HCS/SS/SCS/SB 1009 - This act modifies the law on the type of investments in which insurance companies can participate in.

REAL ESTATE INVESTMENTS - This act limits insurance companies' investments in real estate. The value of such real estate purchased cannot exceed 20% of the insurance company's capital and surplus as shown by its last annual statement. This provision is contained in SCS/SB 1227 and SCS/HB 1568 (2002) (Section 375.330).

DERIVATIVE INSTRUMENTS - The act modifies Missouri law relating to the permissible investments of insurance companies in derivative instruments for hedging, income generation, and replication transactions, and in investment pools by non- insurance affiliates. The purpose of these proposals is to update Missouri investment laws so that Missouri insurance companies can remain competitive.

The proposed changes are a comprehensive update to Missouri's existing law on derivatives based upon the NAIC Model law and Illinois law. Under the definitions, limitations and conditions contained in the proposed law, derivative transactions can only be used for prudent reduction of risk and not to increase risk or for speculative purposes.

This act defines the various types of derivative transactions including a "hedging transaction" (used to protect against changes in value of assets and liabilities or to generate income or enhance return - Section 375.345.1 (12)), and "replication transaction" (used to replicate the investment characteristics of another investment - Section 375.345.1(18)).

The most common type of derivative transaction is hedging, which is used to protect against changes in the interest rates or values associated with another asset held by the company. Under this act, to engage in derivative transactions, an insurance company must be prepared to:

(1) Demonstrate to the Director the intended hedging characteristics and effectiveness of the derivative transaction; (2) Maintain its position in any outstanding derivative transaction for as long as the hedging transaction continues to be effective; (3) Include all counter-party exposure amounts in compliance with the single-entity investment limitations contained in Missouri law; (4) Comply with any additional conditions imposed by the Director by regulation; and (5) Have the policies and record-keeping procedures approved by its Board of Directors (Section 375.345.2)

As an additional safeguard, Section 375.345.2(3), (4) and (5) contain the following quantitative limits on the ownership of derivatives:

(1) With respect to hedging transactions: purchased options, caps, floors and warrants can not exceed 7 1/2 percent of admitted assets; written options, caps and floors can not exceed 3 percent of admitted assets; and collars swaps, forwards and futures can not exceed 6 1/2 percent of admitted assets; (2) With respect to income generation transactions, the limit of 10% of admitted assets; and (3) With respect to replication transactions the limits are the same as those that apply to the replicated asset or investment.

This act prohibits life insurance companies from owning investments in an amount in excess of certain limitations based upon certain admitted assets, capital and surplus as shown its last annual statement (Section 376.307)

BUSINESS AFFILIATES - This act allows business entities affiliated with insurers to be qualified managers of investment pools. The proposed change to this section authorizes a business entity affiliated with an insurer to invest in qualified investment pools under the same conditions that apply to the insurer. Under the current law only affiliated insurers can invest in qualified investment pools. This change is consistent with the current NAIC Model Law. This provision is contained in SCS/HB 1568 (2002) (Section 376.311).

ANNUITIES - This act modifies the law with respect to annuity contracts. Under the provisions of this section, for any contract issued on or after July 1, 2002, and before July 1, 2004, the interest rate shall be 1.5% for determining minimum nonforfeiture amounts (Section 376.671 ). This provision is contained in SCS/HB 1568 (2002).

LONG -TERM CARE INSURANCE - This act makes several changes to the long-term care insurance law. This act clarifies that the term "long-term care insurance" to include any insurance policy that meets the requirements of a "qualified long-term care insurance contract", as defined in Section 7702B of the Internal Revenue Code. This act requires the issuer of a long-term care contract to state clearly in its enrollment materials whether the contract is intended to be tax-qualified, pursuant to Section 7702B (Sections 376.951 - 376.1130).

This act requires the issuer to deliver the certificate of insurance to the applicant no later than 30 days after the date of approval. This act requires the long-term care policy summary to include a statement that any long-term care inflation protection option that may be required by the laws of Missouri is not available under the policy.

This act requires issuers to provide a written explanation for a denial of coverage within 60 days of receiving a written request for an explanation from the applicant. The issuer must provide all information directly related to the denial. This act allows insurers to rescind long-term care contracts upon a showing of misrepresentation. The degree of misrepresentation that must be proven will vary, depending on the length of time the policy has been in effect. This act prohibits a long-term care contract to be field issued based on medical or health status (Section 376.1124).

This act prohibits an insurer from recovering benefits paid to the policyholder when the issuer rescinds the policy. This act requires insurers to offer a policy that includes a nonforfeiture benefit. If that benefit is declined, the issuer must then offer a contingent benefit upon lapse that will be available for a specified period of time following a substantial increase in premium rates. This act requires the Department of Insurance to promulgate rules creating the standards for nonforfeiture benefits, contingent benefits upon lapse, the length of time these benefits must run, and the extent to which premiums may be increased (Section 376.1127).

The Department of Insurance must also promulgate rules regarding marketing practices, agent testing, penalties, and reporting practices for long-term care insurance (Section 376.1130). The long-term care provisions are similar to those contained in SB 1180 and HB 1701 (2002).

MUTUAL INSURANCE COMPANY INVESTMENTS - This act allows stock and mutual insurance companies to invest in any investment in a Missouri tax credit or partnership interest which entitles the company to receive Missouri tax credits that may be used as a credit against the gross premium tax (Section 379.080 ). This provision is also contained in SCS/HB 1568 (2002).
STEPHEN WITTE