The office held a public hearing on April 17, 2019. Notice was published in the Wisconsin Administrative Register and on the office‘s website. Three members of the public appeared at the hearing in favor of the rule but did not testify. The office received one comment from counsel to the Wisconsin Council of Life Insurers in favor of promulgating the rule. The comment provided only general support for the promulgation of this rule without specific comments related to drafting.
In the course of conducting its normal business, the office received informal comments from the Wisconsin Association of Mutual Insurance Companies, Financial Fiduciaries LLC, and South Central Mutual Insurance Company. The representatives’ comments included the following: town mutual insurers should not be precluded from using traditional bank investment custody accounts to hold mutual funds; expense ratio limits on mutual funds should be higher; bonds should be valued at face value rather than market value; and, custodial services should be expanded to brokerage firms. There was positive response to the elimination of the Morningstar ratings as an investment criterion, the increase in the asset limit for a single exchange-traded fund, and the elimination of aggregate asset limits on mutual funds. The office modified the rule draft to permit town mutual insurance companies the option to use traditional investment custody accounts for mutual funds.
Comparison of similar rules in adjacent states as found by the commissioner:
Adjacent states have substantially similar derivative investment (DI) provisions however, regulation of town mutual (TM) insurer or the equivalent vary by state as these insurers only write business in one state. The citations for derivative investment and financial investment requirements for town mutuals may be found at the citations listed below.
Illinois: 215 ILCS 5/126.30 (DI), 215 ILCS 5/120 (TM)
Minnesota: Minnesota Statute § 61A.29 (DI), MN Statutes 67A.231 (TM)
A summary of the factual data and analytical methodologies that the commissioner used in support of the proposed rule and how any related findings support the regulatory approach chosen for the proposed rule:
OCI based the definition of derivative instruments on the model definition developed by the National Association of Insurance Commissioners. The foreign investment limits were set after consultation with the insurance industry and a comprehensive review of the current foreign investment holdings of Wisconsin insurers and their capacity for further foreign investment.
Analysis and supporting documentation that the commissioner used in support of OCI’s determination of the rule’s effect on small businesses under s. 227.114: This rule will have a beneficial effect on small businesses, specifically, approximately 54 town mutual insurance companies. For such small insurers, investing in mutual funds can offer lower investment overhead costs and better price execution than they can achieve on their own.
For large companies, the rule will not change the regulation of derivative instruments; it simply updates the definition of the investment types. The rule change also increases the amount of foreign investments that may be counted towards the satisfaction of compulsory and security surplus requirements but only applies to insurers with $500 million or more in admitted assets.
Effect on small business.
While town mutual insurance companies are not precluded from using traditional investment custody accounts, the smaller town mutual insurers could save between $6,000 to $10,000 per year by investing in a diversified pool of mutual funds instead of managing individual bond and stock positions. Prudent diversification of individual bond positions typically does not allow for buying $100,000 round lots for bonds, thereby precluding town mutual insurers from getting optimal prices on their trade executions.
Agency contact person:
A copy of the full text of the proposed rule changes, analysis, and fiscal estimate may be obtained from the Web site at: http://oci.wi.gov/ocirules.htm or by contacting:
Phone: (608) 267-9586
Address: 125 South Webster St – 2nd Floor, Madison WI 53703-3474
Mail: PO Box 7873, Madison, WI 53707-7873
Place where comments are to be submitted and deadline for submission:
The deadline for submitting comments is 4:00 p.m. on the .
Mailing address:
Julie E. Walsh
Legal Unit - OCI Rule Comment for Rule Ins 6.20
Office of the Commissioner of Insurance
PO Box 7873
Madison WI 53707-7873
Street address:
Julie E. Walsh
Legal Unit - OCI Rule Comment for Rule Ins 6.20
Office of the Commissioner of Insurance
125 South Webster St – 2nd Floor
Madison WI 53703-3474
Email address:
Julie E. Walsh
The proposed rule changes are:
SECTION 1. Ins 2.02 is repealed.
SECTION 2. Ins 2.04 is repealed.
SECTION 3. Ins 6.20 (3) (a) and (b) are repealed.
SECTION 4. Ins 6.20 (3) (am) is created to read:
Ins 6.20 (3) (am) “Derivative instrument” has the meaning contained in the accounting practices and procedures manual of the national association of insurance commissioners. Derivative instruments shall include derivatives embedded within an investment.
SECTION 5. Ins 6.20 (3) (d) is repealed.
SECTION 6. Ins 6.20 (3) (ee), (em) and (es) are created to read:
Ins 6.20 (3) (ee) “Foreign country” means any country other than the United States and Canada.
(em) “Foreign government” means any foreign governmental unit or instrumentality therein, not in the United States or Canada.
(es) “Foreign issuer” means any issuer that is not domiciled in the United States or Canada and is not a foreign government. An issuer shall not be deemed a foreign issuer if the issuer is domiciled and has operations in the United States or Canada and the primary guarantor is domiciled in the United States or Canada. An issuer shall be deemed a foreign issuer when the issuer is a shell business entity or special purpose vehicle, unless the investment is assumed, accepted, guaranteed, insured or otherwise backed by an entity domiciled in the United States or Canada that is not a shell business entity or special purpose vehicle.
SECTION 7. Ins 6.20 (3) (hg) and (hr) are created to read:
Ins 6.20 (3) (hg) “Nationally Recognized Statistical Rating Organization” or “NRSRO” means a credit rating agency registered with the U.S. securities and exchange commission, pursuant to the Credit Rating Agency Reform Act of 2006, as amended.
(hr) “No-load mutual fund” means a mutual fund whose shares are sold without any sales charges, or commissions, including sales compensation that is on an immediate or deferred basis or in some combination of immediate and deferred compensation. No-load mutual funds may impose fees for redemption, exchange, distribution, marketing, or other purposes unrelated to sales charges or commissions.
SECTION 8. Ins 6.20 (3) (j) is repealed.
SECTION 9. Ins 6.20 (4) is amended to read:
Ins 6.20 (4) GENERAL LIMITATIONS ON RESTRICTED INSURERS. No insurer restricted under s. 620.03, Stats., may invest thereafter in any of the following classes of assets except by when the commissioner grants permission of the commissioner: (a) Any securities of an issuer who has defaulted on any payment on any debt security within the previous 5 years;.
(c) Any financial futures contract or financial options contract derivative instrument.
SECTION 10. Ins 6.20 (5) (intro.) and (a) are amended to read:
Ins 6.20 (5) (intro.) Special limitations on restricted insurers other than town mutuals. An insurer which that is restricted under s. 620.03, Stats., and which is not a town mutual, shall not invest in any of the following investments: (a) Evidences Bonds or evidences of indebtedness. In Insurers shall not invest in bonds or evidences of indebtedness under described in s. 620.22 (1), Stats., unless such the bonds or evidences of indebtedness are lawfully authorized and provided that the bonds or evidences of indebtedness have at least one of the following characteristics: SECTION 11. Ins 6.20 (5) (a) 1. is repealed and replaced to read:
Ins 6.20 (5) (a) 1. At the time of purchase have a 1 or 2 designation by the national association of insurance commissioners or equivalent ratings by an NRSRO.
SECTION 12. Ins 6.20 (5) (a) 2. to 5. are amended to read:
Ins 6.20 (5) (a) 2. They are The bonds or evidences of indebtedness are of a municipally owned public utility of this state created pursuant to section 3 of article XI of the constitution, and the net book value of the property pledged as security for the bonds has been established or approved by the public service commission and the total issue of the bonds does not exceed 50% of the net book value of such property; or. 3. They Principal and interest are payable from revenues of a public utility or railroad owned by or held for the benefit of any governmental unit in the United States or Canada, if they are adequately secured by mortgage or lien on property or by specific pledge or revenues, and lawful authorizing resolutions or ordinance of the governing body of the unit require that during the life of the bond or evidence of indebtedness the rates, fees, tolls or charges together with any other revenues pledged shall at all times produce revenues sufficient to pay all expenses of operation and maintenance, interest as promised and the principal sum when due; or.
4. They are The bonds or evidences of indebtedness are of public utilities in the United States or Canada and are either adequately secured by mortgage, pledge or other collateral, or have had net earnings available for fixed charges that for the previous 3 fiscal years have averaged per year not less than 1 1/2 times the average annual fixed charges; or.
5. They are The bonds or evidences of indebtedness are of a United States or Canadian private corporation, and they are either adequately secured by mortgage, pledge or other collateral, or are issued by a corporation which has had net earnings available for fixed charges that have averaged for the previous 5 years and equaled for each of the previous 2 years an annual amount which exceeded average annual fixed charges by at least 50%, or 25% in the case of corporations engaged primarily in wholesale or retail merchandising, installment, commercial and consumer financing, factoring or small loan business.
SECTION 13. Ins 6.20 (6) (b) (intro.) and 1. to 5. are amended to read:
Ins 6.20 (6) (b) (intro.) Permitted investments. Except as permitted by pars. (c), (d) and (e), a town mutual insurer may only invest in one or more of the following:
1. Treasury bonds, treasury notes, treasury bills or any other direct obligations of the United States government or agencies or instrumentalities of the United States government with a final maturity 15 years or less, except that no part of the amount determined under this paragraph shall be invested in zero coupon bonds or collateralized mortgage obligations;.
2. Demand deposit, interest bearing accounts and certificates of deposit in financial institutions, including banks, savings and loan associations and credit unions, except that the amount of an insurer’s investment with each such financial institution shall be limited to the total amount eligible for insurance under the financial institution’s depositor insurance program;.
3. Bonds of any United States or Canadian corporation that at the time of purchase have a “BBB” or better rating from Standard and Poor’s Corporation or Moody’s Investment Service or bonds rated “1” or 2 rating designation by the National Association of Insurance Commissioners Securities Valuation Office national association of insurance commissioners, or equivalent ratings by an NRSRO, except that no part of the amount determined under this paragraph shall be invested in zero coupon bonds, collateralized mortgage obligations, payment in kind bonds or bonds with a final maturity of more than 15 years;.
4. Bonds of any United States municipality that at the time of purchase have a “BBB” or better rating from Standard and Poors Corporation or Moody’s Investment Service or bonds rated “1” or 2 designation by the National Association of Insurance Commissioners Securities Valuation Office national association of insurance commissioners, or equivalent ratings by an NRSRO, with a final maturity of 15 years or less, except that no amount shall be invested in zero coupon bonds;.
5. No more than an aggregate of 10 5% of assets in cumulative dividend preferred stock of any United States or Canadian corporation that at the time of purchase has a “BBB” or better rating from Standard and Poor’s Corporation or Moody’s Investment Service or bonds rated “1” or 2 designation by the National Association of Insurance Commissioners Securities Valuation Office; national association of insurance commissioners, or equivalent ratings by an NRSRO.
SECTION 14. Ins 6.20 (6) (b) 5g. and 5r. are created to read:
Ins 6.20 (6) (b) 5g. Shares in no-load mutual funds provided that all of the following requirements are met:
a. Each no-load mutual fund shall have an expense ratio, including any fees for marketing or distribution, of 0.75% or less.
b. Each no-load mutual fund shall have as a stated investment objective, as disclosed in its prospectus, an intent to invest 80% or more of its assets under management in bonds of any direct obligations of the United States government or agencies or instrumentalities of the United States government, any United States or Canadian corporation, or any United States municipality.
c. At the time of purchase, the shares of each no-load mutual fund shall have a 1 or 2 designation by the national association of insurance commissioners, or an equivalent rating by an NRSRO.
d. Each no-load mutual fund shall have an intent, as stated in its prospectus, to maintain a weighted average maturity of 8 years or less.
e. Investments in no-load mutual fund must be carried at the fair market value on the annual statement filed with the commissioner.
f. A town mutual insurer shall file a prospectus of each fund purchased in accordance with this paragraph with this office no later than February 15 of the year immediately following the year the purchase was made.
