Form F and Enterprise Risk: NAIC Expands Regulatory Authority under the Model Insurance Holding Company System Regulatory Act

The amended model Insurance Holding Company System Regulatory Act, if adopted by state legislatures, will significantly expand the scope of state insurance regulatory authority over insurance holding company systems, including controlling persons and affiliates.
In December of 2010, the National Association of Insurance Commissioners ("NAIC") adopted substantial amendments to its model Insurance Holding Company System Regulatory Act (the "Model Act"). The amendments significantly broaden the authority of state insurance regulatory authorities under the Model Act, and impose additional requirements on insurers, controlling persons and affiliates within insurance holding company systems.

The NAIC is seeking to add the provisions to its accreditation standards for state insurance departments.
The provisions of the Model Act are only effective if adopted by the individual state legislatures. However, the NAIC is moving to include the amendments as part of the national accreditation standards for state insurance departments, increasing the likelihood that state lawmakers will adopt the Model Act provisions.

The Model Act amendments are a response to concerns that insurance regulators previously lacked the necessary authority to oversee and intervene with respect to activities within an insurer's holding company system that might pose material risks to the insurer. Many of these concerns were inflamed by the financial difficulties recently experienced by certain affiliates of the AIG insurance holding company system.[1]

The new Form F is one of the most significant amendments to the Model Act.
One of the most significant amendments to the Model Act is the addition of a new annual reporting requirement for insurance holding company systems: the Form F. The newly created Form F requires, among other things, that the ultimate controlling person of an insurance holding company system report any "enterprise risk" within the system, including:
...any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole, including, but not limited to, anything that would cause the insurer’s Risk-Based Capital to fall into company action level . . . or would cause the insurer to be in hazardous financial condition. . .[2]
The Model Act amendments also expand the examination authority of a state insurance regulator to examine the non-insurer affiliates within an insurance holding company system in order to determine what enterprise risks could ultimately impact the insurer. [3]

The amendments move beyond the "walls" that the Model Act originally created, introducing "windows" of reporting requirements and expansion authority.
While the amendments to the Model Act expand its authority beyond providing the "walls" of protection that it was originally designed to create, the amendments stop short of authorizing direct oversight and control of insurance holding company systems like Solvency II. Instead, the amendments add "windows" of reporting requirements and examination authority with respect to controlling persons and affiliates such that insurance regulators have increased oversight of activities that could pose enterprise risks to regulated insurers.[4]
Enterprise Risk Reports must contain detailed information, including: (i) a description of the holding company’s business plan and strategies; (ii) material developments concerning risk management and internal audit findings; and (iii) rating agency and other discussions that could reflect potential "negative movement" in an insurer’s ratings.[5]
However, the question remains as to exactly what remedies that state insurance regulators will bring to bear against the so-called enterprise risks.

Whether insurance regulators will try to use traditional remedies such as conservation or rehabilitation of the insurer itself to remedy these potential enterprise risks is a significant concern.
To what extent the judiciary will allow state insurance regulators to exercise authority over non-insurance company affiliates within insurance holding company systems remains to be seen. The alternative remedies are those tools traditionally available to state insurance regulators, such as exercising conservation or rehabilitation authority over the insurer itself. Just such an option was proposed by at least one state insurance regulator when questions arose as to how the AIG insurance subsidiaries might be "protected" from the financial difficulties within that system. The extent to which this "solution" might actually do more harm than good is certainly up for debate.[6]

West Virginia became the first state to adopt new laws substantially similar to the Model Act amendments in April of 2011.[7] Texas became one of the first large states to adopt principal provisions of the Model Act amendments in June of 2011.[8]

1Top Ten Items to Watch in Insurance Regulation in 2011, Dewey & LeBoeuf, LLP, January 14, 2011.
2. The Model Act, §1(F).
3Top Ten Items to Watch..., Id.
4Top Ten Items to Watch..., Id.
5NAIC Adopts Final Changes to Holding Company System Model Act and Regulation, Insurance and Financial Services Update, January 6, 2011, Jeff Liebmann and Mike Goldman, Sidley Austin LLP.
6Top Ten Items to Watch..., Id.
7West Virginia Becomes the First State to Adopt the Amendments to the NAIC's Insurance Holding Company System Regulatory Act, Dewey & LeBoeuf, April 7, 2011.
8Texas Adopts Key Features of NAIC's Amended Model Insurance Holding Company Act; Chadbourne & Parke, LLP, June 28, 2011.


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