On December 16, 2010, the National Association of Insurance Commissioners (“NAIC”) adopted final revisions to its model Insurance Holding Company System Regulatory Act (“Model Act”) and its Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (“Model Regulation”). 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 revisions are part of the NAIC’s larger Solvency Modernization Initiative (“SMI”), a comprehensive examination of the US insurance solvency regulatory framework.
The 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 to that traditional “walls” component a new “windows” component – giving insurance regulators access to enhanced information about the activities and risk profile of an insurer’s non-insurance affiliates.
Significant aspects of the revised Model Act and Model Regulation include the following:
- Addition of the concept of “Enterprise Risk” : Enterprise risk means, generally, 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 ultimate controlling person of an insurer will be required to file a confidential annual report identifying the material risks within the insurance holding company system that could pose enterprise risk to the insurer.
- The introduction of supervisory colleges: 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 insurers with international operations, state insurance commissioners may participate in a “supervisory college” with other regulators charged with supervision of such insurers or their affiliates, including other state, federal and international regulatory agencies. Information provided by the commissioner to members of a supervisory college will receive confidential treatment.
- Additional filing requirements with respect to acquisitions and divestitures of insurers: Historically, any person seeking to acquire control of an insurer has been required to file a “Form A” with the insurer’s domiciliary regulator, seeking prior approval of the acquisition. Under the revised Model Act, a “Form A” acquisition statement will need to be accompanied by a “Form E” pre-acquisition notification addressing the competitive impact of the acquisition. In addition, any controlling person of an insurer seeking to divest its controlling interest would be required to file a confidential notice of its plans with the commissioner 30 days prior to cessation of control.
- Expansion of information to be filed with the commissioner on “Form B”: If requested by the commissioner, an insurer will be required to include financial statements from within an insurance holding company system (including affiliates) with its “Form B” holding company registration statement, including annual audited financial statements filed with the U.S. Securities and Exchange Commission. The registration statement will also need to include statements that the insurer’s board of directors is responsible for and oversees corporate governance and that the insurer’s officers or senior management have approved, implemented and continue to maintain and monitor that corporate governance and internal control procedures.
- More burdensome process to disclaim affiliation with insurers: Under the existing Model Act, “control” is presumed to exist where any person directly or indirectly holds 10% or more of an insurer’s voting securities. Historically, that presumption could be rebutted by filing a disclaimer of control with the domiciliary state commissioner, and such a disclaimer became effective immediately unless disallowed by the commissioner after a hearing. In other words, the burden of disallowing a disclaimer of control was placed on the commissioner. Under the revised Model Act, disclaimers will no longer be automatically effective upon filing. Rather, they will become effective if not disallowed by the commissioner within 30 days after filing. If a disclaimer is disallowed, the applicant may request reconsideration at an administrative hearing, but will bear the burden of rebutting the presumption of control at that hearing.
- Increased oversight of inter-affiliate transactions: Historically, material transactions between insurers and their affiliates have required the filing of a “Form D” at least 30 days in advance of the effective date. The revised Model Act will augment the “Form D” requirements with 13 specific items that need to be included in management service and cost sharing agreements among insurers and their affiliates. It will also require insurers to file a “Form D” for amendments or modifications to previously filed agreements, explaining the reason for the change and the financial impact on the insurer. Additionally, it will require notification to the commissioner within 30 days of termination of a previously filed agreement.
- Expansion of the commissioner’s powers with respect to access to books and records: Under the revised Model Act, the commissioner will have the power to 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. The commissioner will be able to order an insurer to produce information not in its own possession, but obtainable by the insurer through contractual relationships, statutory obligations or other methods. If the insurer fails to produce the information without a reason acceptable to the commissioner, such insurer may be subject to fines or the suspension or revocation of its license. The commissioner will also have the power to issue subpoenas and examine persons under oath, and may seek a court order to enforce subpoenas, under penalty of contempt.
The Model Act and Model Regulation still need to be adopted by individual state legislatures. The final language of the regulations may vary from state to state when they are enacted.