79C8(3) AJA

 

CHAPTER 404.  FINANCIAL CONDITION

SUBCHAPTER A.  HAZARDOUS FINANCIAL CONDITION

Revised Law

Sec. 404.001.  DEFINITION.  In this subchapter, "insurer" includes:

(1)  a capital stock insurance company;

(2)  a reciprocal or interinsurance exchange;

(3)  a Lloyd's plan;

(4)  a fraternal benefit society;

(5)  a mutual company, including a mutual assessment company;

(6)  a statewide mutual assessment company;

(7)  a local mutual aid association;

(8)  a burial association;

(9)  a county mutual insurance company;

(10)  a farm mutual insurance company;

(11)  a fidelity, guaranty, or surety company;

(12)  a title insurance company;

(13)  a stipulated premium company;

(14)  a group hospital service corporation;

(15)  a health maintenance organization;

(16)  a risk retention group; and

(17)  any other organization or person engaged in the business of insurance.  (V.T.I.C. Art. 1.32, Sec. 1(a) (part).)

Source Law

Art. 1.32

Sec. 1.  (a)  "Insurer" shall include but not be limited to capital stock companies, reciprocal or interinsurance exchanges, Lloyds associations, fraternal benefit societies, mutual and mutual assessment companies of all kinds and types, state-wide assessment associations, local mutual aids, burial associations, county and farm mutual associations, fidelity, guaranty, and surety companies, trust companies organized under the provisions of Chapter 7 of the Texas Insurance Code of 1951, as amended, title insurance companies, stipulated premium insurance companies, group hospital service companies, health maintenance organizations, risk retention groups, and all other organizations, corporations, or persons transacting an insurance business, … .

Revisor's Note

(1)  Section 1(a), V.T.I.C. Article 1.32, provides that "'[i]nsurer'  shall include but not be limited to" certain entities.  The revised law omits "but not be limited to" as unnecessary because Section 311.005(13), Government Code (Code Construction Act), applicable to the revised law, and Section 312.011(19), Government Code, provide that "includes" and "including" are terms of enlargement and not of limitation and do not create a presumption that components not expressed are excluded.

(2)  Section 1(a), V.T.I.C. Article 1.32, refers to "capital stock companies," "Lloyds associations," "state-wide assessment associations," "local mutual aids," "county and farm mutual associations," "stipulated premium insurance companies," and "group hospital service companies."  For consistency with terminology used in this code, the revised law substitutes "capital stock insurance company" for "capital stock companies," "Lloyd's plan" for "Lloyds associations," "statewide mutual assessment company" for "state-wide assessment associations," "local mutual aid association" for "local mutual aids," "county mutual insurance company" and "farm mutual insurance company" for "county and farm mutual associations," "stipulated premium company" for "stipulated premium insurance companies," and "group hospital service corporation" for "group hospital service companies."

(3)  Section 1(a), V.T.I.C. Article 1.32, refers to "trust companies organized under the provisions of Chapter 7 of the Texas Insurance Code of 1951, as amended."  Before 1957, trust companies were organized and regulated under V.T.I.C. Chapter 7.  Chapter 388, Acts of the 55th Legislature, Regular Session, 1957, repealed V.T.I.C. Chapter 7, as it existed at that time, and the Texas Department of Insurance no longer regulates any trust companies.  Trust companies are currently regulated by the Texas Department of Banking under Chapter 181, Finance Code.  Accordingly, the revised law omits the reference to trust companies organized under V.T.I.C. Chapter 7.

(4)  Section 1(a), V.T.I.C. Article 1.32, refers to "organizations, corporations, or persons transacting an insurance business."  The revised law omits the reference to "corporations" as unnecessary because "organization" includes a corporation.

(5)  Sections (1)(b) and (c), V.T.I.C. Article 1.32, define "board" and "commissioner."  The revised law omits those definitions as unnecessary. Chapter 685, Acts of the 73rd Legislature, Regular Session, 1993, abolished the State Board of Insurance and transferred that board's functions to the commissioner of insurance and the Texas Department of Insurance.  Throughout this chapter, references to the board have been changed appropriately.  The definition of "commissioner" is unnecessary because Section 31.001 of this code defines "commissioner" as the commissioner of insurance for purposes of this code.  The omitted law reads:

(b)  "Board" means the State Board of Insurance of Texas.

(c)  "Commissioner" means the Commissioner of Insurance of Texas.

Revised Law

Sec. 404.002.  APPLICABILITY OF SUBCHAPTER.  This subchapter applies to a person or organization engaged in the business of insurance without regard to whether the person or organization is listed in Section 404.001, unless another statute specifically cites this subchapter and exempts the person or organization from this subchapter.  (V.T.I.C. Art. 1.32, Sec. 1(a) (part).)

Source Law

(a)  ["Insurer" shall include … all other organizations, corporations, or persons transacting an insurance business,] whether or not named above, unless such insurers are by statute specifically, by naming this article, exempted from the operation of this article.

Revised Law

Sec. 404.003.  ORDER TO REMEDY CONDITION.  (a)  If the financial condition of an insurer, when reviewed as provided by Subsection (b), indicates a condition that might make the insurer's continued operation hazardous to the insurer's policyholders or creditors or to the public, the commissioner may, after notice and hearing, order the insurer to take action reasonably necessary to remedy the condition.

(b)  The insurer's financial condition must be reviewed under Subsection (a) in conjunction with one or more of the following:

(1)  the kinds and nature of risks insured;

(2)  the loss experience and ownership of the insurer;

(3)  the ratio of total annual premium and net investment income to commission expenses, general insurance expenses, policy benefits paid, and required policy reserve increases;

(4)  the insurer's method of operation, affiliations, or investments;

(5)  any contracts that lead or may lead to contingent liability; or

(6)  agreements in respect to guaranty and surety.

(c)  In an order issued under Subsection (a), the commissioner may take any action the commissioner considers reasonably necessary to remedy the condition described by Subsection (a), including:

(1)  requiring an insurer to:

(A)  reduce the total amount of present and potential liability for policy benefits by reinsurance;

(B)  reduce the volume of new business accepted;

(C)  suspend or limit writing new business for a period;

(D)  reduce general insurance and commission expenses by specified methods; or

(E)  increase the insurer's capital and surplus by contribution; or

(2)  suspending or canceling the insurer's certificate of authority.

(d)  The commissioner may use the remedies available under Subsection (c) in conjunction with the provisions of Chapter 83 if the commissioner determines that the financial condition of the insurer is hazardous and can be reasonably expected to cause significant and imminent harm to the insurer's policyholders or the public.  (V.T.I.C. Art. 1.32, Sec. 2.)

Source Law

Sec. 2.  Whenever the financial condition of an insurer when reviewed in conjunction with the kinds and nature of risks insured, the loss experience and ownership of the insurer, the ratio of total annual premium and net investment income to commission expenses, general insurance expenses, policy benefits paid, and required policy reserve increases, its method of operation, its affiliations, its investments, any contracts which lead or may lead to contingent liability, or agreements in respect to guaranty and surety, indicate a condition such that the continued operation of the insurer might be hazardous to its policyholders, creditors, or the general public, then the commissioner may, after notice and hearing, order the insurer to take such action as may be reasonably necessary to rectify the existing condition, including but not necessarily limited to one or more of the following steps:

(a)  reduce the total amount of present and potential liability for policy benefits by reinsurance;

(b)  reduce the volume of new business being accepted;

(c)  reduce general insurance and commission expenses by specified methods;

(d)  suspend or limit the writing of new business for a period of time;

(e)  increase the insurer's capital and surplus by contribution; or

(f)  suspend or cancel the certificate of authority.  The commissioner may use the remedies available under this section in conjunction with the provisions of Article 1.10A of this code when the commissioner determines that the financial condition of the insurer is hazardous and can be reasonably expected to cause significant and imminent harm to it policyholders or the general public.

Revisor's Note

Section 2, V.T.I.C. Article 1.32, states that the commissioner of insurance may order an insurer to take any action "as may be reasonably necessary" to remedy the insurer's hazardous financial condition, "including but not necessarily limited to" certain listed actions.  The revised law omits the reference to "but not necessarily limited to" for the reason stated in Revisor's Note (1) to Section 404.001.

Revised Law

Sec. 404.004.  CONSTRUCTION WITH LAW RELATING TO CAPITAL AND SURPLUS.  The commissioner's authority under Section 404.003 to require an increase in an insurer's capital and surplus by contribution, and any capital and surplus requirements imposed by the commissioner under that section, prevail over:

(1)  the capital and surplus requirements of:

(A)  Sections 822.054, 822.201-822.203, 822.205, 822.210-822.212, 841.054, 841.201, 841.204, 841.205, 841.207, 884.206, 884.308, and 884.309; and

(B)  Subchapter G, Chapter 841;

(2)  any other provision of this code or other law establishing capital and surplus requirements for insurers; and

(3)  any rule adopted under a law described by Subdivision (1) or (2). (V.T.I.C. Art. 1.32, Sec. 2A.)

Source Law

Sec. 2A.  The commissioner's authority under Section 2 of this article to require an increase in an insurer's capital and surplus by contribution prevails over the capital and surplus requirements of Articles 2.01, 2.02, 2.20, 3.02, and 22.13 of this code, over any other article of this code or other law establishing capital and surplus requirements for insurers, or any rules adopted under those articles or laws, and in the event of any conflict between capital and surplus requirements imposed by the commissioner under Section 2 of this article and capital and surplus requirements imposed under Articles 2.01, 2.02, 2.20, 3.02, or 22.13 of this code, any other article of this code or other law establishing capital and surplus requirements for insurers, or any rules adopted under those articles or laws, the capital and surplus requirements imposed by the commissioner under Section 2 of this article prevail.

Revisor's Note

Section 2A, V.T.I.C. Article 1.32, refers to the capital and surplus requirements of V.T.I.C. Articles 2.01, 2.02, 2.20, 3.02, and 22.13.  The portions of these articles pertaining to the amount or form of capital and surplus required were revised by Chapter 1419, Acts of the 77th Legislature, Regular Session, 2001, as Sections 822.054, 822.201-822.203, 822.205, 822.210-822.212, 841.054, 841.201, 841.204, 841.205, 841.207, 884.206, 884.308, and 884.309 and Subchapter G, Chapter 841, of this code.  The revised law is drafted accordingly.

Revised Law

Sec. 404.005.  STANDARDS AND CRITERIA FOR EARLY WARNING.  (a)  The commissioner by rule may:

(1)  establish uniform standards and criteria for early warning that the continued operation of an insurer might be hazardous to the insurer's policyholders or creditors or to the public; and

(2)  establish standards for evaluating the financial condition of an insurer.

(b)  Standards established by the commissioner under this section must be consistent with the purposes of Section 404.003.  (V.T.I.C. Art. 1.32, Sec. 3.)

Source Law

Sec. 3.  The board is authorized, by rule and regulations, to fix uniform standards and criteria for early warning that the continued operation of an insurer might be hazardous to its policyholders, creditors, or the general public, and to fix standards for evaluating the financial condition of an insurer, which standards shall be consistent with the purposes expressed in Section 2 of this article.

Revisor's Note

Section 3, V.T.I.C. Article 1.32, refers to certain standards and criteria established by "rule and regulations."  The revised law omits the reference to "regulations" because under Section 311.005(5), Government Code (Code Construction Act), a rule is defined to include a regulation.  That definition applies to the revised law.

Revised Law

Sec. 404.006.  AGREEMENT WITH ANOTHER JURISDICTION.  The commissioner may enter into an agreement with the insurance regulatory authority of another jurisdiction concerning the management, volume of business, expenses of operation, plans for reinsurance, rehabilitation, or reorganization, and method of operations of, and type of risks to be insured by, an insurer that is:

(1)  licensed in the other jurisdiction; and

(2)  considered to be in a hazardous financial condition or in need of a specific remedy that may be imposed by the commissioner and the insurance regulatory authority of the other jurisdiction.  (V.T.I.C. Art. 1.32, Sec. 4.)

Source Law

Sec. 4.  The commissioner is authorized to enter into arrangements or agreements with the insurance regulatory authorities of other jurisdictions concerning the management, volume of business, type of risks to be insured, expenses of operation, plans for reinsurance, rehabilitation, or reorganization, and method of operations of an insurer that is licensed in such other jurisdictions and that is deemed to be in a hazardous financial condition or needful of specific remedies which may be imposed by the commissioner and insurance regulatory authorities of such other jurisdictions.

Revisor's Note

Section 4, V.T.I.C. Article 1.32, refers to "arrangements or agreements."  The revised law omits the reference to "arrangements" as unnecessary because "agreement" includes an arrangement.

Revisor's Note

(End of Subchapter)

The revised law omits as unnecessary Section 5, V.T.I.C. Article 1.32, relating to the cumulative effect of that article.  An accepted general principle of statutory construction requires a statute to be given cumulative effect with other statutes unless the statute provides otherwise or unless the statutes are in conflict.  The general principle applies to this revision. The omitted law reads:

Sec. 5.  Authority granted by the provisions of this article is in addition to other provisions of law and not in substitution, restriction, or diminution thereof.

[Sections 404.007-404.050 reserved for expansion]

SUBCHAPTER B.  IMPAIRMENT OF STOCK OR SURPLUS

Revised Law

Sec. 404.051.  IMPAIRMENT PROHIBITED.  (a)  The impairment of the capital stock of a stock insurance company is prohibited.

(b)  Impairment of the following surpluses in excess of that provided by Section 404.053 is prohibited:

(1)  the surplus of a stock insurance company; or

(2)  the minimum required aggregate surplus of a:

(A)  mutual company;

(B)  Lloyd's plan; or

(C)  reciprocal or interinsurance exchange.  (V.T.I.C. Art. 1.10, Sec. 5 (part).)

Source Law

Sec. 5.  When a Company's Surplus is Impaired.  No impairment of the capital stock of a stock company shall be permitted.  No impairment of the surplus of a stock company, or of the minimum required aggregate surplus of a mutual, Lloyd's, or reciprocal insurer, shall be permitted in excess of that provided by this section… .

Revisor's Note

Section 5, V.T.I.C. Article 1.10, refers to a "stock company" and a "mutual, Lloyd's, or reciprocal insurer."  For consistency with terminology used in this code, the revised law substitutes "stock insurance company" for "stock company," "mutual company" for "mutual … insurer," "Lloyd's plan" for "Lloyd's … insurer," and "reciprocal or interinsurance exchange" for "reciprocal insurer."

Revised Law

Sec. 404.052.  DETERMINATION OF IMPAIRMENT.  (a)  When determining under this subchapter whether the surplus or the minimum required aggregate surplus of an insurer is impaired, the commissioner shall charge against the insurer:

(1)  the reinsurance reserve required by the laws of this state; and

(2)  all other debts and claims against the insurer.

(b)  This section does not apply to a life insurance company.  (V.T.I.C. Art. 1.10, Sec. 5 (part).)

Source Law

Sec. 5.  … Having charged against a company other than a life insurance company, the reinsurance reserve, as prescribed by the laws of this State, and adding thereto all other debts and claims against the company, the Commissioner shall … [if it is determined that the surplus required by Section 822.054, 822.202, 822.203, 822.205, 822.210, 822.211, or 822.212 … is impaired … or … the required aggregate surplus … is impaired … the Commissioner shall order the company to remedy the impairment] … .

Revised Law

Sec. 404.053.  REMEDY FOR IMPAIRMENT.  (a)  The commissioner shall order an insurer to remedy an impairment of the insurer's surplus, aggregate surplus, or aggregate of guaranty fund and surplus, as applicable, by bringing the surplus to an acceptable level specified by the commissioner, or to cease engaging in business in this state, if the commissioner determines that:

(1)  the surplus required by Section 822.054, 822.202, 822.203, 822.205, 822.210, 822.211, or 822.212 of a stock insurance company engaged in the kind of insurance business described by the company's certificate of authority:

(A)  is impaired by more than 50 percent; or

(B)  is less than the minimum level of surplus required by risk-based capital and surplus rules adopted by the commissioner; or

(2)  the required aggregate of guaranty fund and surplus of a Lloyd's plan, or the required aggregate surplus of a reciprocal or interinsurance exchange or of a mutual company, other than a life insurance company, engaged in the kind of insurance business described by the insurer's certificate of authority:

(A)  is impaired by more than 25 percent; or

(B)  is less than the minimum level of surplus required by risk-based capital and surplus rules adopted by the commissioner.

(b)  After issuing an order described by Subsection (a), the commissioner shall immediately institute any proceeding necessary to determine what further actions the commissioner will take in relation to the matter.  (V.T.I.C. Art. 1.10, Sec. 5 (part).)

Source Law

Sec. 5.  … the Commissioner shall, (i) if it is determined that the surplus required by Section 822.054, 822.202, 822.203, 822.205, 822.210, 822.211, or 822.212 of this code of a stock company doing the kind or kinds of insurance business set out in its Certificate of Authority is impaired to the extent of more than fifty (50%) per cent of the required surplus for a capital stock insurance company, or is less than the minimum level of surplus required by Commissioner promulgated risk-based capital and surplus regulations, or (ii) if it is determined that the required aggregate surplus of a reciprocal or mutual company, or the required aggregate of guaranty fund and surplus of a Lloyd's company, other than a life insurance company, doing the kind or kinds of insurance business set out in its Certificate of Authority is impaired to the extent of more than twenty-five per cent (25%) of the required aggregate surplus, or is less than the minimum level of surplus required by Commissioner promulgated risk-based capital and surplus regulations, the Commissioner shall order the company to remedy the impairment of surplus to acceptable levels specified by the Commissioner or to cease to do business within this State.  The Commissioner shall thereupon immediately institute such proceedings as may be necessary to determine what further actions shall be taken in the case.

Revisor's Note

(1)  Section 5, V.T.I.C. Article 1.10, refers to a "stock company," "reciprocal … company," and "Lloyd's company."  For consistency with terminology used in this code, the revised law substitutes "stock insurance company" for "stock company," "reciprocal or interinsurance exchange" for "reciprocal … company," and "Lloyd's plan" for "Lloyd's company."

(2)  Section 5, V.T.I.C. Article 1.10, refers to "regulations."  The revised law substitutes "rules" for "regulations" because "rules" is the term more commonly used and is the term used by Chapter 2001, Government Code (Administrative Procedure Act).  Also, under  Section 311.005(5), Government Code (Code Construction Act), applicable to the revised law, a rule is defined to include a regulation.  That definition applies to the revised law.

(3)  Section 5(ii), V.T.I.C. Article 1.10, which applies to a reciprocal or interinsurance exchange, a mutual company, and a Lloyd's plan, provides an exemption from the operation of Section 5(ii) for a life insurance company.  For clarity, the revised law limits the application of the exemption to a mutual company because neither a reciprocal or interinsurance exchange nor a Lloyd's plan is authorized to engage in the business of life insurance in this state.