PROPOSED RULEMAKING
[31 PA. CODE CH. 11]
Miscellaneous Provisions
[30 Pa.B. 5020] The Insurance Department (Department) proposes to amend Chapter 11 (relating to miscellaneous provisions) to read as set forth in Annex A. The rulemaking is proposed under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412); the act of May 9, 1949 (P. L. 1025, No. 298) (act) (40 P. S. §§ 1261--1264); and section 320 of The Insurance Company Law of 1921 (40 P. S. § 443). Except as otherwise provided, Chapter 11 applies to property and casualty insurance companies, associations, exchanges; and employes mutual liability associations and organizations, including the State Workmen's Insurance Fund and excluding title insurance. The regulations clarify charges made by the Department in filing or certifying records; and prescribe accounting rules for reporting electronic data processing equipment, allocating commission on sliding scale or guaranteed profit reinsurance contracts, and classifying and allocating salvage and subrogation recovery expenses.
Purpose
The purpose of this rulemaking is to update Chapter 11 by eliminating obsolete and unnecessary provisions and by clarifying existing regulations. Section 11.1 (relating to applicability) states that, except as otherwise provided, the chapter applies to stock or mutual insurance companies, associations, exchanges, employes mutual liability associations and organizations writing property or casualty insurance coverages, including The State Workmen's Insurance Fund and excluding title insurance. Sections 11.2 and 11.4 (relating to charges made in filing or certifying records; and reporting of computer or data processing equipment) were last amended December 1, 1990, and apply to all types of insurers subject to fees and charges by the Department or required to file financial statements with the Department. See 48 Pa.B. 5920 (December 1, 1990). Sections 11.5--11.7 (relating to ''sliding scale'' or ''guaranteed profit contracts''; example of ''sliding scale'' and ''guaranteed profit'' contract; and salvage and subrogation recovery expenses) prescribe uniform accounting rules applicable to property and casualty insurance business. This rulemaking will update and clarify the scope of the accounting rules in the regulations.
Explanation of Regulatory Requirements
Sections 1 and 2 of the act (40 P. S. §§ 1261 and 1262) require property and casualty insurers, the State Workmen's Insurance Fund and title insurers to maintain uniform classifications of accounts and records as may be prescribed by the Insurance Commissioner (Commissioner) and, in addition, to file reports in a form determined by the Commissioner. Further, section 320(a) of The Insurance Company Law of 1921, as amended by the act of December 18, 1992 (P. L. 792, No. 176) states, in pertinent part:
(a) (1) Every stock and mutual insurance company, association, and exchange, doing business in this Commonwealth, shall annually, on or before the first day of March, file in the office of the Insurance Commissioner and with the National Association of Insurance Commissioners a statement which shall exhibit its financial condition on the thirty-first day of December of the previous year . . . The Insurance Commissioner shall require each insurance company, association and exchange to report its financial condition on the statement convention blanks, in such form as adopted by the National Association of Insurance Commissioners . . . and may make such changes, from time to time, in the form of the same as shall seem best adapted to elicit from them a true exhibit of their financial condition.(2) Unless otherwise provided by law, regulation or order of the Insurance Commissioner, each insurance company, association and exchange shall adhere to the annual or quarterly statement instructions and the accounting practices and procedures manuals prescribed by the National Association of Insurance Commissioners. . .Under the authority of the act and section 320 of The Insurance Company Law of 1921, the Commissioner has determined that the annual statement instructions and the accounting practices and procedures manual (manual), prescribed by the National Association of Insurance Commissioners (NAIC)1 , sufficiently address the reporting of electronic data processing equipment and software and commission on reinsurance contracts for all insurers subject to the act and section 320 of The Insurance Company Law of 1921. Specifically, Statements of Statutory Accounting Principles Nos. 16, 61 and 62 in the NAIC manual establish statutory accounting principles for electronic data processing equipment and software and commission on reinsurance contracts. Sections 11.4--11.6 in no manner enhance the NAIC instructions and manual. Therefore, §§ 11.4--11.6 are outdated and are no longer needed.
The Commissioner has further determined that the accounting rules in § 11.7 continue to be needed to supplement the NAIC instructions and manual. Section 11.7 provides specific guidance on the types of expenses that shall be treated as salvage expense and on proper billing procedures when insurers use outside agencies to perform salvage activities. The NAIC instructions and manual do not include the accounting rules in § 11.7, and the Commissioner believes these rules are needed to provide adequate instructions for reporting salvage and subrogation recovery expenses. Therefore, § 11.7 is being retained in the regulations.
Finally, because §§ 11.4--11.6 are being deleted and the accounting rules in § 11.7 apply only to property and casualty insurance, § 11.1 is being deleted and provisions relating to the authority and scope of § 11.7 are being included as new subsections (a) and (b) in § 11.7. This proposed amendment will clarify the scope of the subsections in Chapter 11.
External Comments
The Department requested comments from The Insurance Federation of Pennsylvania, Inc., and the Pennsylvania Association of Mutual Insurance Companies in the development of this rulemaking. Insurers subject to these regulations were advised by Insurance Department Notice No. 1998-04 that they will be required to adhere to the manual in preparing financial statements to be filed with the Department. The Department received no objections to the amendments in this rulemaking.
Fiscal Impact
The proposed rulemaking has no fiscal impact.
Paperwork
The proposed rulemaking would impose no additional paperwork requirements on the Department or affected insurers.
Persons Regulated
The proposed rulemaking affects stock and mutual insurance companies, associations, and exchanges required to file financial statements with the Commissioner.
Contact Person
Questions or comments regarding the proposed rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, Pennsylvania Insurance Department, 1326 Strawberry Square, Harrisburg, Pennsylvania 17120, within 30 days following the publication of this notice in the Pennsylvania Bulletin. Questions and comments may also be e-mailed to psalvato@ins.state.pa.us or faxed to (717) 772-1969.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on September 21, 2000, the Department submitted a copy of this proposed rulemaking to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate Banking and Insurance Committee and the House Committee on Insurance. In addition to submitting this proposed rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the agency in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of this material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, if IRRC has objections to any portion of the proposed amendments, it will notify the Department within 10 days of the close of the Committees' review period. The notification shall specify the regulatory review criteria that have not been met by that portion. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the regulations by the Department, the General Assembly and the Governor of objections raised.
M. DIANE KOKEN,
Insurance CommissionerFiscal Note: 11-202. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 31. INSURANCE
PART I. GENERAL PROVISIONS
Subpart A. UNIFORM CLASSIFICATION OF EXPENSES
CHAPTER 11. MISCELLANEOUS PROVISIONS § 11.1. [Applicability] (Reserved).
[(a) Except as otherwise provided, this chapter shall apply to all stock or mutual insurance companies, associations, exchanges, employes mutual liability associations and organizations, including The State Workmen's Insurance Fund, which are subject to the Casualty and Surety Rate Regulatory Act (40 P. S. §§ 1181--1199) or The Fire, Marine and Inland Marine Rate Regulatory Act (40 P. S. §§ 1221--1238) or section 654, article VI(d) (Workmen's Compensation Insurance) of The Insurance Company Law of 1921 (40 P. S. § 814).
(b) This chapter does not apply to insurers authorized to write title insurance.]
§ 11.4. [Reporting of computer or data processing equipment] (Reserved).
[Electronic computer or data processing machines or systems acquired at a cost of $10,000 or more for use in connection with the business of the insurers may be reported as an admitted asset if its cost will be depreciated over a period not exceeding 10 years.]
§ 11.5. [''Sliding scale'' or ''guaranteed profit'' contracts] (Reserved).
[If a commission on reinsurance is on a ''sliding scale'' or ''guaranteed profit'' basis the reinsurance commission shall be allocated to ''Commission and Brokerage--Reinsurance Assumed'' or ''Commission and Brokerage--Reinsurance Ceded.'']
§ 11.6. [Example of ''sliding scale'' and ''guaranteed profit'' contract] (Reserved).
[(a) ''Sliding scale'' contract.
(1) Most ''sliding scale'' contracts provide for a flat commission ranging from about 30% to 37.5% paid on a written basis. Additional profit commissions are paid at a later date on an earned basis as specified by a formula embodied in the contract. These profit commissions are paid as the result of savings in the loss ratio. A common provision is that a 0.5% profit commission shall be paid for each 1.0% saving in the loss ratio. Sometimes a portion of the scale may provide for a full 1.0% profit commission for each 1.0% saving in the loss ratio.
(2) For example, a contract may provide for a flat commission of 35%, with a one-half for one profit commission to be paid the ceding company for any saving in the loss ratio under 55%, until the profit commission reaches 10%, or a total commission of 45%.
(3) Some contracts provide for a possible ''return commission.'' In the example in paragraph (2), if the loss ratio exceeds the breaking point of 55%, the ceding company may have to pay a return commission to the reinsurer on a one-half to one basis until return commissions, such as 5.0%, have been returned, thus reducing the ultimate net commission from 35% to 30%. If the loss ratio runs under 35% or exceeds 65%, such saving or loss shall ordinarily be carried forward to the computation for the following year.
(b) ''Guaranteed profit'' contract.
(1) The most common form of surplus aid is the ''guaranteed profit'' contract. The principal characteristic of such a contract is that it transfers unearned premium reserve from the ceding company to the reinsurer and results in an immediate increase in the surplus of the ceding company by the amount of the tentative commissions received, but because all such tentative commissions are subject to return to the reinsurer does not actually relieve the ceding company of risk. The ceding company still remains exposed to the same risk as before. It is in the position of paying 2.0% to 5.0% of the ceded premiums to induce a reinsurer to sign a contract which has no ultimate effect, other than to reduce its surplus by 2.0% to 5.0% of these premiums.
(2) ''Guaranteed profit'' contracts are often written in a form similar to a quota share or portfolio reinsurance contract, or a combination of both. The tentative commission is ordinarily 45% or 50%. The fee of the reinsurer is generally 2.0%, 3.0% or 5.0% of the amount ceded. Most quota-share type contracts are subject to monthly reporting and settlements. The contract usually provides for each 1.0% decrease in the loss ratio, and return commissions on the basis of 1.0% for each 1.0% increase in the loss ratio. Illustration is provided by the following example:
Commission 45% Fee for reinsurer 3% Loss ratio ''breaking point'' 52%
Total original premium 100% (3) In a situation similar to the example in paragraph (2), the ceding company pays to the reinsurer the gross reinsurance premiums less 45% commissions, or a net of 55%. As losses are determined they are paid by the reinsurer until the ceding company has received back from the reinsurer losses recovered in an aggregate amount equal to 52% of the original premiums ceded (55% less 3.0%). Any additional losses are immediately charged back to the ceding company as return commissions on a one for one basis. On the other hand, any saving under 52% is returned to the ceding company in the form of additional commissions. The ultimate effect on the ceding company is the loss of 3.0% of its ceded premiums. The ceding company actually carries its own full risk throughout the entire period with respect to its gross business.]
§ 11.7. Salvage and subrogation recovery expenses.
(a) This section prescribes accounting practices for the classification and allocation of salvage and subrogation recovery expenses in financial statements filed with the Insurance Commissioner under sections 1 and 2 of the act of May 9, 1949 (P. L. 1025, No. 298)(40 P. S. §§ 1261--1264) and section 320 of The Insurance Company Law of 1921 (40 P. S. § 443).
(b) This section applies to all stock or mutual insurance companies, associations, exchanges, employes mutual liability associations and organizations, including The State Workmen's Insurance Fund, which are subject to the Casualty and Surety Rate Regulatory Act (40 P. S. §§ 1181--1199); The Fire, Marine and Inland Marine Rate Regulatory Act (40 P. S. §§ 1221--1238); or section 654 (Workmen's Compensation Insurance) of The Insurance Company Law of 1921 (40 P. S. § 814). This section does not apply to insurers authorized to write title insurance.
[(a)] (c) * * *
[(b)] (d) * * *
[(c)] (e) * * *
[(d)] (f) * * *
[(e)] (g) * * *
[Pa.B. Doc. No. 00-1665. Filed for public inspection September 29, 2000, 9:00 a.m.] _______
1 In 1998, the NAIC revised its model regulation to make it consistent with the NAIC's codified manual that will be effective January 1, 2001. Insurers subject to these regulations have been advised by Insurance Department Notices Nos. 1998-04 and 2000-02 that they will be required to adhere to the manual in preparing financial statements to be filed with the Department.
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