BILL ANALYSIS
By: Eiland
Committee Report (Substituted)
BACKGROUND AND PURPOSE
This bill relates to unencumbered surplus or guaranty fund requirements for certain insurance companies.
In 1991, the Legislature increased capital requirements for most insurers in response to the failure of a large number of insurance companies that resulted in unpaid claims. However, the 1991 reform allowed a limited exemption for certain non-stock property and casualty insurers (e.g. county mutual insurance companies, Lloyd’s plans and reciprocal exchanges.) The 1991 legislation was subsequently amended to narrow the exemption so that it applies if those insurers only write business in Texas.
Risk based capital (RBC) requirements recognize that insurers range widely in size, exposure, and risks and indexes the amount of capital a particular insurer needs based on its unique risk profile. The Commissioner of Insurance has authority to adopt regulations for the vast majority of insurers that may require capital based upon any of the following risks:
· the nature and type of risks the insurer underwrites;
· the premium volume for the insurer;
· the composition, quality and liquidity of an insurer’s investments;
· fluctuations in the market value of securities held by an insurer; and
· the adequacy of an insurer’s reserves.
Current law does not authorize the Commissioner of Insurance to apply RBC requirements to certain non-stock insurance companies, even though county mutual insurers hold a substantial share of the Texas market for private passenger automobile insurance and Lloyd’s plans hold a majority of the Texas market for homeowners’ insurance. Although these exempt insurers are exposed to the exact same risks that resulted in the application of RBC to their competitors, they enjoy an unfair advantage by being subject to substantially lower capital requirements. Moreover, since the unpaid claims of insolvent insurers ultimately result in tax credits that reduce premium tax collections, exempting these companies from RBC exposes the State’s General Revenue should these exempt insurers become insolvent.
C.S.H.B 2191 amends Section 822.205 of the Insurance Code to subject previously exempt insurance companies to RBC requirements that the commissioner may adopt by rule under Section 822.210 of the Insurance Code. C.S.H.B. 2191 includes a transition period to allow impacted insurers a phase-in period to comply with RBC requirements as additional time may be required to avoid unintended impacts to the market and affected insurance companies. C.S.H.B 2191 also contains provisions that require the commissioner of insurance to adopt requirements for certain niche carriers that are authorized by chapter 912 of the Insurance Code that cede 95 percent or more of their direct and assumed written premium. C.S.H.B 2191 specifies that these rules require a minimum amount of unencumbered surplus equal to the greater of $2,000,000 or 5 percent of the carrier’s net recoverables for reinsurance after taking into account certain funds, collateral and other specified criteria that serve to protect the financial condition of the carrier. These carriers are required by the Act to file a plan with the Department that reflects how compliance with the requirements will be achieved over a 10 year transition period.
RULEMAKING AUTHORITY
It is the committee's opinion that rulemaking authority is expressly granted to the Commissioner of Insurance in SECTION 1 (Section 822.205 of the Texas Insurance Code) of this bill.
It is the committee’s opinion that this bill expressly grants additional rulemaking authority in new 822.205(c) of the Insurance Code as added by the Act that specifies that the Commissioner of Insurance by rule provide a transition period for insurance companies subject to section 822.205 which is generally not less than 10 years unless a company’s market share is 10 percent or more in which case the transition period is not less than 5 years. The bill also grants rulemaking authority in new 822.205(d) as added by the Act that requires the commissioner of insurance to adopt rules for certain carriers authorized by chapter 912 of the Insurance Code that cede 95 percent or more of their direct and assumed written premium. The Act prescribes that these rules require a minimum amount of unencumbered surplus equal to the greater of $2,000,000 or 5 percent of the carrier’s net recoverables for reinsurance after taking into account certain funds, collateral and other specified criteria. The Act further specifies that these rules provide for a 10 year transition period for these carriers and that these carriers file a plan with the Texas Department of Insurance that reflects how compliance will be achieved over the transition period.
ANALYSIS
SECTION 1 of C.S.H.B. 2191 makes the following amendments to the Insurance Code:
Amends Section 822.205 (a) of the Insurance Code to specify its application to an insurance company that before September 1, 2007 was not subject to the additional capital and surplus requirements authorized under Section 822.210.
Amends Section 822.205 (b) of the Insurance Code to specify that an insurance company described by Section 822.205(a) is subject to the capital and surplus requirements adopted by the commissioner under Section 822.210.
Amends Section 822.205 of the Insurance Code to add a new subsection, Subsection (c), that provides that the commissioner by rule shall provide a transition period for insurance companies subject to Section 822.205 to meet the requirements of 822.205 (b) and for the pro rata elimination of any deficiencies in the amounts required. The transition period must be not less than 5 years for insurance companies that have a market share of 10 percent or more and not less than 10 years for all other insurance companies.
Amends Section 822.205 of the Insurance Code to add a new subsection, Subsection (d) that provides that, notwithstanding Section 822.205 (b), the commissioner shall adopt rules specifically for insurance companies authorized under Chapter 912 to write business through multiple agents licensed under Chapter 4053 using multiple rate filings within each line of business and that also cede 95 percent or more of their direct and assumed written premium. The rules required by this subsection must require a minimum amount of unencumbered surplus or a minimum amount of guaranty fund and unencumbered surplus equal to the greater of two million dollars ($2,000,000) or 5 percent of the insurance company’s net recoverables for reinsurance after taking into account: (A) ceded premiums payable and collateral held in compliance with Section 493.104 that secure the collection of the reinsurance; (B) approved cut-through policy endorsements, and (C) reinsurers whose financial strength is rated A+ or better by A.M. Best Company. The rules shall also provide for a 10-year transition period for insurance companies subject to 822.205 (d) for the elimination of any deficiencies in the amounts required. The rules further require that insurance companies subject to 822.205 (d) file a plan with the Department of Insurance, that may be periodically updated, that reflects how compliance with the requirements shall be progressively achieved over the 10 year transition period.
EFFECTIVE DATE
September 1, 2007.
COMPARISON OF ORIGINAL TO SUBSTITUTE
C.S.H.B. 2191 differs from the original house bill by adding a new subsection. Subsection 822.205 (d) was not contained in the original house bill. The new Subsection 822.205 (d) states that the commissioner of insurance shall adopt rules for certain defined carriers that are authorized by Chapter 912 of the Insurance Code and that cede 95 percent or more of their direct and assumed written premium. The substitute specifies that these rules require a minimum amount of unencumbered surplus equal to the greater of $2,000,000 or 5 percent of the carrier’s net recoverables for reinsurance after taking into account certain funds, collateral and other specified criteria that serve to protect the financial condition of the carrier. The substitute also specifies that these rules require that these carriers file a plan with the Department of Insurance, that may be periodically updated, that reflects how compliance with the requirements will be achieved over a 10-year transition period.