Transfer Regulation of Prepaid Funeral Services from the Department of Banking to the Department of Insurance

The Legislature should transfer regulatory responsibility for prepaid funeral and perpetual-care cemetery contracts from the Texas Department of Banking to the Texas Department of Insurance.


Background
State law provides that businesses that sell pre-arranged or prepaid funeral services or merchandise must obtain a permit from the Texas Department of Banking (DOB). Funds received by vendors as part of a prepaid funeral contract must be placed in trust un til the service is provided or the contract canceled.

After a funeral is performed, the permittee applies to the DOB to withdraw funds from trust to pay for its services. In fiscal 1992, DOB licensed 672 vendors, and in c alendar 1991, processed 31,301 withdrawal requests. As of November 1, 1992, withdrawals had reached 29,273.

Increasingly, prepaid funeral contract funds received by vendors are placed in insurance policies instead of trust accounts. Since 1984, the percentage of prepaid contracts placed in insurance-funded contracts has increased from 19 percent to 38 percent. D uring the same period, the dollar value of insurance-funded contracts also increased, from 30 percent to 52 percent. DOB has indicated it expects insurance-funded sales to surpass trust-funded sales in the 1990s.

In addition to issuing permits and processing withdrawal requests, DOB conducts periodic contract examinations and verifies trust-account balances and insurance policies in force. The prepaid funeral examination is more routine and administrative in nature than a bank examination and does not include a qualitative analysis of the assets in trust. In fiscal 1992, DOB conducted 380 examinations of prepaid funeral vendors.

The Texas Health and Safety Code provides for the operation of perpetual-care cemeteries and their regulation by DOB. In fiscal 1992, 220 of these entities were licensed by the state. DOB performs periodic examinations to ensure compliance with the code and to verify funds p laced in trust. Examinations of 211 such entities were conducted in fiscal 1992.

The Texas Department of Insurance (TDI) currently regulates businesses similar in nature to the prepaid funeral industry. As part of its Regulated Lines and Licensing progra m, the TDI licenses and regulates a number of business entities including prepaid legal service providers, health maintenance organizations and continuing-care retirement communities. In addition to these functions, the TDI regularly interacts with and pro vides assistance to DOB on issues related to the prepaid funeral contract industry, especially as they concern insurance-funded contracts.

The regulation of prepaid funeral contracts has never been funded at levels that would allow DOB to examine all cont ract holders. Due to a shortage of examiners, just over half of all prepaid funeral contracts are examined each year, and no safety and soundness procedures are performed.


Recommendation
Prepaid funeral and perpetual-care cemetery regulatory functions should be transferred from the Texas Department of Banking (DOB) to the Texas Department of Insurance (TDI).

The transfer would include all existing positions and related direct and indirect costs. The Prepaid Funeral Contract Fund should be abolished and all license, examination and other revenues deposited to the Insurance Operating Fund. TDI should be given sufficient statutory and rulemaking authority to perform these regulatory functions adequately.


Implications
The performance of non-bank regulatory functions is not directly related to DOB s primary mission. Although regulation of the prepaid funeral contract and perpetual-care cemetery industries is supported by fees and performed by a separate division within DOB, the agency s administrative divisi on is spending considerable resources in support of this non-bank regulation. DOB has requested an additional $304,418 in fiscal 1994 to support these programs.

Given the banking industry s problems, DOB should be free to focus its regulatory resources on its major mission. This recommendation would accomplish this goal and provide DOB with additional office space to accommodate staff it has added in recent years.

TDI is well situated to regulate these non-bank industries. TDI has experience working with entities offering prepaid services and more experience and expertise in insurance regulation. This experience will become increasingly important as the prepaid funeral industry continues its trend toward insurance-funded contracts. The recommendation woul d consolidate similar functions within a single agency, thereby ensuring a more consistent regulatory framework and achieving long-term economies of scale.


Fiscal Impact
There should be no substantial net fiscal impact to the state as a result of the rec ommended transfer of functions. Funds appropriated and otherwise transferred out of the Prepaid Funeral Contract Account would be used to support the prepaid funeral contract regulatory program at TDI. In addition, funds appropriated and otherwise transfe rred out of the Department of Banking Expense Account would be used to support the perpetual-care cemetery regulatory program at TDI. All regulating costs are paid by the industries; therefore, no fiscal implications should result.