HBA-ATS C.S.H.B. 2711 76(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 2711 By: Thompson Insurance 4/16/1999 Committee Report (Substituted) BACKGROUND AND PURPOSE Article 21.39-B (Restriction on Transactions with Funds and Assets) prohibits the director, member of a committee, or officer, or the clerk of a domestic insurance company, who is charged with the duty of handling or investing its funds, from depositing or investing those funds, except in the corporate name of the insurer. Despite this prohibition, it is a common practice for two or more domestic insurers that operate together under a holding company or under an administrative services agreement (to share costs) to operate a risk pool. Insurers in the risk pool spread the risk they assumed when they agreed to cover a particular group by having the pool or affiliates of the parent insurers reinsure the policies. The funds of the pool are usually deposited into one account. Only after the funds have been deposited are they then allocated to each participant in the pool. This practice may violate the prohibition against depositing funds except in the corporate name of the insurer even if funds are not misapplied. C.S.H.B. 2711 prohibits the official of a domestic insurer who is in charge of the insurer's funds from depositing them, except in the insurer's corporate name, in a pooling account with one or more affiliates, or in accordance with a reinsurance agreement. If the domestic insurer's funds are deposited in a pooling account, only the domestic insurer and its affiliates are authorized to hold funds in the pooling account. Moreover, the financial books and records of the companies in the pooling arrangement must be detailed enough to identify specific insurance policies and policyholders with premium funds received by the particular company issuing the insurance. A reinsurance agreement between a domestic insurer and its affiliates must specifically authorize the deposit of premium funds to the account of the affiliate that is assuming the reinsurance. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Article 21.39-B, Insurance Code, to prohibit the official of a domestic insurer who is in charge of the insurer's funds from depositing them, except in the insurer's corporate name, in a pooling account with one or more affiliates, or in accordance with a reinsurance agreement. Authorizes only the domestic insurer and its affiliate, if the domestic insurer's funds are deposited in a pooling account, to hold funds in the pooling account. Provides that the financial books and records of the companies must be detailed enough to identify specific insurance policies and policyholders with premium funds received by the particular company issuing the insurance. Provides that a reinsurance agreement between a domestic insurer and its affiliates must specifically authorize the deposit of premium funds to the account of the affiliate that is assuming the reinsurance. Makes conforming changes. SECTION 2. Effective date: September 1, 1999. SECTION 3. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 2711 modifies the original bill in SECTION 1 (in proposed Section 1(2), Article 21.39B, Insurance Code) by prohibiting the official of a domestic insurer who is in charge of the insurer's funds from depositing them, except in the insurer's corporate name, in a pooling account with one or more affiliates, or in accordance with a reinsurance agreement, rather than a reinsurance agreement with an affiliate. The substitute also makes a nonsubstantive change in the proposed addition of Section 2, Article 21.39B, Insurance Code.