Property & Casualty 2008 Compliance Conference

1. Property & Casualty 2008Compliance Conference

2. Insurance Corporation and Licensing Activities/Transactions

3. Company Licensing and Registration • Topics: • CL&R Background • Company Data • Licensing Process • Corporate Transactions • …Including market exit plans, license cancellation, and dissolutions • Statutory Deposits • Updates • Q&A

4. Company Licensing and Registration Company Licensing and Registration Division is part of the Financial Program within the Texas Department of Insurance. The Division’s main goal is to incorporate and admit into the Texas insurance market insurers that have the management capability and financial wherewithal to successfully operate and meet the needs of the public.

5. CL&R Background • Administrative function: • Accurate company detail information. • Company (corporate and licensing) history. • Officers/directors. • Open records. • Technical Function: • Reviewing forms/ documents for compliance. • Reviewing business plans and financial projections. • Coordination within TDI, the industry, other insurance departments, and other state/federal agencies.

6. CL&R Background Company licensing, registration, and related corporate transactions, processes and reviews are a combination of compliance verification and risk assessment. Compliance with statute/rules is more objective (administrative function.) Risk assessment in consideration of hazardous financial conditions is more subjective (technical function). Understanding where CL&R stands on subjective matters is key!

7. Company Data • Articles of incorporation. • By-laws. • Certificate of authority. • Company history.

8. Company Data • Company detail information: • Mailing addresses • Phone, fax,. e-mails • Officers/directors • Open records request. • Certification of license and other related documents.

9. DANGER! Regulator Scrutiny • Including but not limited too: • Business plan lacks sufficient detail. • Lack of clear explanation of assumptions.

10. Regulator Scrutiny • Lack of sufficient detail of a marketing plan or distribution networks. • Insufficient explanations of proposed use of TPA service or other outsourced functions. • Insufficient evidence of adequate funds to support projections.

11. Regulator Scrutiny • Incomplete explanation of how any reinsurance treaties function and the financial effects of the treaties. • Lack of disclosure of any dividends, interest payments, or expectations of the capital provider reflected in the business plan and projections. • Does not demonstrate adequate expense controls.

12. Regulator Scrutiny • Reinsurance arrangements w/ risk limiting features • Sliding scale commissions • Loss corridors. • Occurrence and/or aggregate caps. • Automatic cut-off provisions. • Managers with criminal histories.

13. Regulator Scrutiny • Managers with past or current involvement with financially hazardous entities. • Managers with past or current involvement with entities fined, license revocations, or other regulatory interventions • Managers with lack of demonstrated experience in the area of proposed duties and positions. • Managers with revoked professional licenses

14. Licensing Process • Uniform Certificate of Authority Application (UCAA): • Primary application for new start –up entities. • Expansion application for Insurers seeking admission into the Texas market. • See: • http://www.naic.org/industry_ucaa.htm

15. Corporate Transactions/Market Exit Plans • Company Licensing and Registration Division is part of the Financial Program within the Texas Department of Insurance. • The Division’s main goal is to incorporate and admit into the Texas insurance market insurers that have the management capability and financial wherewithal to successfully operate and meet the needs of the public. • This goal is further supported by receipt, review, and if applicable, approval or denial of transactions that impact corporate status, licensing status, and/or an insurer’s status in the Texas insurance market.

16. Corporate Transactions More Administrative More Technical capital increase name changes home office changes redomestications mergers assumption reinsurance withdrawal plans

17. Corporate Transactions • Regulator Scrutiny: • Conflicting company names. • Redomesticating in search of preferential regulatory treatment.

18. Corporate Transactions • Regulator Scrutiny: • Mergers/ assumption reinsurance transactions whereby insurance obligations are transferred to troubled companies or those with lesser financial capacity. • Market exit plans that lack details, lack realistic time frames, or are under-reserved.

19. Market Exit Plans • Texas Insurance Code(“TIC”) Ch. 827 and Texas Administrative Code (“TAC”), Title 28, 7.1801 – 7.1808 • Withdrawal plan filing is not a license cancellation filing nor dissolution filing . Better described as a market exit plan. • A withdrawal plan is required when an insurer or HMO, of its own initiative, takes action that will result in a substantial exit from all business or a line of business (line of business defined in TAC 7.1803).

20. Market Exit Plans • The event is measured by a 50% reduction in annual written premium for all business/line of business for personal lines, i.e. auto and home. The 50% can be either statewide or within a rating territory. • Other lines are triggered by a 75% reduction, statewide, in annual written premium. • No new business does not necessarily trigger a withdrawal action, as long as the carrier continues to renew policies.

21. Market Exit Plans Common Questions What if the Company has just stopped writing new business? A withdrawal plan is needed if the company’s “restriction” triggers the 50% reduction in annual premium for auto/homeowners

22. Market Exit Plans Common Questions My Reinsurer has canceled coverage;is a withdrawal plan filing required? A withdrawal plan is needed if the company non-renews policies or another action to trigger the 50% or 75% reductions in annual premium.

23. Market Exit Plans Common Questions Independent agents have already moved the business? A withdrawal plan is needed if the company non-renews policies or another action to trigger the 50% or 75% reductions in annual premium.

24. Market Exit Plans Common Questions The Company will non-renew its business, but another company is offering replacement coverage? If not an affiliated entity, a withdrawal plan is required for review.

25. Market Exit Plans Common Questions The Company will non-renew its business, but an affiliated company is offering replacement coverage? Further inquiry is necessary in determining if transfer among affiliates is seamless.

26. Market Exit Plans Common Questions The Company will non-renew its business, but an affiliated lloyds company is offering replacement coverage? Not an affiliated transfer exemption, file a withdrawal plan.

27. Market Exit Plans TIC 827.005 (b) - Modify, restrict, or limit a withdrawal plan. TIC 827.005 (c)- 60 day deemer. TIC 827.009 – Deposit of Securities held in Trust. TIC 827.010 – Moratorium.

28. Market Exit Plans • In regards to withdrawal plans, the major focus is: • Market impact. • Real reason the company is exiting the market. • Adequate reserves. • Policyholders/agents receive notice in a timely manner and in compliance with statute/rule. • Detailed knowledge of number of affected policyholders and relevant demographics

29. License cancellation/dissolution Approved withdrawal plan X amount of policy obligations End of withdrawal period. No policyholders, diminishing claims exposure 0 # of years 0 policy obligations & assuming 0 contingent liabilities, cancel license

30. Corporate Transactions UCAA Corporate Amendments See http://www.naic.org/industry_ucaa.htm

31. Statutory Deposits Company Licensing and Registration Division is part of the Financial Program within the Texas Department of Insurance. The Division’s main goal is to incorporate and admit into the Texas insurance market insurers that have the management capability and financial wherewithal to successfully operate and meet the needs of the public. This goal is further supported by receipt, review, and if applicable, approval or denial of transactions that impact corporate status, licensing status, and/or an insurer’s status in the Texas insurance market. Our efforts to support industry solvency are further solidified through establishing statutory deposits for the benefit of policyholders and/or creditors.

32. Statutory Deposits • $50k for Casualty Companies • TIC CH. 481 – Voluntary Deposits • TIC 406 Deposits – If any of the following reflect conditions hazardous to policyholders, enrollees, creditors, or the general public: • Insurers financial or operating condition (considering risks insured). • Relationship with affiliates. • Investments. • Contingent liabilities. • Guaranty or performance agreements/arrangements.

33. Statutory Deposits • See: • http://www.tdi.state.tx.us/licensing/company/documents/clrindexsecdep.doc

34. Updates • New minimum Capital and Surplus Requirements for P&C carriers: • Capital $2.5 million. • Surplus $2.5 million. • 10 year phase- in: • 10% of difference between new standards and 2009 YE Cap/Surplus. • Phase in Commences in 2010. • Must be $2.5 million capital and $2.5 million surplus. • Does not apply to Title Insurers.

35. Updates • Summary Denial of License Applications: • TDI may deny a license application w/o a prior hearing. • Applicant has 30 days to request a hearing to contest the denial Order.

36. Company Licensing and Registration • Questions/Comments??????