RS H.B. 1680 75(R) BILL ANALYSIS INSURANCE H.B. 1680 By: Van de Putte 4-21-97 Committee Report (Amended) BACKGROUND Under current Insurance Code provisions, a property and casualty insurance company must hold title or evidence of ownership to all of its assets in its own name; pooling of investments with other companies under common ownership is not permitted. Regulatory authorities have recently begun to recognize, though, that significant cost savings can be achieved through the use of investment pools. The National Association of Insurance Commissioners has worked with investment advisors and insurers to develop a model bill authorizing the use of investment pools by a company group (i.e., two or more companies owned by a common entity) but with safeguards and limitations that protect each company's solvency and the ability of a regulator to require prudent transactions and business practices. PURPOSE The purpose of this bill is to authorize the use of investment pools by property and casualty insurers which are affiliated. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends the Insurance Code to add a new Article 2.10-5 to read as follows. Sec. 1. DEFINITIONS. Defines "business entity", "securities valuation office", "government money market mutual fund", "class one money market mutual fund", "obligation", "money market mutual fund", "reverse repurchase transaction", "securities lending transaction", "repurchase transaction", "qualified bank". Sec. 2. AUTHORITY TO INVEST. Authorizes investment in either a short-term investment pool or an investment pool which purchases investments authorized by this Article. Sec. 3. SHORT-TERM INVESTMENT POOLS. (a) Requires that an investment pool may only acquire securities nationally rated one or two by the securities valuation office, government money market mutual funds, specific securities lending and repurchase transactions, and , must meet certain organizational requirements, must keep detailed accounting records. (b) Establishes that securities that do not have a one or two rating must be issued by an issuer with must meet specific qualifications. (c) Defines a current short-term index for the purposes of this section. Sec. 4. OTHER INVESTMENT POOLS. Limits other investment pools to that which the interest in those investments does not exceed the applicable limits established under this Article. Sec. 5. QUALIFICATIONS FOR INVESTMENT POOL. (a) To qualify, an investment pool must comply with the standards established by this article. (b) Established that a pool may not acquire investments that are secured by that insurer, borrow acquire debt for borrowed money except for securities lending, and reverse repurchase transactions that meet the requirements of this article, or permit the aggregate value of securities loaned, sold to, purchased from, or invested in any one business entity to exceed 10% of the total assets of the investment pool. (c) Requires a written pooling agreement. (d) Specifies the requirements of the pooling agreement including organization under the United States designation of a pool manager, and must be either a certain qualifying business entity, a qualified bank or an investing insurer affiliated with a business entity. (e) The pool shall maintain detailed and specific accounting requirements. (f) Specifies the requirements of the pool manager, and requirements of the custody agreement. (g) Additional requirements for the pooling agreement are required including who is permitted to hold the interest in the investment pool, the underlying assets of the investment pool may not be commingled with general assets of the manager, participants own an interest in underlying assets of the pool in accordance with their individual interest, and in the case of insolvency or bankruptcy, a receiver, conservator or other successor may withdraw all or a portion of investment into the pool. Sec. 6. ADDITIONAL REQUIREMENTS; LIMITATIONS. (a) Requires that an investment pool be a business entity. (b) Requires registration by insurers subject to Article 21.49-1 to file notice of participation under Section 4(d)(2) and they shall report annually the transactions of the pool. (c) Sets specific limits for aggregate investment participation. (d) Requires that participants in the pool have the ability to withdraw funds from the pool without penalty. (e) Defines how a pool manager may make a distribution to a pool participant. (f) That distribution is computed in each case minus the applicable fees and expenses of the pool. (g) The pool manager shall make the records of the pool available to the Commissioner for inspection. SECTION 2. EFFECTIVE DATE. September 1, 1997. SECTION 3. EMERGENCY CLAUSE. EXPLANATION OF AMENDMENT 1. In SECTION 1, Article 2.10-5, Sec. 4, is deleted. A new section 4 is added to clarify that the type of investment pool this measure regulates is limited to investments that are authorized by other provisions of the Insurance Code. In addition the re-definition adds limitation on the amounts of such investments so that an insurer's combined investment on its own account and in the pool cannot exceed that provided in the authorizing statute. The re-definition requires that diversity of investments be maintained so that the portfolio will be a safer investment. 2. SECTION 1, Article 2.10-5, Sec. 5, amended to include the word "investing" to clarify which insurers are affected by that Section. 3. SECTION 1, Article 2.10-5, Sec. 5, merging the definition of "business entity" with the (A) that requires that the entity be registered under the Investment Advisors Act of 1940. 4. SECTION 1, Article 2.10-5, Sec. 5, renumbers subsequent sections of that Section. 5. SECTION 1, Article 2.10-5, Sec. 5, replaces the word "information" with "designation" to correct a technical error from legislative council. 6. SECTION 1, Article 2.10-5 Sec. 5, includes the word "ownership" to clarify which "interest" should be used to comply with this Section. These are technical changes to clarify for the Department of Insurance the necessary components of this investment system for their regulation and enforcement purposes.