Formation And Operation Of Insurers

Maintaining a sound insurance community begins with the attempt to assure the financial strength of new insurers. As do other states, Texas requires that insurers involved in the sale of life and health insurance have a minimum amount of capital and surplus. For example, a new stock insurer must have at least $100,000 of capital and $100,000 of surplus. The investment of these assets is controlled by requiring that they be invested in very secure assets such as United States bonds, Texas state or county bonds, or government-insured first mortgage loans.4 In the case of a mutual insurer the surplus requirement is $200,000. Thus the total dollar amount required for formation is the same for both stock and mutual insurers. Aside from these requirements, the board also examines the background of the incorporators to determine whether or not they have the qualifications necessary to operate the company successfully and to be sure that they are acting in good faith.

The efforts to assure financial solvency and prudent management extend to regulations involving the accounting techniques utilized and the types and quantity of investments. For example, the Texas insurance code specifies that an insurer may not own more than 20 percent of the outstanding stock of a commercial bank and that the bank must be insured by the Federal Deposit Insurance Corporation.

As noted earlier, life and health insurance rates are not specifically controlled. However, requirements that insurers have certain amounts of reserves for policies in force have a direct bearing on rate levels. Another factor that tends to control rates is that insurance companies may not discriminate unfairly between insureds. In other words, the premium charged must reflect the risk to the insurer, and the same premium must be charged all insureds who represent similar risks. For example, an insurer may not charge two males, both in good health and the same age, a different premium for the same coverage.

In addition to the above requirements, many states require each insurer to file an annual statement. The statement provides the commissioner with detailed information on almost every aspect of the insurer’s operations during the past year.