In 2011, Rhode Island, Texas and West Virginia became the first states to adopt legislation to implement the December 2010 amendments to the National Association of Insurance Commissioners (“NAIC”) Insurance Holding Company System Regulatory Act (“Model Act”) and Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (“Model Regulation”). Throughout 2011 and the first part of 2012, legislation was introduced in a number of other states tracking the amendments to the Model Act. States that have considered or are currently considering legislation incorporating aspects of the amended Model Act include California, Florida, Illinois, Indiana, Kansas, Kentucky, Nebraska, New York, Oklahoma and Pennsylvania. In addition, the New York Department of Financial Services has released supplements to prior circular letters, discussing its increased efforts to monitor holding company systems and announcing enterprise risk management expectations. For more information on these New York regulatory developments, please see our articles from the September 2011 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, New York Increases Efforts to Monitor Holding Company Systems and New York Announces Enterprise Risk Management Expectations. While the proposed and recently enacted holding company legislation is not uniform across the states, the legislation generally incorporates significant changes brought about by the amendments to the NAIC models.

The Model Act and Model Regulation apply to insurance holding company systems, which are defined as groups of two or more affiliated entities, at least one of which is an insurer. The December 2010 revisions represent a shift in emphasis of the NAIC’s approach to the regulation of insurance holding company systems. Historically, such regulation has been designed to build “walls” around an insurer through regulation of acquisitions, dividends and inter-affiliate transactions. The new approach adds a new “windows” component to the traditional “walls” component giving insurance regulators access to enhanced information about the activities and risk profile of an insurer’s non-insurance affiliates.  

One of the focal points of the Model Act amendments is the concept of “enterprise risk” – defined as any activity, circumstance or event involving an insurer’s affiliate that is likely to have a material adverse affect upon the financial condition of the insurer or its insurance holding company system, including anything that would cause the insurer’s risk-based capital to fall into the company action level, or would cause the insurer to be in hazardous financial condition. The amended Model Act requires an insurer’s ultimate controlling person to provide a confidential enterprise risk management (“ERM”) report as part of the insurer’s “Form B” annual holding company registration statement.


The Model Act revisions provide that the Form B must include a statement that the insurer’s board of directors is responsible for any oversees corporate governance and internal controls and that the insurer’s officers or senior management have approved, implemented and continue to maintain and monitor corporate governance and internal control procedures. The Form B must also include a confidential ERM report provided by the insurer’s ultimate controlling person. An ERM report should be designed to identify the material risks within the insurance holding company system that could pose financial and/or reputational contagion to the insurer. The ERM report should include material developments regarding strategy, internal audit findings, compliance or risk management affecting the insurance holding company system. Among other considerations, the ERM report should identify any material activity or development of the insurance holding company system that, in the opinion of senior management, could adversely affect the insurance holding company system.


Among changes brought about under the revised Model Act and Model Regulation regarding the “Form A” acquisition process, an acquiring person is required to acknowledge that it and all subsidiaries within its control will provide information to its home state commissioner upon request as necessary to evaluate the risk of financial and/or reputational contagion to the insurer. An acquiring person must file a “Form E” in the domestic state to address the competitive impact of the acquisition. A control person that wishes to divest its controlling interest in a domestic insurer must give the commissioner 30 days’ prior notice.


There is a rebuttable presumption of “control” when a person directly or indirectly holds 10% or more of the voting securities of an insurer. Before the Model Act and Regulation were modified, the presumption could be rebutted by filing a disclaimer of control, which became effective immediately unless disallowed by the commissioner after a hearing. Under the modified Model Act and Regulation, disclaimers are no longer automatically effective upon filing. Disclaimers are only effective if not disallowed within 30 days after filing. If disallowed, an applicant may request an administrative hearing to seek reconsideration of the commissioner’s decision.


The modified Model Act and Regulation provide for revisions to the “Form D” process for review of transactions between insurers and their affiliates. Management service and cost sharing agreements must include specific items enumerated in the Model Act and Regulation. Amendments or modifications to previously filed agreements must be filed with an explanation for the change and the financial impact on the insurer. The domiciliary state commissioner must be notified within 30 days of termination of a previously filed agreement. Among other requirements, a statement must be made describing how each inter-affiliate transaction meets the “fair and reasonable” standard.


Under the modified Model Act and Regulation, a commissioner can examine not only the insurer but also its affiliates to ascertain the financial condition of the insurer, including the risk of financial contagion to the insurer by the ultimate controlling person, any affiliates or combination of affiliates, or the insurance holding company system on a consolidated basis. A commissioner has the power to issue subpoenas and examine persons under oath, and may seek a court order to enforce subpoenas, under penalty of contempt. Sanctions for violating “Form A” approval requirements include prohibiting all dividends or distributions from the insurer and placing the insurer under regulatory supervision.


In order to assess the business strategy, financial position, legal and regulatory position, risk exposure, risk management and governance processes, and as part of the examination of domestic insurers with international operations, a commissioner may participate in a “supervisory college” with other regulators charged with supervision of the insurer or its affiliates, including other state, federal and international regulatory agencies.


The West Virginia amendments become effective on 1 July 2012, including the requirement that the “Form B” include an annual ERM report.

The Rhode Island amendments became effective immediately upon passage on 27 May 2011, except for the requirement to file an ERM report, which takes effect on 1 July 2013.

The Texas amendments became effective on 1 September 2011, but the ERM report requirement is being rolled out in stages, based on the volume of an insurer’s total direct or assumed annual premiums during the preceding 12-month period (“Premium Volume”). An insurer’s annual “Form B” registration statement is required to include an ERM report from its ultimate controlling person as part of its first “Form B” filing due after (1) 1 July 2013, if its Premium Volume was $5 billion or more, (2) 1 January 2014, if its Premium Volume was more than $1 billion but less than $5 billion, (3) 1 January 2015, if its Premium Volume was more than $500 million but less than $1 billion and (4) 1 January 2016, if its Premium Volume was $300 million or more but less than $500 million.

For additional information on the amendments to the Model Act and Regulation, please see our article from the February 2011 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, NAIC Adopts Modified Insurance Holding Company System Model Act and Regulation.