By: Oliverson H.B. No. 3754

A BILL TO BE ENTITLED

AN ACT

relating to the regulation of the pledging or encumbering of domestic insurers' assets in accordance with marketplace practices.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Section 422.002, Insurance Code, is amended to read as follows:

Sec. 422.002. PURPOSES. (a) The purposes of this chapter are to:

(1) require an insurer to maintain unencumbered assets in an amount equal to the insurer's policy reserve liabilities;

(2) provide preferential claims against assets in favor of an owner, beneficiary, assignee, certificate holder, or third-party beneficiary of an insurance policy; and

(3) prevent the pledge or encumbrance of assets in excess of certain amounts without a prior written order of the commissioner.

(b) This chapter and the powers granted and functions authorized by this chapter shall be exercised to accomplish the purposes of this chapter.

SECTION 2. Section 422.003, Insurance Code, is amended to read as follows:

Sec. 422.003. DEFINITIONS. In this chapter:

(1) "Asset" means any property in which an insurer owns a legal or equitable interest that is reported as an asset in the domestic insurer's statutory financial statements most recently filed with the department of insurance.

(2) "Claimant" means an owner, beneficiary, assignee, certificate holder, or third-party beneficiary of an insurance benefit or right arising from the coverage of an insurance policy to which this chapter applies.

(3) "Reserve assets" means the assets of an insurer that are authorized investments for policy reserve liabilities under this code.

(4) "ReservePolicy reserve liabilities" means the liabilities that an insurer is required under this code to establish for all of the insurer's outstanding insurance policies.

SECTION 3. Section 422.005, Insurance Code, is amended to read as follows:

Sec. 422.005. EXEMPTIONS. (a) This chapter does not apply to:

(1) variable contracts for which separate accounts are required to be maintained;

(2) a reinsurance agreement orand any trust account related to the reinsurance agreement if the reinsurance agreement and related trust account meet the requirements of Chapter 493;

(3) an assessment-as-needed company or insurance coverage written by an assessment-as-needed company;

(4) an insurer while:

(A) the insurer is subject to a conservatorship order issued by the commissioner; or

(B) a court-appointed receiver is in charge of the insurer's affairs;

(5) an insurer's reserve assets that are held, deposited, pledged, or otherwise encumbered to secure, offset, protect, or meet the insurer's policy reserve liabilities established in a reinsurance agreement under which the insurer reinsures the insurance policy liabilities of a ceding insurer if:

(A) the ceding insurer and the reinsurer are authorized to engage in business in this state; and

(B) in accordance with a written agreement between the ceding insurer and the reinsurer, reserve assets substantially equal to the policy reserve liabilities the reinsurer must establish on the reinsured business are:

(i) deposited by or withheld from the reinsurer and held in the custody of the ceding insurer, or deposited and held in a trust account with a state or national bank domiciled in this state, as security for the payment of the reinsurer's obligations under the reinsurance agreement;

(ii) held subject to withdrawal by the ceding insurer; and

(iii) held under the separate or joint control of the ceding insurer.; or

(6) any pledge, encumbrance or lien contemplated by or customarily included in the documentation for:

(A) an investment or transaction authorized by Sections 424.068, Subchapter D of Chapter 424, 425.121 and 425.151 of the insurance code, or their successor provisions, regarding a foreign investment, securities lending, a repurchase, a reverse repurchase, or a dollar roll transaction, or authorized by 424.068, Subchapter E of 424, 425.124 through 425.132, or 425.151 of the insurance code, or their successor provisions, regarding a foreign investment or risk control transaction; and

(B) a custodial or trust agreement for an insurer's securities authorized by Section 423.103 of the insurance code, or its successor provisions, that provides for a limited grant of a lien or security interest for payment of fees and expenses due to a service provider or intermediary under the custodial or trust agreement.

(b) Notwithstanding this section, the commissioner may examine any asset, reinsurance agreement, or deposit arrangement described by Subsection (a)(5) at any time, in accordance with the commissioner's authority under this code to examine an insurer.

SECTION 4. Section 422.051, Insurance Code, is amended to read as follows:

Sec. 422.051. RESTRICTIONS ON ENCUMBRANCE OF ASSETS. (a) An insurer shall at all times maintain unencumbered assets in an amount equal to the insurer's policy reserve liabilities.

(b) An insurer may not pledge or otherwise encumber:

(1) the insurer's assets in an amount that exceeds the amount of the insurer's capital and surplus; or

(2) more than 10 percent of the insurer's reserve assets.

(c) The calculation of the quantitative limits in (a) and (b) shall be based on the statutory financial statements for the insurer most recently filed with the department of insurance as of the date of determination of compliance. The date that a pledge or encumbrance is made shall be the applicable date used to determine compliance with the limits in (b). Compliance with the quantitative limits in (b) shall be achieved when, on the date of determination of compliance, the sum of the value of a proposed pledge or encumbrance, when added with the values of all previous and still outstanding pledges and encumbrances, does not exceed any quantitative limit in (b).

(cd) Notwithstanding any other provision of this section, on application made to the commissioner, the commissioner may issue a written order approving the pledge or encumbrance of an insurer's asset in any amount if the commissioner determines that the pledge or encumbrance will not adversely affect the insurer's solvency.

SECTION 5. Section 422.052, Insurance Code, is amended to read as follows:

Sec. 422.052. REPORT TO COMMISSIONER. (a) Not later than the 10th day after the date an insurer pledges or otherwise encumbers an asset, the insurer shall report in writing to the commissioner:

(1) the amount and identity of the pledged or encumbered asset; and

(2) the terms of the transaction.

(b) Annually, or more often as required by the commissioner, the insurer shall file with the commissioner a statement sworn to by the insurer's chief executive officer that:

(1) title to assets that equal the amount of the insurer's policy reserve liabilities and that are not pledged or otherwise encumbered is vested in the insurer;

(2) the only assets of the insurer that are pledged or otherwise encumbered are those identified and reported in the sworn statement, and no other assets of the insurer are pledged or otherwise encumbered; and

(3) the terms of the transaction pledging or otherwise encumbering the assets are those reported in the sworn statement.

(c) The insurer is not required to file the report required under subsection (a) of this section for pledges or encumbrances permitted in a transaction approved by the commissioner under Section 1152.055.

SECTION 6. Section 422.053, Insurance Code, is amended to read as follows:

Sec. 422.053. CLAIMANT LIEN ON CERTAIN ASSETS. (a) A person, corporation, association, or other legal or governmental entity that accepts as security for an insurer's debt or other obligation a pledge or encumbrance of an asset of the insurer that is not made in accordance with this chapter is considered to have accepted the asset subject to a superior, preferential, and automatically perfected lien in favor of a claimant of the insurer.

(b) Subsection (a) does not apply to: (i) an asset of an insurer in conservatorship or receivership if the commissioner in the conservatorship proceeding, or the court in which the receivership is pending, approves the pledge or encumbrance of the asset; or (ii) pledges or encumbrances disclosed permitted in a transaction approved by the commissioner under Section 1152.055.

SECTION 7. Section 422.054, Insurance Code, is amended to read as follows:

Sec. 422.054. PREFERENTIAL CLAIMS ON LIQUIDATION. If an insurer is involuntarily or voluntarily liquidated, a claimant of the insurer has a prior and preferential claim against all assets of the insurer other than the assets that have been pledged or encumbered in accordance with this chapter. or the assets that are subject to pledges or encumbrances described in Section 422.053(b)(ii). All claimants have equal status, and their prior and preferential claim is superior to any claim or cause of action against the insurer by any other person, corporation, association, or legal entity.

SECTION 8. Section 422.055, Insurance Code, is added to read as follows:

Sec. 422.055. RULEMAKING AUTHORITY. The department of insurance may adopt rules regarding the provisions of this chapter.

SECTION 9. This Act takes effect September 1, 2021.