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ORDER TO REPEAL; RENUMBER AND AMEND; CONSOLIDATE, RENUMBER, AND AMEND; AMEND; REPEAL AND RECREATE; AND CREATE A RULE
Office of the Commissioner of Insurance
Rule No. Agency 145 – Ins 2.02, 2.04 and 6.20, Wis. Adm. Code, proposes an order to repeal Ins 2.02, 2.04, 6.20 (3) (a), (b), (d), and (j), (6) (d) 3. (intro.), 5. and 8., (6) (e) 3., (8) (j), (k), (m) and (o); to renumber and amend Ins 6.20 (6) (d) 3. a. to c.; to consolidate, renumber, and amend Ins 6.20 (6) (e) (intro.), 1. and 2.; to amend Ins 6.20 (4), (5) (title), (intro.), (a) (title), (intro.), and 2. to 5., (6) (b) (intro.), and 1. to 6., (6) (c) (title), (intro.), 1. and 2., (6) (d) 9., (6) (f) (intro.), and 1.; to repeal and recreate Ins 6.20 (5) (a) 1., (6) (g); to create Ins 6.20 (3) (am), (ee), (em), (es), (hg), (hr), (6) (a) (title), (6) (b) 5g. and 5r., (6) (d) (title), 3p., 3t., and 3x., (6) (f) 3. to 5., (6) (h) 4. a. to c., (6) (i), (8g), and (8r), Wis. Adm. Code, relating to the repeal of restrictions related to the allocation of dividends to participating life insurance policies issued by a stock company, rating practices for exceeding filed rates for substandard risks, and revisions to the definition of investment terms, limitations on the investments of a town mutual insurer and the permissible scope of foreign investments and affecting small business.
The statement of scope for this rule SS: 031-19, was approved by the Governor on March 13, 2019, published in Register No. 759A3 on March 18, 2019, and approved by the Commissioner on May 13, 2019. The proposed rule was approved by the Governor on March 12, 2020 to submit to the legislature and was submitted to the legislature on March 25, 2020. The rule passed through committees and JCRAR on June 17, 2020 with no action taken.
 
ANALYSIS PREPARED BY THE OFFICE OF THE COMMISSIONER OF INSURANCE (OCI)
Statutes interpreted:
Sections 610.23, 620.01, 620.03, 620.21, 620.22, and 620.23, Stats.
Statutory authority:
Explanation of the commissioner’s authority to promulgate the proposed rule under these statutes:
The statutory authority for these rules is generally found in s. 601.41 (3), Stats., which provide for the commissioner’s rule making authority in general, and s. 601.42, Stats. that authorizes the commissioner to require certain reports and other disclosure of information.
Wisconsin’s investment regulations are contained in ch. 620, Stats. The commissioner has specific authority to regulate investments by rule under ss. 620.01, 620.03, 620.21, 620.22, and 620.23, Stats. Specifically, s. 620.01 (2), Stats., provides in the scope statement, that “the chapter and the rules promulgated to interpret and implement it, apply to all insurers authorized to do business in this state.” Sections 620.03 (1) and (3), Stats., identifies that the commissioner may by rule prescribe procedural requirements and substantive restrictions for certain classes of insurers pertaining to special investments, and the commissioner may extend substantive restrictions by rule beyond 5 years if the commissioner finds that financial condition or management requires additional investment regulations to protect the interests of insureds, creditors, or the public in this state, respectively.
Section 620.21, Stats., permits the commissioner to identify investments that may be counted as admitted assets towards satisfaction of the compulsory surplus requirement or security surplus. Finally, s. 620.22, Stats., generally specifies permitted classes of investments as delineated in subs. (1) to (7), and any other investments that the commissioner authorizes by rule pursuant to s. 620.22 (8), Stats.
  Related statutes or rules:
Sections 620.01, 620.03, 620.21, 620.22, and 620.23, Stats.
  The plain language analysis and summary of the proposed rule:
The proposed changes to ss. Ins 2.02, 2.04 and 6.20, Wis. Adm. Code, relate to the repeal of restrictions related to the allocation of dividends to participating life insurance policies issued by a stock company, rating practices for exceeding filed rates for substandard risks, and revisions to the definition of investment terms, limitations on the investments of a town mutual insurer, and the permissible scope of foreign investments. Section Ins. 2.02, Wis. Adm. Code, is proposed for repeal as the statute cited in the code provision references a statute that was repealed by Chapter 375, laws of 1975 and not replaced. Section Ins. 2.04, Wis. Adm. Code, permitted life insurance companies to exceed the maximum premium rate for coverage of a person that is classified as a substandard risk or is engaged in a hazardous occupation.
The proposed changes to s. Ins 6.20, Wis. Adm. Code, were requested by the insurance industry and are intended to modernize rules and requirements regarding the permissible investments that may be counted toward compulsory and security surplus. The proposed changes would include adding a general definition for derivative instruments and aligning Wisconsin’s requirements with the National Association of Insurance Commissioners Derivative Instrument Model Regulation. Section Ins 6.20, Wis. Adm. Code, currently defines certain types of derivative instruments but does not include a general definition of derivatives. The office added a general definition that would capture all current derivative products and that also encompass derivative products developed in the future. A general definition would allow s. Ins 6.20, Wis. Adm. Code, to remain current with modern investment practices while eliminating the need to revise the code every few years keep pace with financial product innovations. In addition, better aligning office’s requirements with the National Association of Insurance Commissioners’ model act would promote uniform regulation across the states.
The proposed changes would also revise the amount or percentage of admitted assets which an insurer may invest in foreign assets for purposes of compulsory and security surplus. The current restrictions have not changed since 1996 and the proposed changes would allow a greater amount of investment in foreign investments. This change will better align the investment restrictions with current investment practices and modern investment risk considerations. In addition, the proposed rule adds a definition of foreign issuers.
The proposed changes to s. Ins 6.20 (6), Wis. Adm. Code, that apply to town mutual insurance companies, are intended to provide regulatory relief. This relief is in the form of a reduction in regulatory costs and improvements to the basis for investment regulation. Consolidation among commercial banks has reduced access to investment custody services, particularly for small insurers that are seen as not offering worthwhile scale as a customer. Annual minimum costs for such services range from $6,000 to $10,000. In addition, the size of a round lot in bonds, an important factor for the best price execution, is $100,000, which is a scale of individual trading too large for most town mutual insurance companies. Town mutual insurance companies will have the option to hold a diversified portfolio of mutual funds instead of individual bonds and stocks. Moreover, once a town mutual insurer has achieved a specified threshold of low risk assets, there would be no further limits on the town mutual insurer’s equity holdings. In addition, the use of Morningstar ratings on mutual funds, which were intended to stand in for qualitative measures, are removed in favor of maximum expense ratios that have been set at reasonable levels while still allowing for active investment strategies.
Summary of and preliminary comparison with any existing or proposed federal regulation that is intended to address the activities to be regulated by the proposed rule:
There are no federal regulations which address these activities.
Summary of any public comments and feedback on the statement of scope of the proposed rule that the agency received at any preliminary public hearing and comment period held under s. 227.136, Stat., and a description of how and to what extent the agency took those comments and that feedback into account in drafting the proposed rule.
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 mutual insurers may be found at the citations listed below.
Illinois: 215 ILCS 5/126.30 (DI), 215 ILCS 5/120 (TM)
Iowa: IA Code § 515.35 (DI), IA Code § 518.14 (TM)
Michigan: Mich. Comp. Laws §§ 500.901-500.947 (DI), N/A for 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 February 17, 2020.
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
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