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Florida House of Representatives - 2001 HB 1337
By Representatives Fields, Bendross-Mindingall, Wilson,
Brutus, Peterman, Harper, Siplin and Holloway
1 A bill to be entitled
2 An act relating to investments by insurers and
3 health maintenance organizations; amending s.
4 625.012, F.S.; including derivative instruments
5 within a definition of assets; amending s.
6 625.305, F.S.; revising limitations on certain
7 investments for purposes of diversification;
8 amending s. 625.324, F.S.; authorizing insurers
9 to invest in certain additional stocks;
10 creating ss. 625.336 and 641.195, F.S.;
11 providing for investments by insurers and
12 health maintenance organizations in financial
13 derivative instruments; providing requirements
14 and limitations; amending s. 641.35, F.S.;
15 including derivative instruments within a
16 definition of assets; including certain notes
17 and accounts receivable within certain assets
18 for certain purposes; increasing allowable
19 investments by health maintenance organizations
20 in certain corporate stocks; clarifying and
21 revising special consent investments; providing
22 limitations; authorizing certain health
23 maintenance organizations to elect regulation
24 under alternative provisions of law for
25 determing certain practices; providing election
26 requirements; providing an effective date.
27
28 Be It Enacted by the Legislature of the State of Florida:
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1 Section 1. Subsection (12) of section 625.012, Florida
2 Statutes, is renumbered as subsection (13) and a new
3 subsection (12) is added to said section to read:
4 625.012 "Assets" defined.--In any determination of the
5 financial condition of an insurer, there shall be allowed as
6 "assets" only such assets as are owned by the insurer and
7 which consist of:
8 (12) Derivative instruments used for hedging, income
9 enhancement, or replication of other investment instruments,
10 provided the derivative instruments are not contributing to
11 financial leverage or speculation. For purposes of this
12 chapter, "hedging" means investing in an asset to reduce
13 overall risk, "income enhancement" means using an existing
14 asset to modestly increase return without increasing risk, and
15 "replication" means combining two or more assets to duplicate
16 the characteristics of the desired asset.
17 Section 2. Paragraph (a) of subsection (2) of section
18 625.305, Florida Statutes, is amended to read:
19 625.305 Diversification.--
20 (2) Investments eligible under subsection (1), except
21 investments acquired pursuant to s. 625.331, are subject to
22 the following limitations:
23 (a) The cost of investments made by insurers in stock
24 authorized by s. 625.324 shall not exceed 30 15 percent of the
25 insurer's admitted assets; the cost of such investment in
26 common stocks shall not exceed 20 10 percent of the insurer's
27 admitted assets; and the cost of such investment in stock of
28 any one corporation, excluding diversified investment
29 companies or common trust funds, shall not exceed 3 percent of
30 the insurer's admitted assets. Notwithstanding any other
31 provision in this chapter, the cost basis or market value, if
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1 lower, of all stock investment shall be used for the purpose
2 of determining the asset value against which such percentage
3 limitations are to be applied.
4 Section 3. Section 625.324, Florida Statutes, is
5 amended to read:
6 625.324 Corporate stocks.--An insurer may invest in
7 stocks, common or preferred, of any corporation created or
8 existing under the laws of the United States or of any state
9 or Canada or any province thereof. An insurer may invest in
10 stocks, common or preferred, of any corporation created or
11 existing under the laws of any foreign country other than
12 Canada if such stocks are listed and traded on a national
13 securities exchange in the United States, listed and traded on
14 foreign securities exchanges, or traded in foreign
15 over-the-counter markets subject to a governing authority
16 authorized for such purposes in the foreign country, or, in
17 the alternative, if such investment in stocks of any
18 corporation created or existing under the laws of any foreign
19 country are first approved by the department. Nothing in this
20 section shall apply to qualifying investments made by an
21 insurer in a foreign country under authority of s. 625.326.
22 Section 4. Section 625.336, Florida Statutes, is
23 created to read:
24 625.336 Financial derivative instruments.--An insurer
25 may invest any of its funds in derivative instruments, as
26 defined in the National Association of Insurance Commissioners
27 Derivative Instruments Model Regulation adopted in October
28 1997, subject to the following requirements:
29 (1) A derivative transaction is an investment by an
30 insurer in a derivative instrument and is limited to options,
31 warrants, or futures.
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1 (2) Before engaging in a derivative transaction, an
2 insurer shall establish written guidelines that shall be used
3 for effecting and maintaining the transactions. The guidelines
4 shall:
5 (a) Address investment or, if applicable, underwriting
6 objectives, and risk constraints, including, but not limited
7 to, credit risk limits.
8 (b) Address permissible transactions and the
9 relationship of those transactions to its operations,
10 including, but not limited to, a precise identification of the
11 risks being hedged by a derivative transaction.
12 (c) Require compliance with internal control
13 procedures.
14 (3) An insurer shall have a system for determining
15 whether a derivative instrument used for hedging has been
16 effective.
17 (4) An insurer shall have a credit risk management
18 system for over-the-counter derivative transactions that
19 measures credit risk exposure using the counterparty exposure
20 amount. A counterparty is a business entity other than an
21 exchange or clearing house.
22 (5) An insurer's board of directors shall, in
23 accordance with relevant state rules:
24 (a) Approve the guidelines required by subsection (1)
25 and the systems required by subsections (2) and (3).
26 (b) Determine whether the insurer has adequate
27 professional personnel, technical expertise, and systems to
28 implement investment practices involving derivative
29 instruments.
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1 (6) An insurer shall maintain documentation and
2 records relating to each derivative transaction, including,
3 but not limited to:
4 (a) The purposes of the transactions.
5 (b) The assets or liabilities to which the transaction
6 relates.
7 (c) The specific derivative instrument used in the
8 transaction.
9 (d) For over-the-counter derivative transactions, the
10 name of the counterparty and the counterparty exposure amount.
11 (e) For exchange traded derivative instruments, the
12 name of the exchange and the name of the firm that handled the
13 trade.
14 (7) Each derivative instrument shall be:
15 (a) Traded on a qualified exchange;
16 (b) Entered into with, or guaranteed by, a business;
17 (c) Issued or written by or entered into with the
18 issuer of the underlying interest on which the derivative
19 instrument is based; or
20 (d) Entered into with a qualified foreign exchange.
21 Section 5. Section 641.195, Florida Statutes, is
22 created to read:
23 641.195 Financial derivative instruments.--A health
24 maintenance organization may invest any of its funds in
25 derivative instruments, as defined in the National Association
26 of Insurance Commissioners Derivative Instruments Model
27 Regulation adopted in October 1997, subject to the following
28 requirements:
29 (1) A derivative transaction is an investment by a
30 health maintenance organization in a derivative instrument and
31 is limited to options, warrants, or futures.
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1 (2) Before engaging in a derivative transaction, a
2 health maintenance organization shall establish written
3 guidelines that shall be used for effecting and maintaining
4 the transactions. The guidelines shall:
5 (a) Address investment or, if applicable, underwriting
6 objectives, and risk constraints, including, but not limited
7 to, credit risk limits.
8 (b) Address permissible transactions and the
9 relationship of those transactions to its operations,
10 including, but not limited to, a precise identification of the
11 risks being hedged by a derivative transaction.
12 (c) Require compliance with internal control
13 procedures.
14 (3) A health maintenance organization shall have a
15 system for determining whether a derivative instrument used
16 for hedging has been effective.
17 (4) A health maintenance organization shall have a
18 credit risk management system for over-the-counter derivative
19 transactions that measures credit risk exposure using the
20 counterparty exposure amount. A counterparty is a business
21 entity other than an exchange or clearing house.
22 (5) A health maintenance organization's board of
23 directors shall, in accordance with relevant state rules:
24 (a) Approve the guidelines required by subsection (1)
25 and the systems required by subsections (2) and (3).
26 (b) Determine whether the health maintenance
27 organization has adequate professional personnel, technical
28 expertise, and systems to implement investment practices
29 involving derivative instruments.
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1 (6) A health maintenance organization shall maintain
2 documentation and records relating to each derivative
3 transaction, including, but not limited to:
4 (a) The purposes of the transactions.
5 (b) The assets or liabilities to which the transaction
6 relates.
7 (c) The specific derivative instrument used in the
8 transaction.
9 (d) For over-the-counter derivative transactions, the
10 name of the counterparty and the counterparty exposure amount.
11 (e) For exchange traded derivative instruments, the
12 name of the exchange and the name of the firm that handled the
13 trade.
14 (7) Each derivative instrument shall be:
15 (a) Traded on a qualified exchange;
16 (b) Entered into with, or guaranteed by, a business;
17 (c) Issued or written by or entered into with the
18 issuer of the underlying interest on which the derivative
19 instrument is based; or
20 (d) Entered into with a qualified foreign exchange.
21 Section 6. Paragraph (h) is added to subsection (1) of
22 section 641.35, Florida Statutes, paragraph (b) of subsection
23 (2) and subsections (14) and (15) are amended, and subsection
24 (19) is added to said section, to read:
25 641.35 Assets, liabilities, and investments.--
26 (1) ASSETS.--In any determination of the financial
27 condition of a health maintenance organization, there shall be
28 allowed as "assets" only those assets that are owned by the
29 health maintenance organization and which assets consist of:
30 (h) Derivative instruments used for hedging, income
31 enhancement, or replication of other investment instruments,
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1 provided the derivative instruments are not contributing to
2 financial leverage or speculation. For purposes of this
3 chapter, "hedging" means investing in an asset to reduce
4 overall risk, "income enhancement" means using an existing
5 asset to modestly increase return without increasing risk, and
6 "replication" means combining two or more assets to duplicate
7 the characteristics of the desired asset.
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9 The department, upon determining that a health maintenance
10 organization's asset has not been evaluated according to
11 applicable law or that it does not qualify as an asset, shall
12 require the health maintenance organization to properly
13 reevaluate the asset or replace the asset with an asset
14 suitable to the department within 30 days of receipt of
15 written notification by the department of this determination,
16 if the removal of the asset from the organization's assets
17 would impair the organization's solvency.
18 (2) ASSETS NOT ALLOWED.--In addition to assets
19 impliedly excluded by the provisions of subsection (1), the
20 following assets expressly shall not be allowed as assets in
21 any determination of the financial condition of a health
22 maintenance organization:
23 (b) Any note or account receivable from or advances to
24 officers, directors, or controlling stockholders, whether
25 secured or not, and advances to employees, agents, or other
26 persons on personal security only, unless such note or account
27 receivable is payable by the controlling stockholder or entity
28 to the health maintenance organization and is secured by
29 assets that are allowable as admitted assets under this
30 section.
31 (14) SPECIAL LIMITATION INVESTMENTS.--
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1 (a) After satisfying the requirements of this part,
2 any funds of the health maintenance organization may be
3 invested in the following investments, subject to a cost
4 limitation of 10 percent of its admitted assets in each
5 category of investment:
6 1. Anticipation obligations of political subdivisions
7 of a state.--Anticipation obligations of any political
8 subdivision of any state of the United States, including, but
9 not limited to, bond anticipation notes, tax anticipation
10 notes, preliminary loan anticipation notes, revenue
11 anticipation notes, and construction anticipation notes, for
12 the payment of money within 12 months from the issuance of the
13 obligation, on the following conditions:
14 a. The anticipation notes are a direct obligation of
15 the issuer under conditions set forth in subsection (9).
16 b. The political subdivision is not in default in the
17 payment of the principal or interest on any of its direct
18 general obligations or any obligation guaranteed by such
19 political subdivision.
20 c. The anticipated funds are specifically pledged to
21 secure the obligations.
22 2. Revenue obligations of state or municipal public
23 utilities.--Obligations of any state of the United States, a
24 political subdivision thereof, or a public instrumentality of
25 any one or more of the foregoing for the payment of money, on
26 the following conditions:
27 a. The obligations are payable from revenues or
28 earnings of a public utility of such state, political
29 subdivision, or public instrumentality which are specifically
30 pledged therefor.
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1 b. The law under which the obligations are issued
2 requires that such rates for service shall be charged and
3 collected at all times so as to produce sufficient revenue or
4 earning, together with any other revenues or moneys pledged,
5 to pay all operating and maintenance charges of the public
6 utility and all principal and interest on such charges.
7 c. No prior or parity obligations payable from the
8 revenues or earnings of that public utility are in default at
9 the date of such investment.
10 3. Other revenue obligations.--Obligations of any
11 state of the United States, a political subdivision thereof,
12 or a public instrumentality of any of the foregoing for the
13 payment of money, on the following conditions:
14 a. The obligations are payable from revenues or
15 earnings, excluding revenues or earnings from public
16 utilities, specifically pledged therefor by such state,
17 political subdivision, or public instrumentality.
18 b. No prior or parity obligation of the same issuer
19 payable from revenues or earnings from the same source has
20 been in default as to principal or interest during the 5 years
21 next preceding the date of the investment, but the issuer need
22 not have been in existence for that period, and obligations
23 acquired under this paragraph may be newly issued.
24 4. Corporate stocks.--Stocks, common or preferred, of
25 any corporation created or existing under the laws of the
26 United States or any state thereof. The organization may
27 invest in stocks, common or preferred, of any corporation
28 created or existing under the laws of any foreign country if
29 such stocks are listed and traded on a national securities
30 exchange in the United States or, in the alternative, if such
31 investment in stocks of any corporation created or existing
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1 under the laws of any foreign country are first approved by
2 the department. Investment in common stock of any one
3 corporation shall not exceed 3 percent of the health
4 maintenance organization's admitted assets.
5 (b) After satisfying the requirements of this part,
6 any funds of the health maintenance organization may be
7 invested, subject to a cost limitation of 20 percent of
8 admitted assets, in stocks, common or preferred, of any
9 corporation created or existing under the laws of the United
10 States or any state thereof. The health maintenance
11 organization may invest in stocks, common or preferred, of any
12 corporation created or existing under the laws of any foreign
13 country if such stocks are listed and traded on a national
14 securities exchange in the United States, listed and traded on
15 foreign securities exchanges, or traded in foreign
16 over-the-counter markets subject to a governing authority
17 authorized for such purposes in the foreign country, or, in
18 the alternative, if such investment in stocks of any
19 corporation created or existing under the laws of any foreign
20 country are first approved by the department. Investment in
21 common stock of any one corporation, excluding diversified
22 investment companies or common trust funds, shall not exceed 3
23 percent of the health maintenance organization's admitted
24 assets.
25 (c)(b) After satisfying the requirements of this part,
26 the health maintenance organization may invest its funds and
27 accumulations in the following investments, subject to a cost
28 limitation of 5 percent of admitted assets in each category of
29 investment:
30 1. Obligations of the International Bank for
31 Reconstruction and Development.--Obligations issued or
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1 guaranteed by the International Bank for Reconstruction and
2 Development.
3 2. Obligations of the Inter-American Development
4 Bank.--Obligations issued or guaranteed by the Inter-American
5 Development Bank.
6 3. Obligations of the Asian Development
7 Bank.--Obligations issued or guaranteed by the Asian
8 Development Bank.
9 4. Obligations of the State of Israel.--Direct
10 obligations of the State of Israel for the payment of money,
11 or obligations for the payment of money which are guaranteed
12 as to the payment of principal and interest by the State of
13 Israel, on the condition that the State of Israel shall not be
14 in default in the payment of principal or interest on any of
15 its direct, general obligations on the date of such
16 investment.
17 5. Obligations of the African Development
18 Bank.--Obligations issued or guaranteed by the African
19 Development Bank.
20 6. Obligations of the Government of Canada or any
21 province thereof.--Obligations issued or guaranteed by the
22 Government of Canada or any province thereof.
23 7. Obligations of the International Finance
24 Corporation.--Obligations issued or guaranteed by the
25 International Finance Corporation.
26 (15) SPECIAL CONSENT INVESTMENT.--Any investment of
27 the health maintenance organization's funds not enumerated in
28 this part requires the prior approval of the department.
29 (a) After satisfying the requirements of this part,
30 any funds of a health maintenance organization in excess of
31 its statutorily required reserves and surplus may be invested:
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1 1. Without limitation in any investments otherwise
2 authorized by this part; or
3 2. In such other investments not specifically
4 authorized by this part provided such investments do not
5 exceed the lesser 5 percent of the health maintenance
6 organization's admitted assets or 25 percent of the amount by
7 which a health maintenance organization's surplus exceeds its
8 statutorily required minimum surplus. A health maintenance
9 organization may exceed the limitations of this subparagraph
10 only with the prior written approval of the department.
11 (b) Nothing in this subsection authorizes a health
12 maintenance organization to:
13 1. Invest any funds in excess of the amount by which
14 its actual surplus exceeds its statutorily required minimum
15 surplus; or
16 2. Make any investment prohibited by this code.
17 (19) Notwithstanding any other provision of law, a
18 health maintenance organization, which reports surplus on its
19 most recently filed annual report that is equal to or in
20 excess of the greater of $3 million, 20 percent of total
21 liabilities, or 4 percent of annualized premium, may elect to
22 be regulated under parts I and II of chapter 625, instead of
23 chapter 641, for determining assets, liabilities, and
24 investment practices. A health maintenance organization shall
25 notify the department of an intent to make such election 90
26 days prior to the end of the calendar year and the election
27 shall take effect on the first day of the next calendar year.
28 Section 7. This act shall take effect upon becoming a
29 law and shall operate retroactively to January 1, 2001.
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2 HOUSE SUMMARY
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Revises and clarifies authorized investments by insurers
4 and health maintenance organizations to authorize
investments in derivative instruments and in corporate
5 stocks listed and traded on foreign securities exchanges
or traded in foreign over-the-counter markets subject to
6 a governing authority authorized for such purposes in the
foreign country, clarify and revise special consent
7 investments by health maintenance organizations, and
authorize health maintenance organizations to elect
8 regulation under alternative provisions of law for
determining assets, liabilities, and investment
9 practices. See bill for details.
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