RS C.S.H.B. 3007 75(R) BILL ANALYSIS INSURANCE C.S.H.B. 3007 By: Smithee 4-20-97 Committee Report (Substituted) BACKGROUND Texas title insurers are required to establish unearned premium reserves (or "statutory premium reserves") to maintain sufficient assets to pay claims or to secure reinsurance of claims and related expenses on title insurance policies in the event of an insolvency of the title insurance company. These reserves are set aside and cannot be used by the title insurance company to pay any expenses or dividends. The unearned premium reserves required by Article 9.16, Insurance Code are based on a percentage of the premium paid to the title insurance company and are released or drawn down by the title insurance company on an equal percentage (of 5% a year) over 20 years and those reserves must be adequate to pay expenses and projected claims. Current law determines reserve levels based on premiums and assumes that past claims experience will predict such income and will not vary based upon the type and location of transaction. A review of the required reserves to determine the adequacy of current levels reflects that Article 9.16 may not require sufficient reserves for Texas title insurers conducting business in other states. It also reflects that the reduction or release of reserves should more accurately reflect the period for claims payment, which is much higher in the initial years after issuance of a policy and is not equally distributed over a 20-year period after issuance. PURPOSE C.S.H.B. 3007 would revise Article 9.16 of the Insurance Code to increase the initial amount of reserves required to be set aside in 1997 and provides for a more accurate formula for the release of those reserves over a 20-year period. The bill provides that reserves in 1998 and subsequent years will be based on liability (amount of insurance under policies), which is a more accurate reflection of the amounts that will be expended for claims and expenses. 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 Article 9.16 of the Insurance Code as follows: Art. 9.16 RESERVES Sec. 1. STATUTORY PREMIUM RESERVE REQUIRED. (a) Requires that each domestic title insurer doing title insurance business maintain a statutory premium reserve and for the use and purpose provided by this Article shall contain the unused portions of the original premium and shall be charged as a reserve liability in determining the financial condition of that insurer. (b) The reserve required above shall be cumulative and shall be established and maintained consistent with the requirements of this Article. Sec. 2. AMOUNTS ADDED TO RESERVE FOR CALENDAR YEAR 1997; REDUCTIONS. (a) Defines the formula for total charges to a domestic title insurer for policies written or assumed on or after January 1, 1997 but before January 1, 1998 including in the charges the direct premium, the escrow and settlement service fees, other title fees and service charges including fees for closing protection letters and premiums for reinsurance assumed less premiums for reinsurance. (b) A domestic title insurer must set aside in the statutory premium reserve for 1997 an amount computed by multiplying the total charges computed by (a) by 6-2/10% if the insurer had $250 million in premiums or more in 1996 or 3-1/2% if the insurer had less than $250 million in premiums in 1996. (c) Following 1997 the amounts set aside in the statutory premium reserve shall be reduced over twenty years starting the first year following issuance of the policy by 26%, the second year following the insurance of the policy by 20%, the third year following the issuance of the policy by 10% , the fourth year following issuance of the policy by 9%, the fifth and sixth years following the issuance of the policy by 5%, the seventh, eighth and ninth years following issuance of the policy by 3%, the 10th through 14th years following the issuance of the policy by 2%, and for the 14th through the 20th years following the issuance of the policy the amount shall be reduced by 1%. (d) The reductions required in (c) shall be made in increments of one-fourth the appropriate percentage on each March 31, June 30, September 30, and December 31. Sec. 3. AMOUNTS ADDED TO RESERVE IN CALENDAR YEARS AFTER 1997; REDUCTIONS. (a) Requires a domestic title insurer to add an amount equal to the sum of the following amounts to the total charges for title insurance policies written or assumed on or after January 1, 1998 and to set this amount aside in the statutory premium reserve: 25 cents per one thousand dollars of the net retained liability if the insurer issued more than $250 million or more in premiums for the most recent calendar year, or, 30 cents per one thousand dollars of the net retained liability if the insurer issued less than $250 million or more in premiums for the most recent calendar year. (b) The title insurance policies written or assumed after 1997 shall also be reduced over a twenty year period in accordance with Section 2(c) and (d) of this Article. Sec. 4. TRANSITIONAL RELEASE; TRANSITIONAL CHARGE. (a) A domestic title insurer shall compute a total statutory premium reserve balance for all policy years combined as of December 31, 1996. (b) The insurer shall compute a transitional charge or release that is the difference between the balance determined under subsection (a) of this section computed as if Section 2 were in affect for the past 20 years prior to 1996 and the total actual statutory premium reserve balance carried by the insurer on December 31, 1996. (c) If the insurer has a transitional charge as set by subsection (b), in addition to premium reserve changes required by this article, over the next 10 years the domestic title insurer shall remit one tenth of any transitional charge determined from (b) on December 31 of each year to the statutory premium reserve. (d) If the insurer has a transitional release under subsection (b) of this section, then in addition to the changes to the statutory premium reserve as required by this article, over the next 10 years the domestic title insurer shall reduce by one tenth of any transitional release determined from (b) on December 31 of each year to the statutory premium reserve. Sec. 5. RUNOFF BALANCE. (a) The domestic title insurer shall compute a total statutory premium reserve balance at the end of each calendar year beginning in 1997 that includes for all policy years before January 1, 1997 combined. That balance shall be computed as if Section 2 of this article were in effect during the 20-year period ending December 31, 1996 and the balance computed under this subsection is the runoff balance. (b) The title insurer shall reduce the statutory premium reserve by the runoff balance for that year and the runoff balance for the previous calendar year. (c) The reduction to the statutory premium reserve under subsection (b) is in addition to any other changes to the statutory premium reserve required under this section. Sec. 6. ACTUARIAL CERTIFICATION. (a) Domestic title insurers shall file an annual actuarial certification of this Code made by a member in good standing of the American Academy of Actuaries. (b) That certification defined above must include the actuary's professional opinion of the insurer's reserves and those reserves must be analyzed under this section for known claims including adverse development on known claims and reserves for incurred but not reported claims. Sec. 7. SUPPLEMENTAL RESERVE. (a) The domestic title insurers shall establish a supplemental reserve that is the amount that the actuarially certified reserves exceed the total of the known claim reserve and the statutory premium reserve as set forth in the title insurer's annual statement subject to Subsection (b) of this section. (b) The supplemental reserve required under this section shall be computed as 25 % of the applicable supplemental reserve required until December 31, 1996, 50 % of the applicable supplemental reserve required until December 31, 1997, 75 % of the applicable supplemental reserve required until December 31, 1998, and 100 % of the applicable supplemental reserve required after December 31, 1998. This section also deletes the old section that previously existed. Sec. 8. FOREIGN COMPANIES. The Commissioner may require a foreign insurer doing business in this state who does not maintain adequate reserves to maintain adequate reserves. Sec. 9. REEVALUATION OF RESERVE REQUIREMENTS. The Commissioner may make recommendations for legislative changes to Section 3 of this article if he finds the program inadequate. Sec. 10. MAINTENANCE OF FUND. The statutory premium fund shall be maintained in cash or invested in accordance with Article 9.18 of this Code. Sec. 11. EFFECT OF INSOLVENCY OR DISSOLUTION. The statutory premium reserve fund shall be used to protect title insurance contract holders even if there are no accrued title insurance claims or unpaid obligations of other types. SECTION 2. This Act applies to reports made by domestic title insurers beginning with reports due for calendar year 1997. SECTION 3. EMERGENCY CLAUSE. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 3007 includes in Sec. 2 "CALENDAR YEAR" to clarify the section title and replaces (a) with new language to clarify the requirements for figuring the total charges of a domestic title insurer for title insurance policies written or assumed on or after January 1, 1997, but before January 1, 1998, are computed by adding Subsections 1-4, as set forth in the title insurer's annual statement. Removes language of annual statement from subsection (a)(4), but keeps it in subsection (a). In Sec. 3 the substitute changes (1) from $.30 per $1,000 for policies with under $500,000 of net retained liability to $.25 per $1,000 of net retained liability if the insurer had $250 million or more in direct premium written for the most recent calendar year; and (2) from $.13 per $1,000 of net retained liability equal to or greater than $500,000 to $.30 per $1,000 of net retained liability if insurer had less than $250 million in direct written premiums for the most recent calendar year. In Sec. 8 the entire section is replaced to clarify that the commissioner should determine that a foreign title insurer doing business in this state does not maintain adequate statutory premium reserves, the commissioner may require the insurer to maintain adequate reserves. Changes emphasis from laws of state where foreign company resides to reserves maintained by company itself. Sec. 9 renumbers the original Sec. 9 as Sec. 10 and inserts a new Sec. 9 providing the commissioner the authority to reevaluate the adequacy of the statutory premium reserves required under Sec. 3 of this article, and may make recommendations for legislative changes as the commissioner considers appropriate. Renumbers the subsequent sections of the bill. Sec. 10 is changed to specify "article 9.18 of this code," instead of "under the laws of this state."