THE TEXAS DEPARTMENT OF INSURANCE: WHERE IT CAME FROM, WHERE IT’S HEADED BRUCE MCCANDLESS III, Austin Mitchell, Williams, Selig, Gates & Woodyard PATRICIA FULLER MCCANDLESS, Austin Greenberg Traurig State Bar of Texas 9th ANNUAL ADVANCED INSURANCE LAW COURSE April 12-13, 2012 Dallas CHAPTER 5 2023534v.1 901170/1 Arkansas Texas New York Washington, D.C. MitchellWilliamsLaw.com Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. BRUCE MCCANDLESS III 512-480-5128 512-322-0301 (fax) [email protected] Education B.A., Plan II, University of Texas at Austin, with high honors, 1983 M.A., University of Reading, Reading, UK, 1984 J.D., University of Texas at Austin, 1989 Admitted to practice in Texas , 1995 Admitted to practice in New York, 1990 Admitted to practice in District of Columbia, 1992 Admitted to practice in U.S. District Court, Western District of Texas, 2001 Practice Area Insurance corporate and regulatory law, administrative law and governmental relations, contract negotiation, drafting, and disputes. Professional Experience Bruce McCandless III is a former Assistant Attorney General for the State of Texas and Enforcement Attorney for the Texas Department of Insurance. Mr. McCandless specializes in insurance regulatory matters and in representing insurers, agents, and lenders in insurance-related disputes before the Texas Department of Insurance and in the state and federal courts of Texas; he has also prepared and fi led amicus briefs on insurance-related matters before the Texas Supreme Court. In addition, Mr. McCandless has handled insurer acquisitions, withdrawals and licensing matters, and recently obtained regulatory approval of a transaction involving merger of a non-insurance related entity into an affi liated life insurance company. Publications Author, “A Brief History of the Texas Department of Insurance,” Journal of Texas Insurance Law, Vol. 3, Nos. 1 and 2 (Spring 2002 and Fall 2002); “Reforming the Texas Windstorm Insurance Association: The Politics and Policy of Catastrophe Risk Sharing,” FORC Quarterly Journal of Insurance Law and Regulation (Vol. 19, Ed. 2), Summer 2008; “Picking Up After High Tide: Thoughts on Title Agent Insolvencies in Texas,” August 2010, Mitchell Williams insurance regulatory blog. Other Activities Austin Bar Association; State Bar of Texas, Litigation Section Member; President, Zilker Theatre Productions (2007-2008). 106 East Sixth St., Suite 300 | Austin, TX 78701 | 512-480-5100 The Texas Department of Insurance: Where It Came From, Where It’s Headed Chapter 5 TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 1 II. A HISTORY OF TDI ......................................................................................................... 1 A. The Origins of Insurance Regulation in the U.S. ........................................................ 1 B. Early Regulation in Texas (1874-1888). ..................................................................... 2 C. The Populist Influence (1888-1905) ............................................................................ 4 D. The Quest for Control (1905-1944). ............................................................................ 7 E. The Bad Old Days (1945-1972). ............................................................................... 11 F. Consumer Protection as Guiding Principle (1973-1997) .......................................... 15 G. ―The Best Financial Services Agency in the World‖ (1997-present). ...................... 19 III. TDI TODAY ..................................................................................................................... 19 A. The New Commissioner. ........................................................................................... 19 B. Inter-Agency Organizational Chart. .......................................................................... 20 C. TDI Organizational Chart. ......................................................................................... 20 D. Where the Laws Come From. .................................................................................... 20 E. Sources of Texas Insurance Regulation .................................................................... 21 IV. THE TDI OF TOMORROW .......................................................................................... 23 A. Increasing Federal Participation in Health Insurance Regulation. ............................ 23 B. Federal Insurance Office. .......................................................................................... 25 C. Increasing Interstate Collaboration in Financial Regulation: Solvency II and the New Model Holding Company System Act. ........................................................25 V. CONCLUSION ................................................................................................................. 27 2023534v.1 901170/1 i The Texas Department of Insurance: Where It Came From, Where It’s Headed Chapter 5 I. INTRODUCTION Made Upon the Bills of Mortality, contained information on deaths in London from 1604 to 1661. This paper presents an overview of the Texas Working with data kept by parishes of the Church of Department of Insurance (―TDI‖). In addition to England, Graunt analyzed who was dying, how often, sketching the development and present functions of and from what causes—including plague, syphilis, the agency, the paper addresses TDI‘s immediate rupture, worms, and "griping in the guts.‖ Graunt's future. Will the agency‘s power and influence wane in work may in turn have inspired the astronomer the face of federal regulation of the health insurance Edmund Halley's detailed analysis of population data market? How is TDI preparing for implementation of kept by officials in the German city of Breslaw. Using the Affordable Care Act? And what other factors are the Breslaw information, Halley was able to compile, influencing TDI and its mission? in 1693, the first modern table of life expectancies. From this he delved deeper into a detailed 1 mathematical analysis of annuities, including annuities II. A HISTORY OF TDI covering two and three lives as well as one. While Halley‘s work was for him a sort of intellectual TDI started as an administrative cubbyhole, staffed recreation—Halley was instrumental in publishing Sir by one commissioner and a single overworked, all- Isaac Newton‘s monumental Principia Mathematica, purpose clerk. It is currently run by one commissioner and did some work on comets, as well—it provided and a staff of over fifteen hundred men, women and the scientific foundation for a huge, and still-growing, animals, including actuaries, accountants, attorneys, industry.2 peace officers, and arson investigators (some of whom use dogs to sniff out chemical fire accelerants). This In the United States, the insurance industry took staff oversees every automobile, homeowners, title, life root in the country's northeastern metropolitan areas. and health insurance transaction in Texas. It approves The ubiquitous Benjamin Franklin, the Tony Stark of insurance policy forms and many of the rates insureds his day, was an innovator in the field. He established are charged for coverage. It oversees the state‘s workers America‘s first incorporated fire insurance company, compensation system and the State Fire Marshal‘s the Philadelphia Contributorship for the Insurance of Office, investigates violations of Texas‘s insurance laws Houses from Loss by Fire, in 1752. These early and keeps tabs on the financial health of every stock insurance companies were generally formed through insurance company, Lloyds plan, reciprocal exchange, legislative charters. It wasn't until 1849 that New York county mutual, and benevolent association licensed to passed the first general insurance law, which is do the business of insurance in the state. With a commonly thought to mark the beginning of systematic biennial budget of over $200 million, TDI is one of state regulation. New York laws forbade companies the largest insurance regulatory agencies in the United from engaging in multiple lines of insurance. Thus, a States. life insurance company could not sell fire insurance, and vice versa—a prohibition that was to be incorporated in A. The Origins of Insurance Regulation in the Texas's first regulatory statutes twenty-five years later. U.S. The origins of insurance as we know it today— Indeed, the distinction survives even today. simply put, the consensual transfer of risk for monetary consideration—can be found in several different times In 1868, the United States Supreme Court‘s and places. In his book Against the Gods: The decision in Paul v. Virginia established that states, Remarkable Story of Risk, Peter Bernstein paints a rather than the federal government, had the right to fascinating picture of the evolution of actuarial regulate insurance. Paul was an agent of a New York th science, the basis of modern underwriting. In the 17 insurance company who was fined by the Century, an English button merchant named John Commonwealth of Virginia for selling insurance there Graunt set out to calculate the death rates of his fellow without a license. In his appeal, Paul argued that the sale citizens. His study, Natural and Political Observations of insurance was interstate commerce and thus subject 1 These remarks are an updated version of a paper titled 2 Anyone interested in a discussion of the antecedents to ―You Can Take That, or Worse: A Brief History