporation must be solvent with at least
8-24 $1,000,000 of net worth as of the date of its latest annual or more
8-25 recent certified audited financial statement or will have at least
9-1 $1,000,000 of net worth after completion of a security offering
9-2 which is being subscribed to by the insurer;
9-3 (2) investments in the preferred stock of any one
9-4 corporation will not exceed 20 percent of the insurer's capital and
9-5 surplus;
9-6 (3) in the aggregate not more than 10 percent of the
9-7 insurer's assets may be invested in preferred stock, the redemption
9-8 and retirement of which is not provided for by a sinking fund
9-9 meeting the standards established by the National Association of
9-10 Insurance Commissioners to value the preferred stock at cost; and
9-11 (4) the aggregate of all investments made under this
9-12 subsection may not exceed 40 percent of the insurer's assets;
9-13 (j) Collateral Loans. Collateral loans secured by a first
9-14 lien upon or a valid and perfected first security interest in an
9-15 asset; provided:
9-16 (1) the amount of any such collateral loan will not
9-17 exceed 80 percent of the value of the collateral asset at any time
9-18 during the duration of the loan; and
9-19 (2) the asset used as collateral would be authorized
9-20 for direct investment by the insurer under other provisions of this
9-21 Section 4, except real property in Subsection (l);
9-22 (k) Real Estate Loans. Notes, evidences of indebtedness, or
9-23 participations therein secured by a valid first lien upon real
9-24 property or leasehold estate therein located in the United States
9-25 of America; provided:
10-1 (1) the amount of any such obligation secured by a
10-2 first lien upon real property or leasehold estate therein shall not
10-3 exceed 90 percent of the value of such real property or leasehold
10-4 estate therein, but the amount of such obligation:
10-5 (A) may exceed 90 percent but shall not exceed
10-6 100 percent of the value of such real property or leasehold estate
10-7 therein if the insurer or one or more wholly owned subsidiaries of
10-8 the insurer owns in the aggregate a 10 percent or greater equity
10-9 interest in such real property or leasehold estate therein;
10-10 (B) may be 95 percent of the value of such real
10-11 property or leasehold estate therein if it contains only a dwelling
10-12 designed exclusively for occupancy by not more than four families
10-13 for residential purposes, and the portion of the unpaid balance of
10-14 such obligation which is in excess of an amount equal to 90 percent
10-15 of such value is guaranteed or insured by a mortgage insurance
10-16 company qualified to do business in the State of Texas; or
10-17 (C) may be greater than 90 percent of the value
10-18 of such real property or leasehold estate therein to the extent the
10-19 obligation is insured or guaranteed by the United States of
10-20 America, the Federal Housing Administration pursuant to the
10-21 National Housing Act of 1934, as amended (12 U.S.C. Section 1701 et
10-22 seq.), or the State of Texas; and
10-23 (2) the term of an obligation secured by a first lien
10-24 upon a leasehold estate in real property shall not exceed a period
10-25 equal to four-fifths of the then unexpired term of such leasehold
11-1 estate; provided the unexpired term of the leasehold estate must
11-2 extend at least 10 years beyond the term of the obligation, and
11-3 each obligation shall be payable in an installment or installments
11-4 of sufficient amount or amounts so that at any time after the
11-5 expiration of two-thirds of the original loan term, the principal
11-6 balance will be no greater than the principal balance would have
11-7 been if the loan had been amortized over the original loan term in
11-8 equal monthly, quarterly, semiannual, or annual payments of
11-9 principal and interest, it being required that under any method of
11-10 repayment such obligation will fully amortize during a period of
11-11 time not exceeding four-fifths of the then unexpired term of the
11-12 security leasehold estate; and
11-13 (3) if any part of the value of buildings is to be
11-14 included in the value of such real property or leasehold estate
11-15 therein to secure the obligations provided for in this subsection,
11-16 such buildings shall be covered by adequate property insurance,
11-17 including but not limited to fire and extended coverage insurance
11-18 issued by a company authorized to transact business in the State of
11-19 Texas or by a company recognized as acceptable for such purpose by
11-20 the insurance regulatory official of the state in which such real
11-21 estate is located, and the amount of insurance granted in the
11-22 policy or policies shall be not less than the unpaid balance of the
11-23 obligation or the insurable value of such buildings, whichever is
11-24 the lesser; the loss clause shall be payable to the insurer as its
11-25 interest may appear; and
12-1 (4) to the extent any note, evidence of indebtedness,
12-2 or participation therein under this subsection represents an equity
12-3 interest in the underlying real property, the value of such equity
12-4 interest shall be determined at the time of execution of such note,
12-5 evidence of indebtedness, or participation therein and that portion
12-6 shall be designated as an investment subject to the provisions of
12-7 Subsection (l)(2) of this section; and
12-8 (5) the amount of any one such obligation may not
12-9 exceed 25 percent of the insurer's capital and surplus;
12-10 (l) Real Estate. Real property fee simple or leasehold
12-11 estates located within the United States of America, as follows:
12-12 (1) home and branch office real property or
12-13 participations therein, which must be materially enhanced in value
12-14 by the construction of durable, permanent-type buildings and other
12-15 improvements costing an amount at least equal to the cost of such
12-16 real property, exclusive of buildings and improvements at the time
12-17 of acquisition, or by the construction of such buildings and
12-18 improvements which must be commenced within two years of the date
12-19 of the acquisition of such real property; provided:
12-20 (A) at least 30 percent of the available space
12-21 in such building shall be occupied for the business purposes of the
12-22 insurer and its affiliates; and
12-23 (B) the aggregate investment in such home and
12-24 branch offices shall not exceed 20 percent of the insurer's assets;
12-25 and
13-1 (2) other investment property or participations
13-2 therein, which must be materially enhanced in value by the
13-3 construction of durable, permanent-type buildings and other
13-4 improvements costing an amount at least equal to the cost of such
13-5 real property, exclusive of buildings and improvements at the time
13-6 of acquisition, or by the construction of such buildings and
13-7 improvements which must be commenced within two years of the date
13-8 of acquisition of such real property; provided that such investment
13-9 in any one piece of property or interest therein, including the
13-10 improvements, fixtures, and equipment pertaining thereto may not
13-11 exceed five percent of the insurer's assets; provided, however,
13-12 nothing in this article shall allow ownership of, development of,
13-13 or equity interest in any residential property or subdivision,
13-14 single or multiunit family dwelling property, or undeveloped real
13-15 estate for the purpose of subdivision for or development of
13-16 residential, single, or multiunit family dwellings, except
13-17 acquisitions as provided in Subdivision (4) below, and such
13-18 ownership, development, or equity interests shall be specifically
13-19 prohibited;
13-20 (3) the admissible asset value of each such investment
13-21 in the properties acquired under Subdivisions (1) and (2) of this
13-22 subsection shall be subject to review and approval by the
13-23 Commissioner of Insurance. The commissioner shall have discretion
13-24 at the time such investment is made or any time when an examination
13-25 of the company is being made to cause any such investment to be
14-1 appraised by an appraiser, appointed by the commissioner, and the
14-2 reasonable expense of such appraisal shall be paid by such
14-3 insurance company and shall be deemed to be a part of the expense
14-4 of examination of such company; if the appraisal is made upon
14-5 application of the company, the expense of such appraisal shall not
14-6 be considered a part of the expense of examination of such company;
14-7 no insurance company may hereafter make any write-up in the
14-8 valuation of any of the properties described in Subdivision (1) or
14-9 (2) of this subsection unless and until it makes application
14-10 therefor and such increase in valuation shall be approved by the
14-11 commissioner; and
14-12 (4) other real property acquired:
14-13 (A) in good faith by way of security for loans
14-14 previously contracted or money due; or
14-15 (B) in satisfaction of debts previously
14-16 contracted for in the course of its dealings; or
14-17 (C) by purchase at sales under judgment or
14-18 decrees of court, or mortgage or other lien held by such insurer;
14-19 and
14-20 (5) regardless of the mode of acquisition specified
14-21 herein, upon sale of any such real property, the fee title to the
14-22 mineral estate or any portion thereof may be retained by the
14-23 insurance company indefinitely;
14-24 (m) Oil, Gas, and Minerals. In addition to and without
14-25 limitation on the purposes for which real property may be acquired,
15-1 secured, held, or retained pursuant to other provisions of this
15-2 section, every such insurance company may secure, hold, retain, and
15-3 convey production payments, producing royalties and producing
15-4 overriding royalties, or participations therein as an investment
15-5 for the production of income; provided:
15-6 (1) in no event may such company carry such assets in
15-7 an amount in excess of 90 percent of the appraised value thereof;
15-8 and
15-9 (2) no one investment under this subsection may exceed
15-10 10 percent of the insurer's capital and surplus in excess of
15-11 statutory minimum capital and surplus applicable to that insurer,
15-12 and the aggregate of all such investments may not exceed 10 percent
15-13 of the insurer's assets as of December 31st next preceding the date
15-14 of such investment; and
15-15 (3) for the purposes of this subsection, the following
15-16 definitions apply:
15-17 (A) a production payment is defined to mean a
15-18 right to oil, gas, or other minerals in place or as produced that
15-19 entitles its owner to a specified fraction of production until a
15-20 specified sum of money, or a specified number of units of oil, gas,
15-21 or other minerals, has been received;
15-22 (B) a royalty and an overriding royalty are each
15-23 defined to mean a right to oil, gas, and other minerals in place or
15-24 as produced that entitles the owner to a specified fraction of
15-25 production without limitation to a specified sum of money or a
16-1 specified number of units of oil, gas, or other minerals;
16-2 (C) "producing" is defined to mean producing
16-3 oil, gas, or other minerals in paying quantities, provided that it
16-4 shall be deemed that oil, gas, or other minerals are being produced
16-5 in paying quantities if a well has been "shut in" and "shut-in
16-6 royalties" are being paid;
16-7 (n) Foreign Countries and United States Territories. In
16-8 addition to the investments in Canada authorized by other
16-9 provisions of this section, investments <Investments> in other
16-10 foreign countries or in commonwealths, territories, or possessions
16-11 of the United States <where the insurer conducts an insurance
16-12 business>; provided:
16-13 (1) such investments are similar to those authorized
16-14 for investment within the United States of America or Canada by
16-15 other provisions of this section and are rated one or two by the
16-16 Securities Valuation Office of the National Association of
16-17 Insurance Commissioners; and
16-18 (2) such investments when added to the amount of
16-19 similar investments made within the United States and Canada do not
16-20 result in the combined total of such investments exceeding the
16-21 limitations specified in Subsections (a) through (p) of this
16-22 section; and
16-23 (3) such investments may not exceed the sum of:
16-24 (A) the amount of reserves attributable to the
16-25 business in force in said countries if any;
17-1 (B) any additional investments <provided,
17-2 however, such investments may exceed such reserves to the extent>
17-3 required by any country as a condition to doing business therein<,
17-4 but to the extent such investments exceed such reserves said
17-5 investments shall not be considered as admitted assets of the
17-6 insurer>; and
17-7 (C) five percent of the insurer's assets;
17-8 (o) Investments Not Otherwise Specified. Investments which
17-9 are not otherwise authorized by this article and which are not
17-10 specifically prohibited by statute, including that portion of any
17-11 investments which may exceed the limits specified in Subsections
17-12 (a) through (n) of this section; provided:
17-13 (1) if any aggregate or individual specified
17-14 investment limitation in Subsections (a) through (n) of this
17-15 section is exceeded, then the excess portion of such investment
17-16 shall be an investment under this subsection; and
17-17 (2) the burden of establishing the value of such
17-18 investments shall be upon the insurer; and
17-19 (3) the amount of any one such investment may not
17-20 exceed 10 percent of the insurer's capital and surplus in excess of
17-21 the statutory minimum capital and surplus applicable to that
17-22 insurer; and
17-23 (4) the aggregate of all investments made under this
17-24 subsection may not exceed the lesser of either five percent of the
17-25 insurer's assets or the insurer's capital and surplus in excess of
18-1 the statutory minimum capital and surplus applicable to that
18-2 insurer;
18-3 (p) Other Authorized Investments. Those other investments
18-4 as follows:
18-5 (1) any investment held by an insurer on the effective
18-6 date of this Act, which was legally authorized at the time it was
18-7 made or acquired or which the insurer was authorized to hold or
18-8 possess immediately prior to such effective date, but which does
18-9 not conform to the requirements of the investments authorized in
18-10 Subsections (a) through (o) of this section, may continue to be
18-11 held by and considered as an admitted asset of the insurer;
18-12 provided the investment is disposed of at its maturity date, if
18-13 any, or within the time prescribed by the law under which it was
18-14 acquired, if any; and provided further, in no event shall the
18-15 provisions of this subdivision alter the legal or accounting status
18-16 of such asset; and
18-17 (2) any other investment which may be authorized by
18-18 other provisions of this code or by other laws of this state for
18-19 the insurers which are subject to this article;<.>
18-20 (q) Special Limitations for Certain Fixed Annuity Insurers.
18-21 The quantitative limitations imposed above in Subsections (b)(2),
18-22 (c)(2), (f)(1), (g)(3), (h)(3), (i)(2), and (k)(5) of this section
18-23 shall not apply to any insurer with assets in excess of
18-24 $2,500,000,000 and that receives more than 90 percent of its
18-25 premium income from fixed rate annuity contracts and that has more
19-1 than 90 percent of its assets allocated to its reserves held for
19-2 fixed rate annuity contracts, excluding, however, any premium
19-3 income, assets, and reserves received from, held for, or allocated
19-4 to separate accounts from the computation of the above percentages,
19-5 and in lieu thereof, the following quantitative limitations shall
19-6 apply to such insurers:
19-7 (1) the limitation in Subsection (b)(2) of this
19-8 section shall be two percent of the insurer's assets;
19-9 (2) the limitation in Subsection (c)(2) of this
19-10 section shall be two percent of the insurer's assets;
19-11 (3) the limitation in Subsection (f)(1) of this
19-12 section shall be two percent of the insurer's assets;
19-13 (4) the limitation in Subsection (g)(3) of this
19-14 section shall be one percent of the insurer's assets;
19-15 (5) the limitation in Subsection (h)(3) of this
19-16 section shall be one percent of the insurer's assets;
19-17 (6) the limitation in Subsection (i)(2) of this
19-18 section shall be two percent of the insurer's assets; and
19-19 (7) the limitation in Subsection (k)(5) of this
19-20 section shall be two percent of the insurer's assets;<.>
19-21 (r) Premium Loans. Loans to finance the payment of premiums
19-22 for the insurer's own insurance policies or annuity contracts;
19-23 provided that the amount of any such loan does not exceed the sum
19-24 of: (i) the available cash value of such insurance policy or
19-25 annuity contract; and (ii) the amount of any escrowed commissions
20-1 payable relating to such insurance policy or annuity contract for
20-2 which the premium loan is made.
20-3 SECTION 2. Article 6.16, Insurance Code, is amended to read
20-4 as follows:
20-5 Art. 6.16. Reinsurance. 1. No insurer <insurance company>
20-6 incorporated under the laws of the United States or of any State
20-7 thereof and licensed or eligible <authorized> to do business in
20-8 this State <in the writing of fire and allied lines of insurance as
20-9 those terms may be defined by statute, by ruling of the State Board
20-10 of Insurance, hereinafter called the "Board," or by lawful custom,>
20-11 shall expose itself to any loss or hazard on any one (1) subject of
20-12 insurance, located or to be performed in this State either as a
20-13 direct writer or the reinsurer, in <risk, except when insuring
20-14 cotton in bales, and grain, to> an amount exceeding ten (10%) per
20-15 cent of its surplus as regards policyholders <paid-up capital stock
20-16 and surplus>, unless the excess shall be reinsured <by such
20-17 company> in another solvent insurer. Similarly, no insurer
20-18 <insurance company> incorporated under a jurisdiction other than
20-19 that of the United States or a state thereof and licensed or
20-20 eligible <authorized> to do business in this State <in the writing
20-21 of said lines of insurance> shall expose itself to any loss or
20-22 hazard on any one (1) subject of insurance, located or to be
20-23 performed in this State either as the direct writer or the
20-24 reinsurer, in <risk, except when insuring cotton in bales, and
20-25 grain, to> an amount exceeding ten (10%) per cent of the insurer's
21-1 <company's> deposit with the statutory officer in the state through
21-2 which the company gains admission to the United States, together
21-3 with ten (10%) per cent of the <other> surplus as regards <to>
21-4 policyholders of the insurer's <company's> United States Branch,
21-5 unless the excess shall be reinsured <by such company> in another
21-6 solvent insurer.
21-7 2. For the purposes of this article, a "subject of
21-8 insurance" includes the combined total of all insurance written
21-9 under one or more policies against the same peril on the same risk
21-10 involved in one occurrence. As to insurance against fire and
21-11 allied lines, a "subject of insurance" includes all properties
21-12 insured by the same insurer which are customarily considered by
21-13 underwriters to be subject to loss or damage from the same fire or
21-14 other such hazard insured against. <Any insurance or reinsurance
21-15 company authorized to transact insurance or reinsurance within this
21-16 State as to lines of insurance defined in Section 1 hereof, may
21-17 reinsure the whole or any part of an individual risk in another
21-18 solvent insurer.>
21-19 3. For the purpose of this article, "surplus as regards
21-20 policyholders" shall be determined from the last sworn financial
21-21 statement of the insurer on file with the commissioner or by the
21-22 last statutory examination, whichever is the more recent at the
21-23 time of assumption or renewal of such risk.
21-24 4. As to alien insurers, this article shall relate only to
21-25 risks and surplus as regards policyholders of the insurer's United
22-1 States Branch.
22-2 5. This article shall apply to all lines of business
22-3 except: life insurance, annuities, health or accident insurance,
22-4 title insurance, workers' compensation insurance, employer's
22-5 liability coverages, or to any other policy or type of coverage as
22-6 to which the maximum possible loss to the insurer is not readily
22-7 ascertainable on issuance of the policy or certificate.
22-8 6. Any reinsurance required or permitted by this article
22-9 must comply with Article 5.75-1 <or Article 5.75-2> of this code.
22-10 7. The provisions of this article apply to all insurers
22-11 including but not limited to any stock and mutual property and
22-12 casualty insurers, Mexican casualty companies, Lloyd's plan
22-13 insurers, reciprocal or interinsurance exchanges, nonprofit legal
22-14 service corporations, county mutual insurance companies, farm
22-15 mutual insurance companies, risk retention groups, any insurer
22-16 writing any line of insurance regulated by Chapter 5 of this code,
22-17 or any insurer eligible under Article 1.14-2 of this code.
22-18 SECTION 3. Subsection (d), Section 3, Article 21.49-1,
22-19 Insurance Code, is amended to read as follows:
22-20 (d) Amendments to Registration Statements. Each registered
22-21 insurer shall keep current the information required to be disclosed
22-22 in its registration statement by reporting all material changes or
22-23 additions within 15 days after the end of the month in which it
22-24 learns of each such change or addition. Any transaction authorized
22-25 by Subsection (d) of Section 4, however, need not be reported under
23-1 this Subsection. In addition,<; provided, however, that> subject
23-2 to Subsection (c) of Section 4, each registered insurer shall <so>
23-3 report all dividends and other distributions to shareholders within
23-4 two business days following the declaration thereof and at least 10
23-5 days prior to the payment thereof. For purposes of determining
23-6 compliance with these deadlines, reports will be deemed made when
23-7 received by the Texas Department of Insurance. Such reporting is
23-8 for informational purposes only. The Commissioner shall promulgate
23-9 regulations that establish procedures: (1) to consider the
23-10 informational prepayment notices promptly, which considerations
23-11 shall include the standards set forth in Subsection (b) of Section
23-12 4, and (2) to review annually all reported ordinary dividends paid
23-13 within the preceding 12 months<; and provided further that any
23-14 transaction authorized by Section 4(d) hereof need not be reported
23-15 under this subsection>.
23-16 SECTION 4. Subsection (b), Section 4, Article 21.49-1,
23-17 Insurance Code, is amended to read as follows:
23-18 (b) Adequacy of Surplus. For the purposes of this article,
23-19 in determining whether an insurer's surplus as regards
23-20 policyholders is reasonable in relation to the insurer's
23-21 outstanding liabilities and adequate to its financial needs, the
23-22 following factors, among others, shall be considered:
23-23 (1) the size of the insurer as measured by its assets,
23-24 capital and surplus, reserves, premium writings, insurance in
23-25 force, and other appropriate criteria;
24-1 (2) the extent to which the insurer's business is
24-2 diversified among the several lines of insurance;
24-3 (3) the number and size of risks insured in each line
24-4 of business;
24-5 (4) the extent of the geographical dispersion of the
24-6 insurer's insured risks;
24-7 (5) the nature and extent of the insurer's reinsurance
24-8 program;
24-9 (6) the quality, diversification, and liquidity of the
24-10 insurer's investment portfolio;
24-11 (7) the recent past and projected future trend in the
24-12 size of the insurer's surplus as regards policyholders and the
24-13 insurer's investment portfolio;
24-14 (8) the surplus as regards policyholders maintained by
24-15 other comparable insurers;
24-16 (9) the adequacy of the insurer's reserves; <and>
24-17 (10) the quality and liquidity of investments in
24-18 subsidiaries made pursuant to Section 6; the<. The> commissioner
24-19 may treat any such investment as a nonadmitted or disallowed asset
24-20 for purposes of determining the adequacy of surplus as regards
24-21 policyholders whenever in his judgment such investment so warrants;
24-22 and
24-23 (11) the quality of the insurer's earnings and the
24-24 extent to which the insurer's reported earnings include
24-25 extraordinary items.
25-1 SECTION 5. Subchapter E, Chapter 21, Insurance Code, is
25-2 amended by adding Article 21.61 to read as follows:
25-3 Art. 21.61. BUSINESS TRANSACTED WITH PRODUCER-CONTROLLED
25-4 INSURER ACT
25-5 Sec. 1. SHORT TITLE. This article may be cited as the
25-6 Business Transacted with Producer-Controlled Insurer Act.
25-7 Sec. 2. DEFINITIONS. In this article:
25-8 (1) "Producer" means an insurance broker or brokers,
25-9 manager, including a managing general agent, or any other person
25-10 when, for any compensation, commission, or other thing of value,
25-11 such person acts or aids in any manner in soliciting, negotiating,
25-12 or procuring the making of any insurance contract on behalf of an
25-13 insured other than himself or itself.
25-14 (2) "Reinsurance intermediary" means any person who
25-15 solicits, negotiates, or places reinsurance business on behalf of
25-16 an insurer as a broker or any person who has authority to bind
25-17 reinsurance or who manages all or part of the reinsurance business
25-18 of an insurer as a manager and acts as a producer for an insurer.
25-19 (3) "Control," including the terms "controlling,"
25-20 "controlled," "controlled by," and "under common control with,"
25-21 means the possession direct or indirect of the power to direct or
25-22 cause the direction of the management and policies of a person,
25-23 whether through the ownership of voting securities, by contract
25-24 other than a commercial contract for goods or nonmanagement
25-25 services, or otherwise, unless the power is the result of an
26-1 official position with or corporate office held by the person. For
26-2 the purposes of this article control is presumed to exist if any
26-3 person directly or indirectly owns, controls, holds with the power
26-4 to vote, or holds irrevocable proxies representing 50 percent or
26-5 more of the voting securities or authority of any other person.
26-6 This presumption may be rebutted by a showing that control does not
26-7 exist in fact. The commissioner may determine, after furnishing
26-8 all persons in interest notice and an opportunity to be heard and
26-9 making specific findings of fact to support the determination, that
26-10 control exists in fact, notwithstanding the absence of a
26-11 presumption to that effect, if a person exercises directly or
26-12 indirectly, either alone or under an agreement with one or more
26-13 other persons, such a controlling influence over the management or
26-14 policies of an insurer as to make it necessary or appropriate in
26-15 the public interest or for the protection of the policyholders or
26-16 stockholders of the insurer that the person be considered to
26-17 control the insurer. Any producer who owns, controls, or holds
26-18 proxies representing more than 10 percent of the outstanding voting
26-19 securities of an insurer, as reported in the insurer's most recent
26-20 financial statement, shall report annually the extent of its
26-21 ownership in that insurer on a form specified by the commissioner,
26-22 and any producer who after the reporting date acquires any such
26-23 ownership or control shall, within 30 days of the acquisition,
26-24 report the extent of its ownership in the insurer on a form
26-25 specified by the commissioner.
27-1 (4) "Immediate family" means a person's spouse,
27-2 father, mother, children, brothers, sisters, and grandchildren, the
27-3 father, mother, brothers, and sisters of the person's spouse, and
27-4 the spouse of the person's child, brother, sister, mother, father,
27-5 or grandparent.
27-6 (5) "Insurer" or "licensed insurer" means any person
27-7 which is duly licensed to transact insurance business in this state
27-8 and which issues policies covered by Article 21.28-C or Article
27-9 21.28-D of this code. The following are not licensed insurers for
27-10 the purposes of this article:
27-11 (A) all nonadmitted insurers;
27-12 (B) all risk retention groups as defined in the
27-13 Superfund Amendments and Reauthorization Act of 1986 (10 U.S.C.
27-14 Section 2701 et seq.), the Risk Retention Act of 1986 (15 U.S.C.
27-15 Section 3901 et seq.), and Article 21.54 of this code;
27-16 (C) all residual market pools and joint
27-17 underwriting authorities or associations; and
27-18 (D) all captive insurers, that is, insurance
27-19 companies owned by another organization whose exclusive purpose is
27-20 to insure risks of the parent organization and affiliated companies
27-21 or, in the case of groups and associations, insurance organizations
27-22 owned by the insured whose exclusive purpose is to insure risks of
27-23 member organizations or group members and their affiliates.
27-24 (6) "Independent actuary" means an actuary who is a
27-25 member of the American Academy of Actuaries and who is not
28-1 affiliated with, nor is an employee, principal, or the direct or
28-2 indirect owner of, nor is in any way controlled by the insurer or
28-3 producer.
28-4 (7) "Independent certified public accountant" means a
28-5 certified public accountant who is not affiliated with, nor is an
28-6 employee, principal, or the direct or indirect owner of, nor is in
28-7 any way controlled by the insurer or producer.
28-8 (8) "Person" means an individual, corporation,
28-9 partnership, association, or other private legal entity.
28-10 Sec. 3. LIMITATION ON BUSINESS PLACED WITH CONTROLLED
28-11 INSURER. (a) No producer which has control of a licensed insurer
28-12 may directly or indirectly place business with such insurer in any
28-13 transaction in which such producer, at the time the business is
28-14 placed, is acting as such on behalf of the insured for any
28-15 compensation, commission, or other thing of value, unless:
28-16 (1) there is a written contract between the
28-17 controlling producer and the insurer, which contract has been
28-18 approved by the board of directors of the insurer;
28-19 (2) the producer, prior to the effective date of the
28-20 policy, delivers written notice to the prospective insured
28-21 disclosing the relationship between the producer and the controlled
28-22 insurer; and the disclosure, signed by the insurer, shall be
28-23 retained in the underwriting file until the filing of the report on
28-24 examination covering the period in which the coverage is in effect;
28-25 except that, if the business is placed through a subproducer who is
29-1 not a controlling producer, the controlling producer shall retain
29-2 in his records a signed commitment from the subproducer that the
29-3 subproducer is aware of the relationship between the insurer and
29-4 the producer and that the subproducer has or will give notice to
29-5 the insured;
29-6 (3) all funds collected for the account of the insurer
29-7 by the controlling producer are paid, net of commissions,
29-8 cancellations, and other adjustments, as provided in the contract,
29-9 to the insurer no less often than quarterly;
29-10 (4) in addition to any other required loss reserve
29-11 certification, the controlled insurer on April 1 of each year files
29-12 with the commissioner an opinion of an independent actuary
29-13 reporting loss ratios for each line of business written by the
29-14 producer and attesting to the adequacy of loss reserves established
29-15 for losses incurred and outstanding as of year end, including those
29-16 incurred but not reported, on business placed by such producers;
29-17 (5) the controlled insurer reports to the commissioner
29-18 the amount of commissions paid to such producer, the percentage
29-19 such amount represents of the net premiums written and comparable
29-20 amounts and percentage paid to noncontrolling producers for
29-21 placements of the same kinds of insurance; and
29-22 (6) every controlled insurer has an audit committee of
29-23 the board of directors composed of independent directors; prior to
29-24 approval of the annual financial statement, the Audit Committee
29-25 shall meet with management, the insurer's independent certified
30-1 public accountants, and an independent actuary to review the
30-2 adequacy of the insurer's loss reserves.
30-3 (b) No reinsurance intermediary which has control of an
30-4 assuming insurer may directly or indirectly place business with
30-5 such insurer in any transaction in which the reinsurance
30-6 intermediary is acting as a broker or manager on behalf of the
30-7 ceding insurer. No reinsurance intermediary which has control of a
30-8 ceding insurer may directly or indirectly accept business from such
30-9 insurer in any transaction in which the reinsurance intermediary is
30-10 acting as a producer on behalf of the assuming insurer. The
30-11 prohibitions in this subsection shall not apply to a reinsurance
30-12 intermediary which makes a full and complete written disclosure to
30-13 the parties of its controlling relationship with the assuming or
30-14 ceding insurer prior to completion of the transaction.
30-15 Sec. 4. PROHIBITED ACTS. (a) For purposes of this article,
30-16 a violation is a finding by the commissioner that:
30-17 (1) the controlling producer did not materially comply
30-18 with Section 3 of this article;
30-19 (2) the controlled insurer, with respect to business
30-20 placed by the controlling producer, engaged in a pattern of
30-21 charging premiums that were lower than those being charged by the
30-22 insurer or other insurers for similar risks written during the same
30-23 period and placed by noncontrolling producers;
30-24 (3) the controlling producer failed to maintain
30-25 records sufficient:
31-1 (A) to demonstrate that the producer's dealings
31-2 with its controlled insurer were fair and equitable and in
31-3 compliance with Article 21.49-1 of this code; and
31-4 (B) to accurately disclose the nature and
31-5 details of its transactions with the controlled insurer, including
31-6 information necessary to support the charges or fees to the
31-7 respective parties;
31-8 (4) the controlled insurer, with respect to business
31-9 placed by the controlling producer, either failed to establish or
31-10 deviated from its underwriting procedures;
31-11 (5) the controlled insurer's capitalization at the
31-12 time the business was placed by the controlling producer and with
31-13 respect to such business was not in compliance with criteria
31-14 established by the commissioner, the rules and regulations of the
31-15 Texas Department of Insurance, or this code; or
31-16 (6) the controlling producer or the controlled insurer
31-17 failed to substantially comply with Article 21.49-1 of this code or
31-18 any rules or regulations relating to that article.
31-19 (b) For the purposes of Subsection (a) of this section, when
31-20 determining whether premiums were lower than those prevailing in
31-21 the market, the commissioner shall take into consideration
31-22 applicable industry or actuarial standards at the time the business
31-23 was written.
31-24 Sec. 5. PENALTIES AND LIABILITIES. (a) If after notice and
31-25 hearing as provided in this code the commissioner determines that a
32-1 controlling producer has violated this article, the commissioner
32-2 may impose and enforce any sanction authorized by law against the
32-3 violator, including the penalties imposed under Articles 1.10 and
32-4 1.10A of this code.
32-5 (b) If after notice and hearing as provided in this code the
32-6 commissioner determines that the controlling producer has violated
32-7 this article and such violation substantially contributed to the
32-8 insolvency of the controlled insurer, the commissioner shall
32-9 request the attorney general to bring an action against the
32-10 controlling producer to recover reimbursement to the appropriate
32-11 state guaranty fund, either the Texas Property and Casualty
32-12 Insurance Guaranty Association or the Life, Accident, Health, and
32-13 Hospital Service Insurance Guaranty Association, for all payments
32-14 made for losses, loss adjustment, and administrative expenses on
32-15 the business placed by such producer in excess of gross earned
32-16 premiums and investment income earned on premiums and loss reserves
32-17 for such business.
32-18 (c) Appeal from a final decision by the commissioner may be
32-19 made to a district court of Travis County. Review of the
32-20 commissioner's decision by the district court is subject to the
32-21 substantial evidence rule.
32-22 (d) Nothing contained in this section shall affect the right
32-23 of the commissioner to impose any other penalties provided in this
32-24 code.
32-25 (e) Nothing in this article is intended to or shall in any
33-1 manner alter or affect the rights of policyholders, claimants,
33-2 creditors, or other third parties.
33-3 Sec. 6. RULES. The board may adopt reasonable rules and
33-4 regulations for implementing the provisions of this article.
33-5 SECTION 6. This Act takes effect October 1, 1993.
33-6 SECTION 7. The importance of this legislation and the
33-7 crowded condition of the calendars in both houses create an
33-8 emergency and an imperative public necessity that the
33-9 constitutional rule requiring bills to be read on three several
33-10 days in each house be suspended, and this rule is hereby suspended.