This bill makes various changes to the Insurance Holding Company System Act of 1986 (the "Act"), as described below.
MATERIALITY ON REGISTRATION STATEMENT
Present law provides that an insurer or health maintenance organization that is a member of an insurance holding company system or health maintenance organization holding system ("system") does not need to disclose information on the registration statement filed to the commissioner of commerce and insurance if the information is not material. Unless the commissioner by rule, regulation, or order provides otherwise, sales, purchases, exchanges, loans or extensions of credit, investments, or guarantees involving one-half of one percent or less of an insurer's or health maintenance organization's admitted assets as of December 31 next preceding, are not deemed material.
This bill clarifies that such standard of materiality does not apply for purposes of the group capital calculation, or the liquidity stress test framework, as described below.
GROUP CAPITAL CALCULATION
Present law provides that the ultimate controlling person of an insurer or health maintenance organization that is a member of a system ("ultimate controlling person") must file an annual enterprise risk report. The report must, to the best of the ultimate controlling person's knowledge and belief, identify the material risks within the system that could pose enterprise risk to the insurer. Additionally, the report must be filed with the lead state commissioner of the system as determined by the procedures within the financial analysis handbook adopted by the National Association of Insurance Commissioners ("NAIC").
This bill adds to present law by providing that the ultimate controlling person must concurrently file with the registration an annual group capital calculation as directed by the lead state commissioner. The report must be completed in accordance with the NAIC group capital calculation instructions, which may permit the lead state commissioner to allow a controlling person who is not the ultimate controlling person to file the group capital calculation. The report must be filed with the lead state commissioner of the system as determined by the commissioner in accordance with the procedures within the financial analysis handbook adopted by the NAIC.
However, a system is exempt from filing the group capital calculation under this bill if the system is any of the following:
(1) A system that has only one insurer within its holding company structure, that only writes business in its domestic state, and that assumes no business from another insurer;
(2) A system that is required to perform a group capital calculation specified by the United States federal reserve board. The lead state commissioner must request the calculation from the federal reserve board under the terms of information sharing agreements in effect. If the federal reserve board cannot share the calculation with the lead state commissioner, then the system is not exempt from the group capital calculation filing;
(3) A system whose non-United States group-wide supervisor is located within a reciprocal jurisdiction that recognizes the United States state regulatory approach to group supervision and group capital; or
(4) A system that provides information to the lead state that meets the requirements for accreditation under the NAIC financial standards and accreditation program, either directly or indirectly through the group-wide supervisor, who has determined such information is satisfactory to allow the lead state to comply with the NAIC group supervision approach, as detailed in the NAIC financial analysis handbook; and a system whose non-United States group-wide supervisor who is not in a reciprocal jurisdiction recognizes and accepts, as specified by the commissioner in rule, the group capital calculation as the worldwide group capital assessment for United States insurance groups who operate in that jurisdiction.
However, notwithstanding (3) and (4) above, this bill requires the commissioner to require the group capital calculation for United States operations of a non-United States-based system where, after the necessary consultation with other supervisors or officials, it is deemed appropriate by the commissioner for prudential oversight and solvency monitoring purposes or for ensuring the competitiveness of the insurance marketplace.
Additionally, notwithstanding the exemptions from filing the group capital calculation described in (1)-(4) above, this bill authorizes the commissioner to exempt the ultimate controlling person from filing the annual group capital calculation or to accept a limited group capital filing or report in accordance with criteria as specified by the commissioner in rule.
If the commissioner determines that a system no longer meets one or more of the requirements for an exemption under (1)-(4) above, then the system must file the group capital calculation at the next annual filing date, unless given an extension by the commissioner based upon a showing of reasonable grounds for the extension, in the discretion of the commissioner.
LIQUIDITY STRESS TEST
This bill requires the ultimate controlling person of an insurer scoped into the NAIC liquidity stress test framework to file the results of a specific year's liquidity stress test with the lead state insurance commissioner of the system as determined by the procedures within the financial analysis handbook adopted by the NAIC. The NAIC liquidity stress test framework includes the designated exposure bases, along with minimum magnitudes thereof, for a specified data year, used to establish a preliminary list of insurers considered scoped into the NAIC liquidity stress test framework for a data year ("scope criteria"). The scope criteria are reviewed at least annually by the NAIC financial stability task force or its successor. A change to the NAIC liquidity stress test framework or to the data year for which the scope criteria are to be measured is effective on January 1 of the year following the calendar year when the change is adopted. An insurer that meets at least one threshold of the scope criteria is considered scoped into the NAIC liquidity stress test framework for the specified data year unless the commissioner, in consultation with the NAIC financial stability task force or its successor, determines the insurer should not be scoped into the liquidity stress test framework for that data year. Similarly, an insurer that does not trigger at least one threshold of the scope criteria is considered scoped out of the NAIC liquidity stress test framework for the specified data year, unless the commissioner, in consultation with the NAIC financial stability task force or its successor, determines the insurer should be scoped into the liquidity stress test framework for that data year.
In order to avoid an insurer being scoped in and out of the NAIC liquidity stress test framework on a frequent basis, this bill requires the commissioner, in consultation with the financial stability task force or its successor, to assess this concern as part of the determination for an insurer. The performance and filing of the results from a specific data year's liquidity stress test must comply with the NAIC liquidity stress test framework's instructions and reporting templates for that data year and the commissioner's determinations, in consultation with the NAIC financial stability task force or its successor, provided within the liquidity stress test framework.
TRANSACTIONS WITHIN A SYSTEM
Present law subjects transactions within an insurance or health maintenance organization system to the following standards:
(1) The terms must be fair and reasonable;
(2) Agreements for cost sharing services and management must include such provisions as required by rule and regulation issued by the commissioner;
(3) Charges or fees for services performed must be reasonable;
(4) Expenses incurred and payment received must be allocated to the insurer or health maintenance organization in conformity with customary insurance accounting practices, or, in the case of health maintenance organizations, customary accounting practices applicable to health maintenance organizations, consistently applied;
(5) The books, accounts and records of each party to all the transactions must be so maintained as to clearly and accurately disclose the nature and details of the transactions, including the accounting information necessary to support the reasonableness of the charges or fees to the respective parties; and
(6) The insurer's surplus as regards policyholders, or the health maintenance organization's net worth, following any dividends or distributions to shareholder affiliates must be reasonable in relation to the insurer's, or health maintenance organization's, outstanding liabilities and adequate to meet the insurer's or health maintenance organization's financial needs.
This bill adds the following additional standards:
(7) If an insurer, subject to the Act, is deemed by the commissioner to be in a hazardous financial condition, or a condition that would be grounds for supervision, conservation, or a delinquency proceeding, then the commissioner may require the insurer to secure and maintain either a deposit, to be held by the commissioner, or a bond, as determined by the insurer at the insurer's discretion, for the protection of the insurer for the duration of the contracts or agreements, or the existence of the condition for which the commissioner required the deposit or the bond. In determining whether a deposit or a bond is required, the commissioner should consider whether concerns exist with respect to the affiliated person's ability to fulfill the contracts or agreements if the insurer were to be put into liquidation. Once the insurer is deemed to be in a hazardous financial condition or a condition that would be grounds for supervision, conservation, or a delinquency proceeding, and a deposit or bond is necessary, the commissioner may determine the amount of the deposit or bond, not to exceed the value of the contracts or agreements in any one year, and whether such deposit or bond should be required for a single contract, multiple contracts, or a contract only with a specific person or persons;
(8) All records and data of the insurer held by an affiliate are and remain the property of the insurer, are subject to the control of the insurer, are identifiable, and are segregated or readily capable of segregation, at no additional cost to the insurer, from all other persons' records and data. This includes records and data that are otherwise the property of the insurer, in whatever form maintained, including claims and claim files, policyholder lists, application files, litigation files, premium records, rate books, underwriting manuals, personnel records, financial records, or similar records within the possession, custody, or control of the affiliate. At the request of the insurer, the affiliate must authorize the receiver to obtain a complete set of all records that pertain to the insurer's business, to obtain access to the operating systems in which the data is maintained, and to obtain the software that runs those systems either through assumption of licensing agreements or otherwise. The insurer must restrict the use of the data by the affiliate if it is not operating the insurer's business. The affiliate must provide a waiver, if applicable, of a landlord lien or other encumbrance to give the insurer access to all records and data in the event of the affiliate's default under a lease or other agreement; and
(9) Premiums or other funds belonging to the insurer that are collected by, or held by, an affiliate are the exclusive property of the insurer and are subject to the control of the insurer. A right of offset in the event an insurer is placed into receivership is subject to the Insurers Rehabilitation and Liquidation Act.
Present law prohibits, amongst other transactions, management agreements, service contracts, tax allocation agreements, guarantees, and all cost-sharing arrangements involving a domestic insurer or a health maintenance organization and a person in its system that are subject to certain materiality standards from being entered into, unless the insurer or health maintenance organization has notified the commissioner in writing of its intention to enter into the transaction at least 30 days prior, or a shorter period that the commissioner permits, and the commissioner has not disapproved it within the period.
This bill provides that an affiliate that is a party to an agreement or contract with a domestic insurer that is subject to the transactions described above is subject to the jurisdiction of a supervision, seizure, conservatorship, or receivership proceeding against the insurer and to the authority of a supervisor, conservator, rehabilitator, or liquidator for the insurer appointed pursuant the Insurers Rehabilitation and Liquidation Act for the purpose of interpreting, enforcing, and overseeing the affiliate's obligations under the agreement or contract to perform services for the insurer that:
(1) Are an integral part of the insurer's operations; or
(2) Are essential to the insurer's ability to fulfill its obligations under insurance policies.
This bill authorizes the commissioner to require that such a transaction for the provision of services described in (1) and (2) above specify that the affiliate consents to such jurisdiction.
CONFIDENTIALITY OF INVESTIGATIONS, EXAMINATIONS, RECORDS
Present law provides that documents, materials, or other information in the possession or control of the department that are obtained by or disclosed to the commissioner or any other person in the course of an examination or investigation made pursuant to the Act, and all information reported or provided to the department pursuant to the Act, are confidential and privileged, not subject to open records laws, not subject to subpoena, and not subject to discovery or admissible in evidence in a private civil action. However, the commissioner is authorized to use the documents, materials, or other information in the furtherance of a regulatory or legal action brought as a part of the commissioner's official duties.
Present law prohibits the commissioner from otherwise making the documents, materials, or other information public without the prior written consent of the insurer or health maintenance organization to which it pertains unless the commissioner, after giving the insurer, or health maintenance organization and its affiliates who would be affected thereby, notice and opportunity to be heard, determines that the interest of policyholders, enrollees, providers, shareholders, or the public will be served by the publication thereof, in which event the commissioner may publish all or any part in the manner the commissioner deems appropriate.
This bill adds to the present law by providing that, for purposes of the information reported and provided to the commissioner regarding the group capital calculation, the group capital calculation and group capital ratio produced within the calculation and group capital information received from an insurance holding company supervised by the federal reserve board or a United States group-wide supervisor are confidential and privileged. Further, for purposes of the information reported and provided to the commissioner regarding the liquidity stress test, the liquidity stress test results and supporting disclosures and liquidity stress test information received from an insurance holding company supervised by the federal reserve board and non-United States group-wide supervisors are confidential and privileged.
Present law provides that, in order to assist in the performance of the commissioner's duties, the commissioner must enter into written agreements with the NAIC governing sharing and the use of information provided pursuant to the Act that must, amongst other things, specify procedures and protocols regarding the confidentiality and security of information shared with the NAIC and its affiliates and subsidiaries pursuant to the Act, including procedures and protocols for sharing by the NAIC with other state, federal or international regulators.
This bill adds to the present law by providing that the agreement must provide that the recipient agrees in writing to maintain the confidentiality and privileged status of the documents, materials, or other information, and has verified in writing the legal authority to maintain such confidentiality.
Additionally, this bill provides that, in order to assist in the performance of the commissioner's duties, the commissioner must enter into written agreements with the NAIC governing sharing and the use of information provided pursuant to the Act that must, amongst other things:
(1) Excluding documents, material, or information reported regarding the liquidity stress test, prohibit the NAIC and its affiliates and subsidiaries from storing the information shared pursuant to the Act in a permanent database after the underlying analysis is completed; and
(2) For documents, material, or information reported regarding the liquidity stress test, in the case of an agreement involving an affiliate or subsidiary, provide for notification of the identity of the affiliate or subsidiary to the applicable insurers.
This bill also provides that the group capital calculation and resulting group capital ratio and the liquidity stress test, along with its results and supporting disclosures, are regulatory tools for assessing group risks and capital adequacy and group liquidity risks, respectively, and are not intended as a means to rank insurers or insurance holding company systems generally. Therefore, except as otherwise provided under the Act, the making, publishing, disseminating, circulating, or placing before the public, or causing directly or indirectly to be made, published, disseminated, circulated, or placed before the public in a newspaper, magazine, or other publication, or in the form of a notice, circular, pamphlet, letter, or poster, or over a radio or television station or an electronic means of communication available to the public, or in another way as an advertisement, announcement, or statement containing a representation or statement with regard to the group capital calculation, group capital ratio, the liquidity stress test results, or supporting disclosures for the liquidity stress test of an insurer or an insurer group, or of a component derived in the calculation by an insurer, broker, or other person engaged in the insurance business would be misleading and is therefore prohibited.
However, if a materially false statement with respect to the group capital calculation, resulting group capital ratio, an inappropriate comparison of an amount to an insurer's or insurance group's group capital calculation or resulting group capital ratio, liquidity stress test result, supporting disclosures for the liquidity stress test, or an inappropriate comparison to an insurer's or insurance group's liquidity stress test result or supporting disclosures is published in a written publication and the insurer is able to demonstrate to the commissioner with substantial proof the falsity of such statement or the inappropriateness of such comparison, then this bill authorizes the insurer to publi