STATEMENT OF SCOPE
OF A PROPOSED RULE
Agency #145 Office of the Commissioner of Insurance
Section
Ins
6.20
, Wis. Adm. Code, relating to
the
d
efinition
s of investment terms and
permissible scope of foreign investments
by insurers
Rule Type:
_________
Emergency
____X
____
Permanent
_________
Both Emergency and Permanent
1.
Detailed description of the objective of the rule:
The proposed change
s
to s.
Ins 6.20
, Wis. Adm. Code
were requested by the insurance industry and are intended to modernize
the
O
ffice of the
C
ommissioner of
I
nsurance
’s
(“OCI”)
rules and requirements regarding
the
permissible investments
that may be counted toward
compulsory and security surplus. The
proposed
change
s would
include adding a general definition for derivative instruments
and aligning Wisconsin’s requirements with the National Association of Insurance Commissioner’s (“NAIC”)
D
erivative
Instrument
M
odel
Regulation
. Section
Ins 6.20
, Wis. Adm. Code
currently defines certain types of derivative instruments but does not include a general definition o
f
derivatives.
OCI would like to add a general definition that would capture all current derivative products and
that
would
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 OCI’s requirements with the NAIC model act would promote uniform regulation across the states.
The proposed change
s
would also revise
the amount
or percentage of assets which an insurer may invest in foreign assets
for purpose
s
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
.
2.
Description of existing policies relevant to the rule and of new policies proposed to be included in the rule and an analysis of policy alternatives; the history, background, and justification for the proposed rule:
In the existing rule
,
foreign inv
estments are restricted
to 1% of assets in direct obligations of foreign governments and 2% of assets in other t
ypes
of foreign investments (e.g. foreign securities).
Section
620.22
, Wis. Stat. also contains a “basket clause” which allows 5% of insurer
’
s first $500 million in
assets
and 10% of an insurer’s assets exceeding $500 million to be invested in any investment not specifically prohibited
by law
. An insurer could
also
invest all or some of the basket clause limits in foreign investments.
The existing rule has no general definition of derivatives but does contain definitions of specific types of derivative
instruments (e.g
.
“financial futures contracts” and “financial options contracts”)
.
Current
practice by
OCI
is to
allow insurers to invest in derivative instruments that arguably do not fall within one of the specifically defined categories if
an insurer agrees to comply with the rules applicable to the
current
categories of derivative instruments
in the code
.
The new policy would be to increase the amount of permissible foreign investments
that may be counted toward
compulsory and security surplus
,
broaden the definition of derivatives to include modern financial instruments
and financial instruments created in the future
that may not meet the current definition
s
, and to
better
align Wisconsin’s derivative regulation with the NAIC
’s Derivative Instrument
M
odel
Regulation
. The background of the change is to modernize our investment rule to better reflect current investment practices.
The policy alternative is
to not increase the limits on foreign investments and to leave the current, outdated scope of allowable derivative instruments
in place.
3.
Detailed stat
utory authority for the rule
(including the statutory citation and language):
The agency shall reference each statute that authorizes the promulgation of the proposed rule and each statute or rule that will affect the proposed rule or be affected by it. The agency shall also explain in detail the agency’s authority to promulgate the proposed rule under those statutes. An agency shall rely on an explicit grant of authority from the Legislature to promulgate a rule, if one exists. An agency shall not rely upon general statements of legislative purpose or legislative findings or agency general powers and duties clauses to confer authority to promulgate rules.
The statutory authority for
these rules are
generally found
in ss.
227.11
,
601.41(3)
, Wis. Stats., which provide for the commissioner’s rule making authority in general, and sec.
601.42
,
Wis. Stat.
which authorizes the commissioner to require certain reports and other disclosure of information.
Wisconsin’s investment
regulations
are found in
Ch.
620
, Wis. Stats.
The commissioner has specific authority to regulate investments by rule in
ss.
620.01
,
620.03
,
620.21
,
620.22
,
and
620.23
, Wis. Stats.
4.
Estimates of the amount of time that state employees will spend to develop the rule and of other resources necessary to develop the rule:
200 hours and no other resources are necessary to develop the rule.
5.
List with description of all entities that may be impacted by the rule:
The proposed rules will
apply to all
domestic
insurers
except for some insurers that are
restricted in their investments under s.
620.03
, Wis. Stat
.
Non-domestic insurers authorized to do business in this state would be subject to the investment rules of their state of domicile.
6.
Summary and preliminary comparison of any existing or proposed federal regulation that is intended to address the activities to be regulated by the rule:
The office is unaware of any proposed or existing federal laws or regulations that are intended to address the activities to be regulated by the proposed rule changes.
7.
Anticipated economic impact of implementing the rule (note if the rule is likely to have a significant economic impact on small businesses):
The rule is unlikely
to have a
significant economic impact on small businesses
because it is not anticipated that this rule change will have any effect on insurers that would meet the definition of small business.
In addition, the proposed rule change is expected to have no economic impact
with regard to regulatory costs
as the proposed rule change only changes the type of investments that may be counted toward compulsory and security surplus requirements. It does not affect the required amount of that surplus
or add additional regulatory requirements
.
The proposed changes regarding derivative investments should have little or no
economic impact and
cause
little or no increase in regulatory costs
.
The rule will allow insurers to invest a larger percentage of their investments internationally
which
c
ould possibly
lessen the amount of investments in the United States and Wisconsin. This could have a possible
indirect
economic impact on the state but it is
difficult to predict whether a significant shift toward foreign investments
would occur or to what degree.
In any event, a significant or even moderate economic impact is not anticipated.
Also, a
llowing a larger percentage of assets
to be in held in
foreign investments
, which
arguably carry more risk
than other permitted investments,
could increase the likelihood of insurer insolvency.
____
yes
__
X
_
no
local/statewide economic impact (choose one)
X
minimal or none (< or = $50,000)
moderate ($50,000--$20,000,000)
significant (>$20,000,000)
