BILL ANALYSIS

C.S.H.B. 1265

By: Smithee

Insurance

Committee Report (Substituted)

BACKGROUND AND PURPOSE

Currently, mortgage guaranty insurers are prohibited from writing new business if the insurer exceeds the 25:1 risk-to-capital ratio standard for outstanding total liability and there is concern that the law lacks flexibility or discretion for the insurer. 

Recent economic conditions are contributing to higher claims rates.  As a result, many mortgage guaranty insurers are at risk of being forced to stop writing new business even though they have the means to do so. Without premiums from new business, a mortgage insurance company's ability to pay claims can be impaired as older claims are paid only from reserves and renewal premiums, possibly resulting in fewer loans being insured and decreasing availability of mortgage finance credit. To comply with liability limits and regulations, some mortgage insurance companies cut volume, tighten guidelines, and eventually stop writing new business altogether.  This could cause further stalling or delay in housing and economic recovery.  The financial burden of default losses will most likely fall increasingly on the federal government and taxpayers. The ability of a mortgage guaranty insurer to continue to write business through a stressful economic period could potentially ensure the survival of the mortgage industry and strengthen an insurer's ability to pay claims during the period.

C.S.H.B. 1265 provides the commissioner of insurance with discretionary authority, on a certain finding by the commissioner, to increase the risk-to-capital ratio limit allowing a mortgage insurance company to have outstanding total liability at any given time in an amount up to a 50:1 ratio of risk-to-capital so mortgage insurance companies can continue to provide important coverage in Texas.

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.

ANALYSIS

C.S.H.B. 1265 amends the Insurance Code to authorize the commissioner of insurance to waive the limit on the amount of outstanding total liability that a mortgage guaranty insurer is authorized to have at any time under the insurer's aggregate mortgage guaranty insurance policies, at the written request of the mortgage guaranty insurer, on a finding by the commissioner that the sum of the insurer's capital, surplus, and contingency reserve is reasonable in relationship to the insurer's aggregate insured risk and adequate to the insurer's financial needs. The bill requires that such a request by an insurer be made in writing on or before the 90th day before the date the insurer expects to exceed the limit and, at a minimum, address relevant factors for the commissioner to consider in making the finding. The bill authorizes the commissioner, in the commissioner's sole discretion, to consider relevant factors in determining whether a mortgage guaranty insurer's capital, surplus, and contingency reserve is reasonable in relation to the insurer's aggregate insured risk and adequate to the insurer's financial needs, including the following factors:

· the insurer's size as measured by the insurer's assets, capital and surplus, reserves, premium writings, insurance in force, and other appropriate criteria;

· the extent to which the insurer's business is diversified across time, geography, credit quality, origination, and distribution channels;

· the nature and extent of the insurer's reinsurance program;

· the quality, diversification, and liquidity of the insurer's investment portfolio;

· the historical and forecasted trend in the size of the insurer's capital, surplus, and contingency reserve;

· the capital, surplus, and contingency reserve maintained by other comparable mortgage guaranty insurers in relation to the nature of the insurers' respective insured risks;

· the reasonableness of the insurer's reserves;

· the quality and liquidity of the insurer's investments in affiliates; and

· the quality of the insurer's earnings and the extent to which the insurer's reported earnings include extraordinary items.

C.S.H.B. 1265 authorizes the commissioner, with respect to the quality and liquidity of the insurer's investments in affiliates, to treat an investment in an affiliate as a nonadmitted asset for purposes of determining the adequacy of surplus as regards policyholders. The bill authorizes the commissioner to retain accountants, actuaries, or other experts to assist the commissioner in the review of a request made by an insurer for a waiver under the bill's provisions and requires the insurer to pay the commissioner's cost of retaining those persons. The bill restricts a waiver to a specified period that does not exceed two years and subjects a waiver to any terms and conditions the commissioner considers best suited to restoring the insurer's capital, surplus, and contingency reserve to the required level. The bill authorizes an insurer to apply to extend the waiver on or before the 90th day before the date the waiver period expires. The bill prohibits the commissioner from allowing the mortgage guaranty insurer, under any circumstances, to have outstanding under the insurer's aggregate mortgage guaranty insurance policies a total liability, net of reinsurance, that exceeds the sum of the insurer's capital, surplus, and contingency reserve, multiplied by 50. The bill prohibits an insurer from being allowed a waiver for a continuous period of more than six years.

EFFECTIVE DATE

On passage, or, if the bill does not receive the necessary vote, September 1, 2011.

COMPARISON OF ORIGINAL AND SUBSTITUTE

C.S.H.B. 1265 contains a provision not included in the original prohibiting the commissioner of insurance from allowing a mortgage guaranty insurer to have outstanding under the insurer's aggregate mortgage guaranty insurance policies a total liability that exceeds a specified amount.  The substitute contains a provision not included in the original prohibiting an insurer from being allowed a waiver for a continuous period of more than six years. The substitute differs from the original by making the bill effective on passage, or, if the bill does not receive the necessary vote, September 1, 2011, whereas the original makes the bill effective September 1, 2011.