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State insurance holding company regulation was first introduced in the 1970s – the NAIC adopted its Insurance Holding Company System Regulatory Act and Insurance Holding Company System Model Regulation at that time. The Model Act and Model Regulation have undergone revisions since then to address deficiencies discovered by state insurance regulators.
The key elements of insurance holding company regulation are these: (i) state insurance regulator approval of the acquisition of control of domestic insurers, (ii) prior review or approval of certain transactions between a controlled insurer and its affiliates, and (iii) regulation of large dividends (e.g. extraordinary dividends) made by stock controlled insurers.
(a)Acquisition of Control
The key elements of the acquisition of control provisions of the Model Act are these: (i) a person cannot acquire control of a U.S. insurer without filing a prescribed statement with the insurer’s domestic state insurance regulator, (ii) a person cannot acquire control of a U.S. insurer without sending a copy of the statement filed with the insurer’s domestic state insurance regulator to the acquired insurer, and (iii) the domestic state insurance regulator must approve the acquisition.22 Some states also mandate a public hearing before the domestic state insurance regulator approves an application.23 The application made to acquire control of an insurer is on a form designated as “Form A.”24
(b)Affiliate Transactions
Transactions between a controlled insurer and its affiliates are subject to regulatory standards and certain transactions are subject to prior regulatory notice and/or approval in order to avoid a parent of the insurer causing the insurer to enter into an affiliate transaction that may be detrimental to policyholders of the insurer.
The Model Act provides that transactions within a holding company system to which a controlled insurer is a party are subject to the following standards:
(a) The terms shall be fair and reasonable;
(b) Charges or fees for services performed shall be reasonable;
(c) Expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied;
(d) The books, accounts and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the reasonableness of the charges or fees to the respective parties; and
(e) The insurer’s surplus as regards policyholders following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer’s outstanding liabilities and adequate to meet its financial needs.25
The Model Act then provides that the following transactions involving a domestic insurer and any person in its holding company system may not be entered into unless the insurer has notified its domestic state insurance regulator in writing of its intention to enter into the transaction at least 30 days prior thereto and the state insurance regulator has not disapproved it within that period: (i) certain material sales, purchases, exchanges, loans, extensions of credit, or investments, (ii) loans or extensions of credit to any person who is not an affiliate, where the insurer makes loans or extensions of credit with the agreement or understanding that the proceeds of the transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, to purchase assets of, or to make investments in, any affiliate of the insurer making the loans or extensions of credit, (iii) certain material reinsurance agreements or modifications thereto, including those agreements which may require as consideration the transfer of assets from an insurer to a non-affiliate, if an agreement or understanding exists between the insurer and non-affiliate that any portion of the assets will be transferred to one or more affiliates of the insurer, (iv) all management agreements, service contracts, guarantees and all cost-sharing arrangements, (v) certain material quantifiable guarantees when made by a domestic insurer, and all guarantees which are not quantifiable as to amount, (vi) certain material direct or indirect acquisitions or investments in a person that controls the insurer, and (vii) any material transactions, specified by regulation, which the state insurance regulator determines may adversely affect the interests of the insurer’s policyholders.26
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