Preproposal statement of inquiry was filed as WSR 19-15-134.
Title of Rule and Other Identifying Information: Technical corrections for producer accounting systems.
Hearing Location(s): On November 5, 2019, at 8:30 a.m., at the Office of the Insurance Commissioner (OIC), 302 Sid Snyder Avenue S.W., #200, Olympia, WA 98504.
Date of Intended Adoption: November 8, 2019.
Submit Written Comments to: Bode Makinde, P.O. Box 40260, Olympia, WA 98504-0260, email firstname.lastname@example.org, fax 360-586-3109, by November 4, 2019.
Assistance for Persons with Disabilities: Melanie Watness, phone 360-725-7013, fax 360-586-2023, TTY 360-586-0241, email MelanieW@oic.wa.gov, by November 4, 2019.
Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The commissioner will consider adopting rules that is [are] intended to clarify the types of accounting records or accounting system that is required by the state. The clarification is needed based upon what is being discovered and reviewed when an insurance agency is being examined
Reasons Supporting Proposal: The revision is intended to clarify the types of accounting records or accounting system that is required by the state. The commissioner's financial examination team has suggested the clarification based upon what is being discovered and reviewed when an insurance agency is being examined.
Rule is not necessitated by federal law, federal or state court decision.
Name of Proponent: Mike Kreidler, insurance commissioner, governmental.
Name of Agency Personnel Responsible for Drafting: Bode Makinde, P.O. Box 40260, Olympia, WA, 98504-0260, 360-725-7041; Implementation: Todd Dixon, P.O. Box 40255, Olympia, WA 98504-0255, 360-725-7156; and Enforcement: Toni Hood, P.O. Box 40255, Olympia, WA 98504-0255, 360-725-7264.
This rule proposal, or portions of the proposal, is exempt from requirements of the Regulatory Fairness Act because the proposal:
Explanation of exemptions: Much of this proposed rule simply corrects the word "indentify" and clarifies requirements that already exist in the WAC.
The clarifications further describe accounting recordkeeping for a producer.
(1) The purpose of this section is to effectuate RCW 48.15.180
with respect to the separation and accounting of premium funds by insurance producers, title insurance agents and surplus line brokers, collectively referred to in this section as "producers." Pursuant to RCW 48.30.010
, the commissioner has found and hereby defines it to be an unfair practice for any producer, except as allowed by statute, to conduct insurance business without complying with the requirements of RCW 48.15.180
and this section.
(2) All funds representing premiums as defined in RCW 48.18.170
, which includes premium taxes and commissions, and return premiums received on Washington business by a producer in his or her fiduciary capacity on or after January 1, 1987, must be deposited in one or more identifiable separate accounts which may be interest bearing.
(a) A producer must not deposit funds other than premiums as defined in RCW 48.18.170
, which includes premium taxes and commissions and return premiums to the separate account except as follows:
(i) Funds reasonably sufficient to pay bank charges;
(ii) Funds a producer may deem prudent for advancing premiums, or establishing reserves for the paying of return premiums;
(iii) Funds for contingencies as may arise in the business of receiving and transmitting premiums or return premiums; and
(iv) Fees paid by insureds as permitted under RCW 48.17.270
(b) A producer may commingle Washington premiums as defined in RCW 48.18.170
, which includes premium taxes and commissions, and return premiums with those produced in other states, provided adequate records are maintained to identify the amounts for Washington business. There must be no commingling of any funds not permitted by this section.
(3)(a) The separate account funds must be:
(i) Deposited in a checking account, demand account, or a savings account in a bank, national banking association, savings and loan association, mutual savings bank, stock savings bank, credit union, or trust company located in the state of Washington. The account must be insured by an entity of the federal government; or
(ii) Invested in United States government bonds and treasury certificates or other obligations for which the full faith and credit of the United States government is pledged for payment of principal and interest, and repurchase agreements collateralized by securities issued by the United States government. Insurers may, of course, restrict investments of separate account funds by their agent.
(b) A nonresident licensee, or a resident producer with affiliated operations under common ownership in two or more states, may utilize comparable accounts in another state provided such accounts otherwise meet the requirements of RCW 48.15.180
and this rule, and are accessible to the commissioner for purposes of examination or audit at the expense of the producer.
(4) Disbursements or withdrawals from a separate account must only be made for the following purposes, and in the manner stated:
(a) For charges imposed by a bank or other financial institution for operation of the separate account;
(b) For payments of premiums, directly to insurers or other producers entitled thereto;
(c) For payments of return premiums, which includes premium taxes, directly to the insureds or other persons entitled thereto;
(d) For payments of earned commissions and other funds belonging to the separate account's producer, directly to another account maintained by such producer as an operating or business account, but only to the extent that the premium funds for the policy or policies have actually been deposited into the separate premium account;
(e) For transfer of fiduciary funds, directly to another separate premium account which meets the requirements of this section;
(f) For payment of surplus line premium taxes to the state; and
(g) For payment of earned producer fees, but only to the extent that the fees were originally deposited in the separate premium account.
(5)(a) The funds deposited in the separate premium account must be paid promptly to the insurer or to another producer entitled thereto, in accordance with the terms of any applicable agreement between the parties.
(b) Return premiums received by a producer and the producer's share of any premiums required to be refunded, must be deposited promptly to the separate account. The funds must be paid promptly to the insured or person entitled thereto.
(6)(a) When a producer receives a premium payment in the form of an instrument, such as a check, which is made payable to an insurer, general agent or surplus line broker, the producer may forward the instrument directly to the payee if that can be done without endorsement or alteration. In this case, the producer's separate account is not involved because the producer has not "received" any funds.
(b) If the producer receives a premium payment in the form of cash or an instrument requiring endorsement by the producer, the premium must be deposited into the producer's separate account, unless the insurer entitled to such funds has established other procedures by written direction to a producer who is its appointed agent, which procedures:
(i) Recognize that the producer is receiving premiums directly on behalf of the insurer; and
(ii) Direct the producer to give adequate receipts on behalf of the insurer; and
(iii) Require deposit of the proceeds into the insurer's own account or elsewhere as permitted by the insurer's direction.
Thus, for example, an insurer may utilize the services of a licensed insurance producer, acting as a "captive agent," in the sale of its insurance and in the operation of its places of business, and directly receive payments intended for it without the payments being deposited into and accounted for through the licensed insurance producer's separate account. In these cases, for purposes of this rule, the insurer, as distinguished from the insurance producer, is actually "receiving" the funds and is immediately responsible therefor.
(c) When a producer receives premiums as a surplus line broker, licensed under chapter 48.15
RCW, after a binder or other written evidence of insurance has been issued to the insured, subject to the express written direction of the insurer involved, the premiums, except premium taxes, may be removed from the separate account.
(7) The commissioner recognizes the practical problems of accounting for the small amounts of interest involved spread over a large number of insurers and insureds. Therefore, absent any agreement between the producer and the insured or insurer to the contrary, interest earned on the deposits held in the separate account may be retained by the producer and used to offset bank charges, establish reserves, pay return premiums, or for any of the purposes listed in subsection (2) of this section, or the interest may be removed to the operating account.
(8) A producer must establish and maintain accounting
records ((and an appropriate accounting system
)) for all premiums as defined in RCW 48.18.170
, which includes premium taxes and commissions, return premiums, and fees received by the producer, and must make the records available for inspection by the commissioner ((during regular business hours upon demand
)) during the five years immediately after the date of the transaction.
(9) The accounting ((system used))records must:
(a) Effectively isolate the separate premium account from any operating accounts ((and segment or indentify));
(b) Identify all Washington business from that of other states((. All recordkeeping systems, whether manual or electronic must));
(c) Provide an audit trail ((so that details))to identify underlying ((the summary data, such as invoices, checks, and statements, may be identified and made available on request. The system must provide the means to trace any transaction back to its original source or forward to final entry, as is accomplished by a conventional double-entry bookkeeping system. When automatic data processing systems are used, a description of the system must be available for review by the commissioner. A balance forward system (as in an ordinary checking account) is not acceptable.))documents; and
(d) Provide the origin and disposition of all premium transactions.
(10)(a) A producer that is a business entity may utilize one separate account for the funds received by its affiliated persons operating under its license, and the affiliated persons may deposit the funds they receive in this capacity directly into the separate account of their firm or corporation.
(b) Funds received by an insurance producer who is employed by and offices with another insurance producer may be deposited into and accounted for through the separate account of the employing insurance producer. This provision does not, however, authorize the insurance producer employee to represent an insurer as to which he or she has no appointment.
(11) Premium taxes deposited to the separate premium account are held in trust for the state and must be maintained in the account until paid to the state.
(12) The separate premium account is a fiduciary account and not the personal asset or account of the producer. A producer must not make withdrawals from the account except as provided in this section. The separate premium account must not be encumbered in any manner nor be pledged as collateral for a loan.
(13) For the purposes of this section, a commission is earned no earlier than when the policy is bound or effective.