(a) Purpose. The purpose of implementing a risk-based capital and surplus provision is to require a minimum level of capital and surplus to absorb the financial, underwriting, and investment risks assumed by a carrier.

(b) Scope.

(1) Life companies. This section applies to any carrier authorized to do business in Texas as an insurance company that writes or assumes a life insurance or annuity contract or assumes liability on or indemnifies one person for any risk under an accident and health insurance policy, or any combination of these policies, in an amount that exceeds $10,000 including: capital stock companies, mutual life companies, limited purpose subsidiary life insurance companies, and stipulated premium insurance companies.

(2) Property and casualty companies. This section applies to all domestic, foreign, and alien property and casualty companies subject to the provisions of Insurance Code §822.210 and §982.106, including county mutual insurance companies that do not meet the express criteria contained in Insurance Code §912.056(f), but excluding monoline financial guaranty insurers, monoline mortgage guaranty insurers, title insurers, and those insurers subject to Insurance Code §822.205.

(3) Health maintenance organizations and certain health carriers. This section applies to all domestic and foreign health maintenance organizations subject to the provisions of Insurance Code Chapter 843 and carriers that file the NAIC Health Annual Statement with TDI under TDI filing requirements.

(4) Fraternal benefit societies. This section applies to all domestic and foreign fraternal benefit societies.

(c) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise.

(1) Annual financial statement--The annual statement to be used by carriers under §7.68 of this title.

(2) Authorized control level--The result determined using the sources of information under subsection (d) of this section, including the RBC formula in accord with the RBC instructions.

(3) Carrier--An insurer, health maintenance organization, or fraternal benefit society included within the scope of subsection (b) of this section.

(4) NAIC--National Association of Insurance Commissioners.

(5) RBC--Risk-based capital.

(6) RBC formula--NAIC risk-based capital formula.

(7) RBC instructions--NAIC Risk-Based Capital Report Including Overview and Instructions for Companies.

(8) Total adjusted capital--A carrier's adjusted statutory capital and surplus as determined using the sources of information under subsection (d) of this section, including the RBC formula in accord with the RBC instructions.

(d) Sources of information for determining RBC. The commissioner reserves all authority and discretion to resolve any issues in Texas concerning RBC. The commissioner and carriers will refer to the sources in paragraphs (1) - (4) of this subsection in the respective order of priority listed to determine RBC:

(1) Texas statutes;

(2) TDI rules;

(3) commissioner orders; and

(4) except as provided in this section, as applicable to the carrier: (A) the NAIC Life Risk-Based Capital Report Including Overview and Instructions for Companies, which includes the RBC formula, for the period being reported. (B) the NAIC Fraternal Risk-Based Capital Report Including Overview and Instructions for Companies, which includes the RBC formula, for the period being reported. (C) the NAIC Property and Casualty Risk-Based Capital Report Including Overview and Instructions for Companies, which includes the RBC formula, for the period being reported. (D) the NAIC Health Risk-Based Capital Report Including Overview and Instructions for Companies, which includes the RBC formula, for the period being reported.

(e) Filing requirements. All carriers must file electronic versions of the RBC reports and any supplemental RBC forms and reports with the NAIC in accord with and by the due dates specified in sources of information for determining RBC listed in subsection (d) of this section, including the RBC instructions.

(f) Conflicts. In the event of a conflict between the Insurance Code, any TDI rule, any specific requirement of this section, and the RBC formula or the RBC instructions, the Insurance Code, rule, or specific requirement of this section takes precedence and in all respects controls. The requirements of this section do not repeal, modify, or amend any TDI rule or any Insurance Code provision.

(g) Actions of commissioner. The level of risk-based capital is calculated and reported annually. Depending on the results computed by the risk-based capital formula, the commissioner of insurance may take a number of remedial actions, as considered necessary. The ratio result of the total adjusted capital-to-authorized control level risk-based capital requires the following actions related to a carrier within the specified ranges:

(1) A carrier reporting total adjusted capital of 150 percent to 200 percent of authorized control level risk-based capital triggers a company action level under which the carrier must prepare a comprehensive financial plan that identifies the conditions that contribute to the carrier's financial condition. The plan must contain proposals to correct areas of substantial regulatory concern and projections of the carrier's financial condition, both with and without the proposed corrections. The plan must list the key assumptions underlying the projections and identify the concerns associated with the carrier's business. The RBC plan must be submitted within 45 days of filing the RBC report with the NAIC. After review, the commissioner will notify the carrier if the plan is satisfactory or not satisfactory. If the commissioner notifies the carrier that the plan is not satisfactory, the carrier must prepare a revised plan and submit it to the commissioner. Failure to file this comprehensive financial plan triggers the regulatory action level described in this subsection.

(2) A carrier reporting total adjusted capital of 100 percent to 150 percent of authorized control level risk-based capital triggers a regulatory action level initiative. At this action level, a carrier must file an RBC plan or revised RBC plan within 45 days of filing the RBC report with the NAIC, and the commissioner must perform any examinations or analyses to the carrier's business and operations that are deemed necessary. The commissioner may issue orders specifying corrective actions to be taken or may require other appropriate action.

(3) A carrier reporting total adjusted capital of 70 percent to 100 percent of authorized control level risk-based capital triggers an authorized control level. In addition to the remedies available at the carrier and regulatory action levels described in this subsection, the commissioner may take other action deemed necessary, including initiating a regulatory intervention to place a carrier under regulatory control.

(4) A carrier reporting total adjusted capital of less than 70 percent of authorized control level triggers a mandatory control level that subjects the carrier to one of the following actions: (A) being placed in supervision or conservation; (B) being determined to be in hazardous financial condition as provided by Insurance Code Chapter 404 and §8.3 of this title regardless of percentage of assets in excess of liabilities; (C) being determined to be impaired as provided by Insurance Code §§404.051 and 404.052 or 841.206; or (D) any other applicable sanctions under the Insurance Code.

(5) A life company described in subsection (b)(1) of this section is subject to a trend test described in the RBC formula and RBC instructions, if its total adjusted capital-to-authorized control level risk-based capital is between 200 percent and 300 percent. Any life insurer that trends below 190 percent of total adjusted capital-to-authorized control level risk-based capital triggers the company action level.

(6) A property and casualty company described in subsection (b)(2) of this section is subject to a trend test if its total adjusted capital-to-authorized control level risk-based capital is between 200 percent and 300 percent. If the result of the trend test as determined by the RBC formula and RBC instructions is "YES," the insurer triggers regulatory attention at the company action level.

(7) A health maintenance organization or health carrier described in subsection (b)(3) of this section is subject to a trend test if its total adjusted capital-to-authorized control level risk-based capital is between 200 percent and 300 percent and triggers the trend test determined in accord with the trend test calculation included in the Health RBC instructions. If the result of the trend test as determined by the RBC formula and RBC instructions is "YES," the health maintenance organization or certain health carrier triggers regulatory attention at the company action level.

(8) A fraternal benefit society described in subsection (b)(4) of this section is subject to a trend test described in the RBC formula and RBC instructions, if its total adjusted capital-to-authorized control level risk-based capital is between 200 percent and 300 percent. Any fraternal benefit society that trends below 190 percent of total adjusted capital-to-authorized control level risk-based capital triggers the company action level.

(h) Prohibition on announcements. Except as required under this section, a carrier, agent, or other person engaged in the business of insurance under the Insurance Code is prohibited from making, publishing, disseminating, circulating, or placing before the public, or causing, directly or indirectly to be made, published, disseminated, circulated, or placed before the public, in a newspaper, magazine, or other publication, or in the form of a notice, circular, pamphlet, letter, poster, over any radio or television station, or in any other way, an advertisement, announcement, or statement containing an assertion, representation, or statement with regard to any component derived in the calculation. Any violation of this subsection may be considered a violation of Insurance Code Chapter 541, regulating unfair methods of competition and unfair or deceptive acts or practices.

(i) Prohibition on use in ratemaking. The RBC instructions and any related filings are intended solely for use by the commissioner in monitoring the solvency of carriers and in taking corrective action with respect to carriers. The RBC instructions and any related filings may not be:

(1) used by the commissioner for ratemaking;

(2) considered or introduced as evidence in any rate proceeding; or

(3) used by the commissioner to calculate or derive any elements of an appropriate premium level or rate of return for any line of insurance that a carrier or any affiliate is authorized to write.

(j) Limitations. The requirements of this section do not reduce the amount of capital and surplus otherwise required by the Insurance Code, TDI rules, or by authority of the commissioner as provided by law.

Source Note: The provisions of this §7.402 adopted to be effective February 7, 2008, 33 TexReg 927; amended to be effective October 26, 2009, 34 TexReg 7309; amended to be effective December 12, 2010, 35 TexReg 10961; amended to be effective February 29, 2012, 37 TexReg 1346; amended to be effective August 11, 2013, 38 TexReg 5106; amended to be effective March 12, 2014, 39 TexReg 1720; amended to be effective July 1, 2015, 40 TexReg 4215