In the aftermath of the 2008-09 financial crisis, state insurance regulators sought to address what was perceived to be a deficiency in how insurers which are part of a broader insurance holding company systems were supervised. In particular, regulators were concerned that the existing framework of group supervision – designed to cover situations where an insurance company is domiciled in one state while various affiliated insurance companies or its holding company are domiciled in another state – was not sufficient to guard against the potential risk to insurance companies from non-regulated entities within their holding company structure. The risk of this so-called “contagion effect” is illustrated by AIG’s financial difficulties at the onset of the financial crisis. In response to these concerns, state regulators – working through the NAIC - adopted the revised Insurance Holding Company Regulatory Act and the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions in 2010 (NAIC MODELS # 440 and 450, respectively). The key provisions of the NAIC’s revised Insurance Holding Company Act and Model Regulation include:
- New requirements that regulated insurers identify and report their “enterprise risk” – defined as any activity, circumstance or event involving one or more affiliate of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company as a whole.
- New requirements that regulated insurers provide financial statements of all affiliates.
- Expanded ability to evaluate any entity within an insurance holding company system.
- Enhanced regulatory access to books and records and to compel production of information for all members of an insurance holding company system.
- Expectation of funding for regulator to participate in “supervisory colleges” – defined as a means to more adequately monitor domestic insurers that are part of a holding company system with international operations through communication among regulators.
- Enhanced requirements for corporate governance.
The main focus of these revisions is to consider enterprise risk as an element of state insurance regulation and to provide regulators with the information and authority necessary to address it.
Full adoption of the NAIC Model Act and Regulation mandates addressed above is necessary for each state to maintain its NAIC accreditation which allows states to rely on the regulator of the state where an insurer is domiciled to provide the primary financial oversight. Without accreditation, other states would have to conduct independent regulatory review of an insurer. As of June 2015, 23 states had fully implemented the revised Act and Regulation.
On April 7, 2014, Alabama passed the legislative component of the revised Insurance Holding Company Act with an effective date of January 1, 2016. Authorization for the Commissioner to participate in supervisory colleges in order to assess the business strategy, financial position, legal and regulatory position, risk exposure, risk management, and governance processes of a domestic insurer that is part of an insurance holding company system with international operations was included in the April legislative enactment. The revised Act will be reflected at Alabama Code Section 27-29-6.
On June 17, 2015, the Alabama Department of Insurance commenced the second phase of implementation of the NAIC Model Act Amendments by issuing a notice of a public hearing to occur on August 12, 2015 during which testimony concerning the proposed adoption of the NAIC Model Regulation will be heard. The Regulations primarily addresses Enterprise Risk Disclosure requirements for insurers.