Prior Approval and Affiliate Examination Authority: NAIC Expands Regulatory Authority under the Model Insurance Holding Company System Regulatory Act

The NAIC has adopted amendments to its model Insurance Company System Regulatory Act that, if adopted by state legislatures, would expand state insurance regulatory authority to examine the affiliates within an insurance holding company system, require prior notice of divestiture of a controlling interest of an insurer in a insurance holding company system and require prior approval of reinsurance pooling agreements.
As noted in a previous article, the National Association of Insurance Commissioners ("NAIC") adopted substantial amendments to its model Insurance Holding Company System Regulatory Act and its Insurance Holding Company System Model Regulation (collectively, the "Model Law") in December of 2010. The amendments, if adopted by the individual state legislatures, would broaden the authority of state insurance regulatory authorities and impose additional requirements on insurers, controlling persons and affiliates within insurance holding company systems such as requiring the annual filing of a Form F "enterprise risk" report.[1]

The amendments authorize state insurance regulators to require annual filing of financial statements of all affiliates within an insurer's holding company system.
Additionally, the amendments to the Model Law authorize the state insurance regulator to require annual filing of the financial statements of all affiliates within an insurer's insurance holding company system. In the event that an insurer is ordered by the state regulatory authority to produce information not in the insurer's possession, the insurer can be penalized and fined under the amended Model Law if it cannot provide a valid reason why it is unable to produce such information. Further, the state insurance regulator may compel the production of information via subpoena or court order.[2]

Significantly, the amended Model Law expands a state insurance regulator's examination authority to include any or all of an insurer's affiliates within the insurance holding company system in order to ascertain the financial condition of the insurer. This includes an examination of any "enterprise risk" to the insurer by the ultimate controlling party, or by any entity or entities within the insurance holding company system, or by the insurance holding company system on a consolidated basis.

Prior notice to the state regulator is required before divestiture of a controlling interest in an insurer.
The amendments to the Model Law require that any controlling person of a domestic insurer, before it may divest itself of its controlling interest in the insurer, must file a notice of proposed divestiture with the state insurance regulatory authority. The acquiring party must also file a pre-acquisition notice. Upon receipt of the notice, the state insurance regulator has thirty (30) days in which it will determine whether the controlling person shall be required to file for and obtain approval for the proposed divestiture.[3]

The amended Model Law also requires the following:
  • An annual statement that the insurer's board of directors oversees the corporate governance and internal controls of the insurer, and that the insurer's officers and senior management have approved and implemented, and continue to maintain and monitor, corporate governance and internal control procedures;
  • Prior approval of amendments or modifications to any agreements with affiliates (previously approved under the Model Law) with an explanation of the reasons for the change and the financial impact on the insurer;
  • Prior approval of all reinsurance pooling agreements; and
  • Documents, materials or other information filed with the NAIC under the Model Law shall be confidential and privileged by law, and shall not be subject to public records requests, nor shall such be subject to subpoena or discovery, or admissible as evidence, in any private civil action.[4]
Finally, the amended Model Law includes provisions designed to allow cooperation between state insurance regulatory authorities and regulators outside of the United States with respect to insurance holding company systems that operate in other countries.


1Top Ten Items to Watch in Insurance Regulation in 2011, Dewey & LeBoeuf, LLP, January 14, 2011.
2NAIC Adopts Revised Holding Company System Model Act Requiring Enterprise Risk Disclosure, Anthony Roehl, Morris, Manning & Martin, LLP, March 23, 2011.
3. The NAIC model Insurance Company System Regulatory Act.
4NAIC Adopts Revised..., Id.

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