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Texas Senate Bill SB1735

Texas 2011 - 82nd Regular

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11 By: Van de Putte S.B. No. 1735
22 (In the Senate - Filed March 11, 2011; March 23, 2011, read
33 first time and referred to Committee on State Affairs; May 4, 2011,
44 reported adversely, with favorable Committee Substitute by the
55 following vote: Yeas 8, Nays 0; May 4, 2011, sent to printer.)
66 COMMITTEE SUBSTITUTE FOR S.B. No. 1735 By: Van de Putte
77
88
99 A BILL TO BE ENTITLED
1010 AN ACT
1111 relating to limited purpose subsidiary life insurance companies.
1212 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1313 SECTION 1. Chapter 841, Insurance Code, is amended by
1414 adding Subchapter I to read as follows:
1515 SUBCHAPTER I. LIMITED PURPOSE SUBSIDIARY LIFE INSURANCE COMPANIES
1616 Sec. 841.401. PURPOSE. The purpose of this subchapter is to
1717 authorize the establishment of domestic limited purpose subsidiary
1818 life insurance companies to enable those companies to support
1919 excess reserves for certain life insurance policies.
2020 Sec. 841.402. DEFINITIONS. In this subchapter:
2121 (1) "Affiliated companies" means domestic life
2222 insurance companies that are:
2323 (A) directly or indirectly wholly owned
2424 subsidiaries of the same holding company; or
2525 (B) controlled persons of the same holding
2626 company.
2727 (2) "Appointed actuary" means the actuary who is
2828 appointed by a limited purpose subsidiary life insurance company to
2929 render the actuarial opinion required by Subchapter B, Chapter 425.
3030 (3) "Ceding insurer" means a company that cedes risk
3131 to a limited purpose subsidiary life insurance company under a
3232 reinsurance contract and that is:
3333 (A) a domestic life insurance company that is the
3434 parent of a limited purpose subsidiary life insurance company; or
3535 (B) an affiliated company of a limited purpose
3636 subsidiary life insurance company.
3737 (4) "Controlled person" means a person organized or
3838 authorized to do business under the laws of this state that is
3939 controlled directly or indirectly by a holding company.
4040 (5) "Excess reserves" means the amount of statutory
4141 reserves determined to be redundant by the appointed actuary for
4242 life insurance policies whose reserves are calculated under 28
4343 T.A.C. Subchapter EE, Chapter 3. Excess reserves may not be an
4444 amount greater than the difference between the reserves calculated
4545 using 28 T.A.C. Subchapter EE, Chapter 3 and the reserves
4646 calculated using generally accepted accounting principles.
4747 (6) "Guarantor" means a holding company or an
4848 affiliated company under Section 841.417 of the limited purpose
4949 subsidiary life insurance company that is a party to a guaranty.
5050 (7) "Guaranty" means a commissioner-approved
5151 agreement by a guarantor with sufficient equity and financial
5252 strength to pay, during the life of the guaranty, an amount equal to
5353 the specified obligations of a limited purpose subsidiary life
5454 insurance company, less the equity of all ceding insurers that are
5555 subsidiaries of the guarantor, to satisfy the agreement.
5656 (8) "Holding company" means a person that directly or
5757 indirectly controls an insurer.
5858 (9) "Insurer" means a domestic life insurance company
5959 organized under this chapter.
6060 (10) "Letter of credit" means a clean, unconditional,
6161 irrevocable letter of credit issued or confirmed by a qualified
6262 United States financial institution, as defined by Section
6363 492.104(b)(2)(C).
6464 (11) "Limited purpose subsidiary life insurance
6565 company" means a limited purpose subsidiary life insurance company
6666 organized under this subchapter:
6767 (A) that is wholly owned by a life insurance
6868 company or an affiliated company; and
6969 (B) to which the commissioner issues a
7070 certificate of authority under this chapter.
7171 (12) "Material transaction" means a transaction or
7272 series of transactions involving amounts equal to or exceeding
7373 three percent of a limited purpose subsidiary life insurance
7474 company's admitted assets.
7575 (13) "Organizational document" means a limited
7676 purpose subsidiary life insurance company's articles of
7777 incorporation and the company's bylaws.
7878 (14) "Organizing company" means the company that
7979 organizes a limited purpose subsidiary life insurance company under
8080 this subchapter.
8181 (15) "Parent" means a person that directly or
8282 indirectly controls through one or more intermediaries, wholly
8383 owns, or is an affiliated company of a limited purpose subsidiary
8484 life insurance company.
8585 (16) "Person" has the meaning assigned by Section
8686 823.002.
8787 (17) "Reinsurance contract" means a contract between a
8888 limited purpose subsidiary life insurance company and a ceding
8989 insurer under which the limited purpose subsidiary life insurance
9090 company agrees to provide reinsurance to the ceding insurer for
9191 certain risks.
9292 (18) "Risk" means a risk associated with life
9393 insurance policies written on or after September 1, 2011, by a
9494 ceding insurer, or assumed by a ceding insurer from an affiliated
9595 company under life insurance policies written on or after September
9696 1, 2011, by the affiliated company and for which the ceding insurer
9797 calculates statutory reserves for those policies under 28 T.A.C.
9898 Subchapter EE, Chapter 3.
9999 Sec. 841.403. ORGANIZATIONAL DOCUMENTS. (a) A wholly
100100 owned domestic insurer authorized to transact the business of
101101 insurance under this chapter or an affiliated company organized or
102102 authorized to conduct business under the laws of this state may
103103 organize a limited purpose subsidiary life insurance company under
104104 this subchapter.
105105 (b) A limited purpose subsidiary life insurance company may
106106 reinsure risks of the organizing company and of an affiliated
107107 company.
108108 (c) A limited purpose subsidiary life insurance company's
109109 organizational documents must:
110110 (1) limit the company's authority to transact the
111111 business of insurance to reinsuring only the risks of a ceding
112112 insurer;
113113 (2) provide that the limited purpose subsidiary life
114114 insurance company may not otherwise engage in the business of
115115 insurance; and
116116 (3) provide that the limited purpose subsidiary life
117117 insurance company must always be wholly owned by a domestic insurer
118118 authorized to transact the business of insurance under this chapter
119119 or by an affiliated company organized or authorized to do business
120120 under the laws of this state.
121121 Sec. 841.404. CERTIFICATE OF AUTHORITY REQUIRED. A limited
122122 purpose subsidiary life insurance company may not engage in the
123123 business of reinsurance in this state unless the limited purpose
124124 subsidiary life insurance company obtains from the commissioner a
125125 certificate of authority under this subchapter.
126126 Sec. 841.405. APPLICATION FOR CERTIFICATE OF AUTHORITY. To
127127 obtain a charter for a limited purpose subsidiary life insurance
128128 company, the incorporators of the company shall pay to the
129129 department a charter fee in an amount determined under Chapter 202
130130 and file with the department:
131131 (1) an application for charter on the form prescribed
132132 by, and containing the information prescribed by, the commissioner;
133133 (2) the company's articles of incorporation;
134134 (3) an affidavit made by the company's president, vice
135135 president, treasurer, or chief financial officer stating that:
136136 (A) the minimum capital and surplus requirements
137137 of this subchapter are satisfied;
138138 (B) the capital and surplus are the bona fide
139139 property of the company;
140140 (C) the information in the articles of
141141 incorporation is true and correct;
142142 (D) the proposed organization and operation of
143143 the limited purpose subsidiary life insurance company comply with
144144 all applicable provisions of this subchapter;
145145 (E) the limited purpose subsidiary life
146146 insurance company's investment policy reflects and takes into
147147 account the liquidity of assets and the reasonable preservation,
148148 administration, and management of those assets with respect to the
149149 risks associated with the reinsurance contract; and
150150 (F) any reinsurance contract and any arrangement
151151 for securing the limited purpose subsidiary life insurance
152152 company's obligations under the reinsurance contract, including
153153 any agreements or other documentation to implement the arrangement;
154154 (4) a business plan that includes pro forma financial
155155 statement projections that demonstrate how the limited purpose
156156 subsidiary life insurance company will comply with Section 841.412;
157157 (5) a copy of any proposed guaranty that demonstrates
158158 how compliance with Sections 841.412 and 841.417 will be achieved;
159159 (6) an opinion of a qualified independent actuary
160160 acceptable to the commissioner that the methodology and assumptions
161161 used to set and discount reserves make good and sufficient
162162 provision for the risk assumed by the limited purpose subsidiary
163163 life insurance company, including significant stress tests on key
164164 assumptions; and
165165 (7) any other statement or document required by the
166166 commissioner to evaluate the limited purpose subsidiary life
167167 insurance company's application for a certificate of authority.
168168 Sec. 841.406. INVESTMENT OF CERTAIN SURPLUS BY ORGANIZING
169169 COMPANY. If the company that organizes a limited purpose
170170 subsidiary life insurance company is a domestic life insurance
171171 company, the organizing company may invest funds from the
172172 organizing company's surplus in the limited purpose subsidiary life
173173 insurance company.
174174 Sec. 841.407. OFFICERS AND DIRECTORS. The officers and
175175 directors of a company that organizes a limited purpose subsidiary
176176 life insurance company may serve as officers and directors of the
177177 limited purpose subsidiary life insurance company.
178178 Sec. 841.408. ISSUANCE OF CERTIFICATE OF AUTHORITY.
179179 (a) The commissioner may issue a certificate of authority to a
180180 limited purpose subsidiary life insurance company, authorizing the
181181 company to transact reinsurance business in this state as a limited
182182 purpose subsidiary life insurance company based on a finding that:
183183 (1) the company's application meets the criteria
184184 described by Section 841.061(a);
185185 (2) the proposed plan of the limited purpose
186186 subsidiary life insurance company provides for viable operation of
187187 the company, including a determination by the commissioner that the
188188 limited purpose subsidiary life insurance company applicant has
189189 sufficiently strong financial support;
190190 (3) the guaranties meet the requirements of Section
191191 841.417;
192192 (4) the terms of any reinsurance arrangement,
193193 including the reinsurance contract and related transactions,
194194 comply with this subchapter and all applicable insurance laws and
195195 rules;
196196 (5) the proposed application and reinsurance
197197 arrangement is not hazardous to any ceding insurer; and
198198 (6) the proposed application and reinsurance contract
199199 will always fund authorized investments that comply with Section
200200 841.412, including statutory reserves for life insurance with
201201 invested assets at least equal to the amount of reserves required
202202 under generally accepted accounting principles.
203203 (b) In conjunction with the issuance of a certificate of
204204 authority under this section, the commissioner may issue an order
205205 that includes any provisions, terms, and conditions regarding the
206206 organization, licensing, and operation of the limited purpose
207207 subsidiary life insurance company that the commissioner deems
208208 appropriate and that are not inconsistent with this chapter,
209209 including requesting from the company information to monitor the
210210 financial strength of guarantors and requiring the periodic
211211 reporting and monitoring of assets behind any guaranties issued.
212212 Sec. 841.409. SCOPE OF CERTIFICATE OF AUTHORITY. (a) A
213213 limited purpose subsidiary life insurance company that has been
214214 issued a certificate of authority may reinsure only the risks of a
215215 ceding insurer. A limited purpose subsidiary life insurance
216216 company may not otherwise engage in the business of insurance.
217217 (b) A limited purpose subsidiary life insurance company may
218218 purchase reinsurance to cede the risks assumed under a reinsurance
219219 contract.
220220 (c) A limited purpose subsidiary life insurance company
221221 organized under this subchapter is considered to be licensed to
222222 transact the business of reinsurance for the purposes of Section
223223 492.051, but may only reinsure risks of the company's affiliated
224224 companies.
225225 (d) A limited purpose subsidiary life insurance company
226226 shall provide the commissioner with notice of any change in the
227227 company's business plan required by Section 841.405, including any
228228 material change in the methods used to comply with Section 841.413.
229229 Sec. 841.410. CAPITAL AND SURPLUS. (a) The commissioner
230230 may not issue a certificate of authority to a limited purpose
231231 subsidiary life insurance company unless the company possesses and
232232 maintains unimpaired paid-in capital and surplus of not less than
233233 $10 million.
234234 (b) A limited purpose subsidiary life insurance company
235235 shall comply with the risk-based capital requirements adopted by
236236 the commissioner by rule.
237237 (c) A limited purpose subsidiary life insurance company
238238 shall maintain risk-based capital in an amount that is at least
239239 equal to 300 percent of the authorized control level of risk-based
240240 capital adopted by the commissioner.
241241 Sec. 841.411. FORECLOSURE ON COLLATERAL. A limited purpose
242242 subsidiary life insurance company shall immediately notify the
243243 commissioner of any action by a ceding insurer or any other person
244244 to foreclose on, or otherwise take possession of, collateral
245245 provided by the limited purpose subsidiary life insurance company
246246 to secure an obligation of the company.
247247 Sec. 841.412. MINIMUM AUTHORIZED INVESTMENT REQUIREMENT
248248 AFTER CREDIT FOR REINSURANCE; LETTERS OF CREDIT; GUARANTIES.
249249 (a) A limited purpose subsidiary life insurance company shall hold
250250 investments authorized under Subchapters C and D, Chapter 425,
251251 exclusive of investments in affiliates, in an amount that at least
252252 equals the sum of:
253253 (1) the minimum capital and surplus requirements of
254254 Section 841.410;
255255 (2) the risk-based capital requirements adopted by the
256256 commissioner; and
257257 (3) reserves calculated using generally accepted
258258 accounting principles.
259259 (b) Subject to compliance with Subsection (a) and
260260 notwithstanding Chapter 425, a limited purpose subsidiary life
261261 insurance company may reduce the amount of the company's excess
262262 reserves on account of:
263263 (1) reinsurance that complies with Chapter 492;
264264 (2) a letter of credit that complies with Section
265265 492.104(b)(2)(C); or
266266 (3) guaranties from a holding company or an affiliated
267267 company as provided by Section 841.417(b)(3).
268268 (c) Notwithstanding Subsection (b), a limited purpose
269269 subsidiary life insurance company may hold guaranties from a
270270 holding company or an affiliated company as provided by Section
271271 841.417(b)(3) as an admitted asset with an offsetting increase in
272272 special surplus funds to support excess reserves only.
273273 Sec. 841.413. PERMITTED REINSURANCE. (a) A limited
274274 purpose subsidiary life insurance company may only reinsure the
275275 risks of a ceding insurer under a reinsurance contract.
276276 (b) Unless otherwise approved in advance by the
277277 commissioner, a limited purpose subsidiary life insurance company
278278 may not assume or retain exposure to reinsurance losses for the
279279 company's own account that are not funded by:
280280 (1) premium and other amounts payable by the ceding
281281 insurer to the limited purpose subsidiary life insurance company
282282 under the reinsurance contract, or any return on the investment of
283283 the premiums or other amounts;
284284 (2) letters of credit that qualify under Section
285285 492.104(b)(2)(C); or
286286 (3) guaranties of a holding company or an affiliated
287287 company as provided by Section 841.417(b)(3).
288288 (c) A limited purpose subsidiary life insurance company may
289289 cede risks assumed under a reinsurance contract to one or more
290290 reinsurers through the purchase of reinsurance, subject to the
291291 prior approval of the commissioner. The commissioner may approve a
292292 reinsurance contract under this subsection if the commissioner
293293 finds that:
294294 (1) the proposed reinsurance complies with Chapter
295295 492;
296296 (2) the proposed reinsurer has sufficient liquidity,
297297 admitted assets, and policyholder surplus to support the
298298 liabilities assumed under the reinsurance contract; and
299299 (3) the proposed reinsurance contract would not result
300300 in a hazardous financial condition for the limited purpose
301301 subsidiary life insurance company.
302302 (d) A limited purpose subsidiary life insurance company may
303303 enter into contracts and conduct other commercial activities
304304 related or incidental to, and necessary to fulfill the purposes of,
305305 a reinsurance contract.
306306 Sec. 841.414. REPORTS ON RESERVES AND RISK-BASED CAPITAL.
307307 (a) A limited purpose subsidiary life insurance company annually
308308 shall file an opinion of the appointed actuary acceptable to the
309309 commissioner concerning the methods and assumptions used to set
310310 reserves. The opinion must demonstrate that the limited purpose
311311 subsidiary life insurance company holds risk-based capital and
312312 invested admitted assets that are at least equal to reserves
313313 specified by generally accepted accounting principles.
314314 (b) The commissioner may reject the opinion of the appointed
315315 actuary if the commissioner determines that accepting the opinion
316316 would be hazardous to policyholders, enrollees, creditors, or the
317317 public.
318318 (c) A limited purpose subsidiary life insurance company
319319 annually shall file with the commissioner a report of the limited
320320 purpose subsidiary life insurance company's risk-based capital
321321 level as of the end of the preceding calendar year containing the
322322 information required by the risk-based capital instructions
323323 adopted by the commissioner.
324324 Sec. 841.415. OTHER LAWS NOT APPLICABLE. The deposit
325325 requirements in Subchapter H do not apply to a limited purpose
326326 subsidiary life insurance company.
327327 Sec. 841.416. APPLICABILITY OF OTHER LAW. Except as
328328 specifically provided by law, all provisions of this code apply to a
329329 limited purpose subsidiary life insurance company formed under this
330330 subchapter.
331331 Sec. 841.417. GUARANTY REQUIREMENTS. (a) A guaranty may
332332 not be used to comply with this chapter without the prior written
333333 approval of the commissioner.
334334 (b) Before approving a guaranty, the commissioner must find
335335 that:
336336 (1) the guarantor has capital and surplus of $100
337337 million, exclusive of investments in subsidiaries and affiliates;
338338 (2) the guarantor has admitted assets backing capital
339339 and surplus in an amount sufficient to fulfill the guaranty, and the
340340 sufficiency on an ongoing basis is demonstrated to the satisfaction
341341 of the commissioner;
342342 (3) the guarantor and all affiliates are in good
343343 standing with the department;
344344 (4) the guarantor has provided all information
345345 requested by the commissioner; and
346346 (5) the guarantor is otherwise acceptable to the
347347 commissioner.
348348 (c) Notwithstanding Subsection (b)(3), the commissioner may
349349 allow, subject to the commissioner's prior approval, an affiliated
350350 company of the holding company to serve as guarantor. The
351351 commissioner may approve an affiliated company as a guarantor on a
352352 finding that the affiliated company possesses the independent
353353 financial means to discharge the guaranty using the affiliated
354354 company's own financial resources.
355355 Sec. 841.418. SUNSET PROVISION. This subchapter is valid
356356 for business sold only until January 1 after the year in which
357357 principle-based reserve requirements become operative in Texas
358358 under the adoption of the National Association of Insurance
359359 Commissioners' 2009 amendments to the NAIC Model Standard Valuation
360360 Law. After that January 1, the limited purpose subsidiary life
361361 insurance company may not assume new risks of a ceding insurer
362362 relating to business sold after that date.
363363 Sec. 841.419. CERTIFICATION OF ACTUARIAL OFFICER. (a) At
364364 the time a limited purpose subsidiary life insurance company files
365365 an application for a certificate of authority under this
366366 subchapter, and not later than March 1 of each year that a limited
367367 purpose subsidiary life insurance company is in operation and is
368368 ceded new business from a ceding insurer, a senior actuarial
369369 officer of each ceding insurer shall file with the commissioner a
370370 certification that the ceding insurer's transactions with the
371371 limited purpose subsidiary life insurance company are not being
372372 used to gain an unfair advantage in the pricing of the ceding
373373 insurer's products.
374374 (b) A ceding insurer may not be deemed to have an unfair
375375 advantage if the pricing of the policies and contracts reinsured by
376376 the limited purpose subsidiary life insurance company reflects, at
377377 the time the policies and contracts were issued, a reasonable
378378 long-term estimate of the cost to the ceding insurer of an
379379 alternative third-party transaction, and uses current pricing
380380 assumptions.
381381 (c) The ceding insurer shall keep documentation between
382382 examinations that sets forth the manner in which a senior actuarial
383383 officer arrived at the conclusions in the certification.
384384 Sec. 841.420. ACCOUNTING AND FINANCIAL REPORTING. The
385385 commissioner shall prescribe accounting and financial reporting
386386 requirements with regard to the limited purpose subsidiary life
387387 insurance company and any insurer as defined by Section 841.402
388388 that organizes a limited purpose subsidiary life insurance company.
389389 SECTION 2. This Act takes effect immediately if it receives
390390 a vote of two-thirds of all the members elected to each house, as
391391 provided by Section 39, Article III, Texas Constitution. If this
392392 Act does not receive the vote necessary for immediate effect, this
393393 Act takes effect September 1, 2011.
394394 * * * * *