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Relating to the standard valuation for life insurance, accident and health insurance, and annuities and the nonforfeiture requirements of certain life insurance policies; amending provisions that may be subject to a criminal penalty.
No significant fiscal implication to the State is anticipated.
SB 1654 would change the standard valuation for life insurance, accident insurance, health insurance, and annuities by implementing a principle-based valuation (PBV) approach.
The Texas Department of Insurance (TDI) would not have to conduct annual valuations; instead, it could have independent actuaries, appointed by the commissioner, to conduct the annual valuations. Additionally, this legislation would not require TDI to certify the amount of those reserves. Insurance companies would have to submit the opinion of an appointed actuary to TDI. The opinion includes information on an insurance company’s reserves and if it meets the requirements established in the valuation manual for Texas.
SB 1654 requires any changes to the valuation model to be similar to the changes implemented for the Standard Model Valuation Law (SMVL), which is a model adopted by the National Association of Insurance Carriers (NAIC). The commissioner would be required to abide by the same restrictions as well.
If the commissioner finds that a company’s PBV calculation is not in accordance with the valuation model, then he or she has the authority to require a company to make the necessary changes to be in compliance.
The bill also makes changes to the nonforfeiture requirements for life insurance. Specifically, it adds and amends subsections of Section 1105.55 of the Insurance Code concerning the use of mortality tables and interests rates when calculating the net premiums for nonforfeiture.
Finally, this legislation implements a section on the confidentiality of a company’s valuation and it permits the commissioner to use and share this information with the NAIC.
Although this bill gives more latitude for insurance companies to tailor risks to their products, there is little reason why the government should be involved to this extent in the insurance industry. If this industry were allowed to operate in the free market, bills such as this would be needless. However, the current state of the insurance regulatory system requires problems caused by excessive regulation to be cured with more regulation.
However, this bill does not really add to the regulatory framework as it actually replaces one law with another one aimed at fixing the problem. In this sense, SB 1654 may be considered a “necessary evil."
Current laws determine what an insurer’s reserves should be based on a “one-size fits all” formula. This formula has been known to set reserves on insurers and their products either unnecessarily high or too low to adequately cover the risks incurred. It is important to remember that each product created by an insurance company carries its own level of risk. The level of risk created by the product is determined on how the insurers designed their plan to function.
SB 1654 would remove this current formula and replace it with a new formula known as principle-based reserving (PBR). PBR determines the reserves by more closely reflecting the risks associated with certain products. Some of the products are extraordinarily complex and PBR would allow the reserves to be adjusted proportional to that products risk. Thus this would remove frequent issues of the current formula either setting a reserve too high or too low. PBR would set the reserve appropriate to the given risk.
The reserve minimums are reflected in the SMVL, which creates the valuation manual for each state. The valuation manual establishes the minimum reserve and other requirements in states that have adopted SMVL.
It can be argued that this bill establishes reserve minimums for insurers and it does. However, this bill would amend existing law by implementing a more appropriate way of determining an insurer’s required minimum reserve. Certainly, this bill may hurt insurers who have a significantly low minimum reserve, but it would help those insurers that are forced to maintain an unnecessarily high reserve.
While this legislation may serve a purpose to add flexibility to the method of valuation, this neither further regulates nor lessens the regulatory burden on the insurance industry therefore we are neutral on this legislation.