Legislative Analysis
Phone: (517) 373-8080
FRATERNAL BENEFIT SOCIETY SOLVENCY
http://www.house.mi.gov/hfa
Senate Bill 495 (S-1) as passed by the Senate Analysis available at
Sponsor: Sen. Dan Lauwers http://www.legislature.mi.gov
House Committee: Insurance and Financial Services
Senate Committee: Finance, Insurance, and Consumer Protection
Complete to 12-4-24
SUMMARY:
Senate Bill 495 would amend the Insurance Code to provide procedures relating to the solvency
of fraternal benefit societies domiciled in Michigan. The bill would require a society to notify
the director of the Department of Insurance and Financial Services (DIFS) before assessing its
members to make up for a shortfall in reserves, and it would allow the director to disapprove
an assessment that is not in the interests of those members. The bill also would allow the
director to order a society that has insufficient capital or has not responded satisfactorily to a
corrective order to remedy that condition. The order could authorize the society to negotiate
the transfer of its members, policies, and assets and liabilities to another fraternal benefit
society or a commercial insurer, and the bill includes provisions that would facilitate such a
transfer. A society that failed to remedy a hazardous condition would be subject to
rehabilitation or liquidation. However, rehabilitation would be presumed futile unless the
director reasonably believed it highly likely to return the society to long-term viability or
facilitate a transfer to another society or insurer. The liquidator of a society would have to try
to transfer the society’s policies to another society or insurer.
Fraternal benefit societies are tax-exempt, nonprofit membership organizations that operate
for a particular educational, charitable, religious, patriotic, or social purpose and that also offer
financial products such as life insurance and annuities to their members. 1 Fraternal benefit
societies must be operated on a lodge system (that is, with local chapters) and have a
representative form of government. 2 They may have initiatory or other rituals. Society
membership is based on some common bond, often that of religion (e.g., the Baptist Life
Association), ethnic heritage (e.g., the Sons of Norway), or occupation (e.g., the Police and
Firemen’s Insurance Association). The largest fraternal benefit societies in the United States
are the Knights of Columbus and Thrivent Financial, both of which have chapters in Michigan.
According to the American Fraternal Alliance, two fraternal benefit societies are domiciled in
Michigan: the Gleaner Life Insurance Society and the Woman’s Life Insurance Society. 3
Under current law, a fraternal benefit society that has a shortfall in its capital reserves can
assess its members proportionately in order to make up that deficiency. An unpaid assessment
becomes a debt against the member’s contract or the benefits paid under it.
1
See: https://www.irs.gov/charities-non-profits/other-non-profits/fraternal-societies
Also: https://www.irs.gov/pub/irs-tege/eotopicf04.pdf
2
“Fraternal benefit society,” “operating on the lodge system,” and “representative form of government” are defined
in sections 8164, 8165, and 8166 of the Insurance Code, respectively.
3
See https://static1.squarespace.com/static/60ff13a7b4c26d7bf72e587a/t/62101fca18f4161223ab98bb/1645223882
510/Michigan.pdf
House Fiscal Agency Page 1 of 5
 In addition, like all insurers doing business in Michigan, fraternal benefit societies must file
annual statements regarding their financial condition, using accounting practices, procedures,
and reporting standards specified by the director of DIFS. 4 These filings include a risk-based
capital (RBC) report, which facilitates a regulatory measure of whether the society holds
enough capital to fulfill its financial obligations to its members. As described by the National
Association of Insurance Commissioners (NAIC): 5
The RBC requirement is a statutory minimum level of capital that is based on two
factors: 1) an insurance company’s size; and 2) the inherent riskiness of its financial
assets and operations. That is, the company must hold capital in proportion to its risk.
RBC is intended to be a regulatory standard and not necessarily the full amount of
capital that an insurer would need to hold to meet its objectives. [...]
Under the RBC system, regulators have the legal authority to take preventive and
corrective measures. These measures vary depending on the capital deficiency
indicated by the RBC result. Capital sufficiency is the ratio of total adjusted capital to
RBC. There are four levels of regulatory intervention. If the ratio is at or above 200%,
no regulatory intervention is needed. Below that ratio, interventions range from
submission of action plans to a regulatory takeover of the management of the company.
If the ratio is below 70%, a regulator is obligated to take over management of the
company. These preventive and corrective measures are designed to provide for early
regulatory intervention to correct problems before insolvencies become inevitable,
thereby minimizing the number and adverse impact of insolvencies.
In general, 6 the four levels of regulatory intervention described above, and the RBC ratios that
trigger them, are as follows:
• Company action level (the ratio of total adjusted capital to RBC is below 200% but still
150% or greater).
• Regulatory action level (that ratio is below 150% but still at least 100%).
• Authorized control level (that ratio is below 100% but still at least 70%).
• Mandatory control level (that ratio is less than 70%).
There are other circumstances (“events”) that can trigger one of these levels of regulatory
intervention. For example, a fraternal benefit society is subject to company action level
intervention if the ratio of its total adjusted capital to its RBC is below 300% (but still 150%
or greater) and has a negative trend.
As indicated above, these levels of regulatory intervention can range from requiring the insurer
to file a comprehensive financial corrective action plan (company action level), to allowing the
director of DIFS to issue corrective orders (regulatory action level), to allowing the director to
seek to place the insurer under regulatory control (authorized control level), to requiring the
director to seek to do so (mandatory control level).
4
Michigan generally uses procedures and standards promulgated by the NAIC. See https://www.michigan.gov/-
/media/Project/Websites/difs/Form/Insurance/Financial_Filing/Booklet_Life.pdf
See also https://content.naic.org/cipr-topics/statutory-accounting-principles
5
https://content.naic.org/cipr-topics/risk-based-capital
6
See DIFS Bulletin 2013-21-INS: https://www.michigan.gov/difs/-
/media/Project/Websites/difs/Bulletins/2013/Bulletin_2013-21-INS.pdf
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 Under the bill, an assessment imposed by a fraternal benefit society on its members to make
up a shortfall in reserves could not take effect until at least 90 days after the date the director
of DIFS was notified of the assessment, unless the director approves an earlier effective date.
The bill also would allow the director to disapprove an assessment that was not made in
conformity with the Insurance Code or that is contrary to the interests of the members of the
society.
Transfer of domestic fraternal benefit society in hazardous condition
In addition, if a domestic fraternal benefit society (one domiciled in Michigan) has a regulatory
or authorized control level event, as defined by the director, or if the continued operation of a
domestic society is considered hazardous to policyholders, creditors, or the public under the
code, under circumstances the director determines will not be promptly remedied, the director
could order the society to remedy the risk-based capital control level event or hazardous
condition. The order could authorize the society to negotiate an agreement to transfer all of its
members, certificates (i.e., insurance policies), and other assets and liabilities to another
fraternal benefit society or other insurer through merger, consolidation, assumption, or other
means. These powers would be in addition to any other action of the director required or
allowed by law.
Under DIFS Bulletin 2013-21-INS, an authorized control level event is defined as
either of the following:
• The filing of an RBC report that indicates that the insurer’s total adjusted
capital is less than its authorized control level RBC but still not below its
mandatory control level RBC (that is, its ratio of total adjusted capital to RBC
is below 100% but still 70% or greater). This provision also applies to an
adjusted RBC report that shows such a level of capital if the insurer does not
challenge the adjusted report or its challenge is rejected after a hearing.
• The failure of the insurer to respond to a corrective order in a manner
satisfactory to the director of DIFS. This provision also applies to a failure to
satisfactorily respond to the rejection or modification of a challenged corrective
order.
A transfer as described above would constitute a novation of the domestic fraternal benefit
society’s certificates (i.e., benefit contracts), effective on the date of transfer. 7 The society
would have to ensure that the transfer is concluded within the time ordered by the director of
DIFS, and the transfer would be subject to the director’s approval. The transfer agreement
would be considered fully approved by the society upon a majority vote of its board of
directors, notwithstanding section 8177 of the Insurance Code, 8 and regardless of whether any
other law, rule, or regulation (or bylaw or rule of the society itself) requires notice to or
approval by the society’s members or supreme governing body. The transferring society would
7
“Novation” means that the transferring society would be replaced in the certificates with the entity they are being
transferred to. A novated agreement replaces the original, as though the contract were simply canceled and reissued
with the new entity in place of the old.
8
Section 8177 governs the consolidation or merger of a domestic fraternal benefit society with another fraternal benefit
society. Among other things, it requires a consolidation or merger to be approved by a 2/3 vote of the supreme
governing body of each society and provides that the full terms and conditions of the consolidation or merger must be
provided to all of the members of each society at least 60 days before that vote.
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 have to provide notice of the transfer to its members by mail or in its official publication no
later than 30 days after approval of the transfer by the director of DIFS.
If the domestic fraternal benefit society sought to make a transfer as described above to an
organization without a certificate of authority in Michigan, the director of DIFS could grant
the organization a limited certificate of authority with authority limited to servicing the existing
benefit contracts and fulfilling obligations owed under them after the transfer, but not to
otherwise conduct insurance business in Michigan.
By order of the director of DIFS, the society’s board of directors could suspend or modify the
qualifications for membership in the society as necessary to facilitate a transfer described
above, notwithstanding the society’s bylaws or any law or rule to the contrary.
Upon the effective date of a transfer to an organization that is not a fraternal benefit society
(i.e., to a commercial insurer) and in consideration for the transfer, each member of the society
would be considered to agree that any terms of a certificate that subject it to the society’s
bylaws or provide for the maintenance of the society’s solvency are void (except to the extent
of any outstanding lien not released by the terms of the transfer), and the assuming organization
would have to endorse the certificate accordingly.
Rehabilitation or liquidation of a domestic fraternal benefit society
Either of the following would qualify as additional grounds for rehabilitation or liquidation
under the code:
• Failure by a domestic fraternal benefit society to comply with an order of the director
of DIFS described above.
• Failure by a domestic fraternal benefit society to remedy within the time specified by
the director of DIFS a hazardous condition as described above.
Rehabilitation under the code would be presumed to be futile unless the director of DIFS
reasonably believes that is has a high probability of returning the society to long-term viability
or that it would facilitate a transfer to another fraternal benefit society or insurer. If the
rehabilitator seeks to make a transfer to an organization that does not have a certificate of
authority in Michigan, the director of DIFS could grant the organization a certificate of
authority with authority limited to servicing the existing certificates and fulfilling all
obligations owed to certificate holders following the transfer but not to otherwise transact
insurance business in Michigan.
After the director filed a petition for liquidation of a domestic fraternal benefit society under
the code, the society could not assess payment of shares of a deficiency unless the director
determined that the assessment was to satisfy the obligations of the society to Class 1 or Class
2 creditors described in section 8142(1)(a) and (b) of the code. The society could not make an
assessment for the purpose of any deficiency related to other claims, including those described
in section 8142(1)(c) to (i). 9
Liquidation proceedings for a domestic fraternal benefit society would have to be conducted
in a manner designed to conserve assets, limit liquidation expenses, and avoid any assessment
9
See section 8142: http://legislature.mi.gov/doc.aspx?mcl-500-8142
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 of shares of a deficiency. The liquidator would have to attempt to transfer policies or
certificates of the liquidating society by way of assignment, assumption, or other means to a
qualified fraternal benefit society, either domestic or foreign, or, if no qualified fraternal benefit
society will accept the transfer, to an insurer authorized to transact life insurance business in
Michigan. If the liquidator seeks to make a transfer to an organization that does not have a
certificate of authority in Michigan, the director of DIFS could grant the organization a
certificate of authority with authority limited to servicing the existing certificates and fulfilling
all obligations owed to certificate holders following the transfer but not to otherwise transact
insurance business in Michigan. In determining whether a fraternal benefit society or insurer
is qualified to accept a transfer, the liquidator would have to consider the solvency of the
fraternal benefit society or other insurer. A qualified fraternal benefit society or insurer would
not be obligated to accept a transfer.
On the effective date of a transfer described above to an insurer that is not a fraternal benefit
society and in consideration for the transfer, each member of the society and owner of a policy
or certificate being transferred would be considered to agree that any terms of the policy or
certificate that provide for the maintenance of the society’s solvency or that subject the policy
or certificate to the policies of the society are void and to agree to any other changes to terms
of the policy or certificate that are determined necessary by the liquidator to effectuate the
transfer. The insurer accepting the transfer would have to endorse the policy or certificate
accordingly.
Any transfer under the above provisions would be a novation of the policy or certificate that is
effective on the date of transfer.
MCL 500.8182 and proposed MCL 500.8199b and 500.8199c
FISCAL IMPACT:
Senate Bill 495 would have no fiscal impact on any units of state or local government.
Legislative Analyst: Rick Yuille
Fiscal Analyst: Una Jakupovic
■ This analysis was prepared by nonpartisan House Fiscal Agency staff for use by House members in their
deliberations and doe