On July 31, 2013, Governor Cuomo signed into law certain amendments to Articles 15 and 16 of the Insurance Law. Correspondingly, Regulation 52 (Part 80 of Title 11 of the New York Codes, Rules and Regulations ("NYCRR")) was amended. These new laws and regulations implement key provisions of the NAIC’s Amended Model Insurance Holding Company System Regulatory Act (the "NAIC Model Act"). Although the effective date of some changes vary, all amendments to the aforementioned laws and regulations are in effect as of October 29, 2013. The first Enterprise Risk Management report required by the new laws is due April 30, 2014, although efforts have been made to exempt certain insurers from this requirement by regulation.
With Governor Cuomo's signature on July 31, 2013, substantial revisions to New York's
Insurance Law went into effect. The amendments modify insurers' obligations with respect to
holding company registration, registration under Article 16, prior notice of certain transactions
and enterprise risk management reporting. In this Alert, we outline some of the significant
changes (and highlight some ambiguities) made by these amendments. Please note,
however, that the New York Department of Financial Services ("DFS") has noted that it
will be issuing a number of circular letters and/or additional regulations in the future to
clarify issues raised by these amendments and, therefore, the requirements noted below
are certainly subject to change.
Enterprise Risk Management Reporting
Pursuant to Section 1503 of the Insurance Law, a holding company that directly or indirectly
controls an insurer shall adopt a formal enterprise risk management ("ERM") function and
annually file with the Superintendent an ERM report. The report is due April 30th of each year
beginning in 2014. Similarly, Section 1604 of the Insurance Law requires authorized domestic
insurers, other than domestic insurers required to register as controlled insurers pursuant to
Section 1503 of the Insurance Law
, to adopt ERM functions and annually file with the
Superintendent ERM reports. Such report is also due by April 30th of each year beginning in
Section 1501(a)(7) defines "enterprise risk" as follows:
"'Enterprise risk' means any activity, circumstance, event, or series of events involving the
holding company system that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its holding company system,
including anything that would cause the insurer's risk-based capital to fall into company action
level as set forth in Section 1322 or 1324 of this chapter, or that would cause further transaction
of business to be hazardous to the insurer's policyholders or creditors or the public."
Correspondingly, Section 1604(b)(2) defines "enterprise risk" as follows:
""[E]nterprise risk" means any activity, circumstance, event, or series of events involving one or
more subsidiaries 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, including anything that
would cause the insurer's risk-based capital to fall into company action level as set forth in
Section 1324 of this chapter, or that would cause further transaction of business to be
hazardous to the insurer's policyholders or creditors or the public."
It is important to note that entities required to file ERM reports pursuant to Article 15 or 16 must
file information as to all entities within their systems, whether or not such other entities are
insurance companies. Moreover, electronic filing with a hard copy to follow will be required.
Although the NAIC Model Act prescribes the use of Form F, which identifies the issues and key
areas which an insurer must report, the DFS has indicated that the form it will require insurers to
use will need to contain the information requested in its proposed Regulation 203, which was
issued in January 2014. Such regulation is expected to be finalized sometime in March.
Proposed Regulation 203, if adopted, would require the following information to be included in
the ERM report:
Any material developments regarding strategy, internal audit findings, compliance or risk
management affecting the insurer or group;
Any acquisition or disposal of insurance entities and reallocation of existing financial or
Any changes in the shareholders exceeding ten percent or more of voting securities;
Developments in any investigations, regulatory activities or litigation that could have a
significant bearing or impact on the insurer or group;
The entity's business plan and a summary of strategies for the next twelve months;
Identification of any material concern by a supervisory college, if any, held during the last
Identification of capital resources and material distribution patterns;
Identification of any negative movement or discussions with nationally recognized
statistical rating organizations that may have caused or may cause potential negative
movement in the credit ratings and financial strength ratings assessment of the insurer
Information on any corporate or parental guarantees throughout the group and the
expected source of liquidity should the guarantees be called upon; and
Identification of any material activity or development that, in the opinion of senior
management, could adversely affect the insurer or group.
While Regulation 203 includes some possible exemptions applicable apparently applicable to
stand-alone insurers, such exemptions have not been discussed in this Alert. Annual Reporting
Section 1604 now provides that an authorized domestic insurer required to register with the
Superintendent pursuant to Section 1603 (discussed below) must do so within 30 days of
becoming subject to registration. The Superintendent has not yet released regulations or
guidance regarding these new registration requirements for insurers subject to Article 16;
however, the DFS has indicated that such registration requirements will be addressed in an
amended version of Regulation No. 53 (11 NYCRR 81-1.1 et seq.).
Additionally, effective June 23, 2013, controlled insurers required to register pursuant to Section
1503 must include additional information in their registration statements (Form HC 1).
In registration statements, registrants must now include a statement that the registrant's
board of directors, or a committee of the board, oversees corporate governance and
internal controls and that the registrant's management has approved or devised
implemented, and continues to maintain and monitor corporate governance and internal
In registration statements, a registrant must now submit:
o An opinion, rather than a certificate, of an independent certified public account
with its financial statements. Where inclusion of an accountant's opinion
constitutes a demonstrable hardship, the registrant may request permission to
submit a certified public account compilation in lieu of an opinion.
o A list identifying each insurer in the holding company system that is not an
authorized insurer in New York that electronically filed its most recent annual
statement with the NAIC. For unauthorized insurers that have not done so, the
report must still include a copy of the most recent annual statement filed with the
unauthorized insurer's state of domicile.
Under the amended laws, insurers required to register pursuant to Article 15 or 16 of the
Insurance Law must amend their registration within 30 days of any material change.
Acquisition of Control
The new laws modify the notice requirements for insurers subject to registration pursuant to
Articles 15 and Article 16.
Section 1506 of the Insurance Law now provides that no person, other than an authorized
insurer, shall acquire control of any domestic insurer unless such person gives 20 days prior
written notice to the insurer, or shorter notice if permitted by the Superintendent; provided,
however, that the notice of intention to acquire must include an agreement by the acquiring
person to provide the annual report required by Section 1503 so long as control exists.
Because Section 1503 now relates to the submission of both an annual holding company
registration report and an ERM report, one would assume that the statement must relate to both
reports, although the amended language is not clear in this respect. In addition, Section 1603 of the Insurance Law now provides that a domestic insurer shall not
acquire control of any other domestic insurer, whether by purchase of its securities or
unless, in addition to providing notice of intention to the DFS of its intent to acquire
the other insurer at least 90 days in advance, the acquiring insurer obtains the prior approval of
the Superintendent. Previously, Section 1603 stated that an insurance company could not
acquire a majority of another corporation's outstanding common shares without obtaining the
DFS's prior approval (notice was not limited to the acquisition of another insurer). Significantly,
we have been informed that regardless of the changes to Section 1603, insurers
proposing to acquire non-insurance company entities are still required to provide prior
notice under Section 1603.
Transactions within a Holding Company System Affecting Controlled Insurers;
Transactions between a Domestic Insurer and Any Subsidiary
The amendments to Articles 15 and 16 and Regulation 52 also address transactions within a
holding company system and enacted similar provisions governing transactions between a
domestic insurer and any subsidiary. The new requirements apply to specified transactions that
occur on or after July 31, 2013. Notably, for companies subject to registration pursuant to
Article 15 or 16, if the transaction involves reinsurance treaties or agreements within the holding
company system or between a parent and its subsidiary, the amendments require that such
notice must be provided at least 45 days in advance.
First, the amendments to Article 15 and Regulation 52 modified the financial thresholds for
sales, purchases, exchanges, loans or extensions of credit, or investment transactions within
holding company systems that require prior approval. Specifically, the amendments raised the
financial minimum which triggers the approval requirement. Previously, approval for such
transactions within a holding company system was required where the transaction involved
more than 0.5% but less than 5% of the insurer's admitted assets at year end. Now, for such
transactions occurring on or after July 31, 2013, this 0.5% minimum threshold stands at the
lesser of 3% of the insurer's admitted assets at last year end or 25% of capital and/or surplus.
Additionally, the amendments also raised the financial thresholds for certain lease
arrangements within holding company systems that require prior approval. Specifically,
transactions within a holding company system that involve any lease of real or personal property
that does not provide for the rendering of services on a regular basis require approval if the
aggregate payments to be made, including any renewal or extensions, exceeds 1% (raised from
0.5%) of admitted assets at least year end for life insurers or 2% (raised from 1%) for all other
Second, under Article 16, sales, purchases, exchanges, loans or extensions of credit, or
investment transactions between domestic insurers and subsidiaries which equal or exceed a
specified financial threshold require prior notice. Specifically, prior notice is required if the
transaction is equal to or exceeds the lesser of 3% of the insurer's admitted assets at last year
end or 25% of surplus. This 30-day prior notice requirement (with the same financial threshold) also applies to loans or extensions of credit to any person who is not a subsidiary if such loans
or extensions of credit are made with the agreement or understanding that the proceeds of such
transactions, in whole or in substantial part, are to be used to make loans or extensions of credit
to, purchase assets of, or make investments in, any subsidiary of the insurer making such loans
or extensions of credit. Note that for companies subject to Article 16, the format of the
aforementioned notices remains unclear.
Lastly, the amendments to Articles 15 and 16 as well as Regulation 52 now explicitly require
prior approval for management agreements, service contracts, tax allocation agreements,
guarantees and cost-sharing arrangements.
Divestiture of Control
Pursuant to the amendments to Article 15 and Regulation 52, a holding company which seeks
to divest its controlling interest in a domestic insurer must file with the Superintendent notice of
the proposed divesture upon the earlier of 30 days prior to the proposed cessation of control or
within 10 days of becoming aware of the proposed divestiture. Similarly, 1603 now provides
that any domestic insurer seeking to divest its controlling interest in another domestic insurer, in
any manner, shall file with the Superintendent, with a copy to the insurer, notice of its proposed
divestiture at least 30 days prior to the cessation of control.
If you have questions regarding the effect of these amendments on your organization, please
contact the Jaeckle attorneys listed below.