New York Insurance Holding Company Bill Becomes Law

Transcription

1 AUGUST 13, 2013 INSURANCE UPDATE Insurance Holding Company Bill Becomes Law On July 31, 2013, Governor Cuomo signed a bill (Assembly 7807A) that amends the Insurance Law and implements key provisions of the NAIC s Amended Model Insurance Holding Company System Regulatory Act (the NAIC Model Act ). Consistent with the NAIC Model Act, the legislation authorizes the Superintendent of Financial Services (the Superintendent ) to participate in supervisory colleges (meetings with other state, federal and international regulators of an insurer or insurance group) and requires that insurers file Enterprise Risk Reports with the Superintendent addressing risks within an insurer s holding company system that could ultimately have a material adverse effect on the financial condition or liquidity of the insurer or its holding company system. The legislation also amends current law governing insurer registration, annual reports and notice to the Department of Financial Services (the DFS ) of an insurer s transactions with its affiliates. The legislation is distinct from the NAIC Model Act in that it creates three similar, but separate, requirements for registration, affiliate transaction filings and enterprise risk reports that apply to: 1. Authorized insurers controlled directly or indirectly by a holding company and subject to Article 15 of the New York Insurance Law ( Controlled Insurers ); 2. Authorized domestic property-casualty insurers subject to Article 16 of the Insurance Law (relating to investments in subsidiaries); and 3. Domestic life insurers, Article 43 domestic non-profit corporations and Article 46 domestic retirement systems that are subject to Article 17 of the Insurance Law (referred to in Article 17 as Parent Corporations. ) With respect to affiliate transaction reporting, the legislation is in some cases more burdensome than the NAIC Model Act (for example, the amount of advance notice required for affiliate reinsurance agreements has been increased from 30 to 45 days). In other respects, the legislation is less restrictive than the NAIC Model Act (for example, higher materiality thresholds before reporting obligations are triggered). The legislation also amends certain other sections of the Insurance Law, including Article 74 governing insolvency proceedings, and adds a prior notice requirement for persons seeking to divest a controlling interest in a domestic insurer. The legislation also imposes new penalties for violations of Article 15 of the Insurance Law that prevent the DFS from fully understanding the enterprise risk posed to the insurer by the holding company system. Set forth below is a summary of key provisions of the legislation. Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising - For purposes of compliance with State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue,, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; and 1501 K Street, N.W., Washington, D.C ,

2 Page 2 REGISTRATION REQUIREMENTS The legislation amends Article 15 so that a Controlled Insurer must file an amended registration statement within 30 days of any material change to information in its most recently filed statement, and not just a change in the identity of the insurer s holding company, as currently required. The legislation also imposes registration requirements on insurers subject to Articles 16 and such insurers must file registration statements with the Superintendent within 30 days of becoming subject to registration. The legislation provides that sections governing registration statement filings under Articles 16 and 17 become effective within 90 days after the bill becomes law. As with Controlled Insurers, insurers subject to Articles 16 and 17 must amend their registration statements within 30 days of a material change to information in the statements. AFFILIATE TRANSACTION REPORTING The legislation amends certain affiliate transaction reporting requirements in Article 15 and adds two additional sections governing reporting by insurers subject to Articles 16 and 17. Article 15 Transactions with Affiliates The legislation adds a materiality threshold to certain agreements between a domestic controlled insurer and persons in its holding company system that must be filed with the Superintendent. Specifically, the 30 day prior notice requirement set forth in Section 1504(d) of the Insurance Law will now apply to sales, purchases, exchanges, loans or extensions of credit, or investments (involving less than 5% of the insurer s admitted assets) only if they equal or exceed: (i) the lesser of 3% of the insurer s admitted assets or 25% of capital and surplus for accident and health insurers or Article 43 corporations; (ii) 3% of the insurer s admitted assets for life insurers; or (iii) the lesser of 3% of the insurer s admitted assets or 25% of policyholders surplus with regard to all other insurers, each as of last year-end. (Approval requirements for such transactions involving five percent or more of the insurer's admitted assets pursuant to Section 1505(c) remain unchanged.) Notably, the legislation does not apply this materiality threshold to affiliate reinsurance treaties and agreements even though the DFS, in April 2013, added a materiality threshold to certain affiliate reinsurance agreement filing requirements for non-life insurers when it amended Regulation 52, which implements Article 15. Also, the legislation increases the amount of advance notice from 30 to 45 days for affiliate reinsurance agreements a domestic controlled insurer cannot enter into a reinsurance agreement with a person its holding company system unless it has notified the Superintendent of the transaction at least 45 days prior thereto. It is likely that inconsistencies between the new legislation and Regulation 52 will be resolved when the DFS re-adopts amendments to Regulation 52 (thus far, adopted on an emergency basis only). Article 16 Transactions with Subsidiaries (Non-Life) The legislation adds affiliate transaction reporting requirements to Article 16 similar to those in Article 15 and, notably, such requirements apply to certain transactions with non-affiliates if the transaction will ultimately affect an insurer s subsidiary. Under new subsection (e) of Section 1608 of the Insurance Law, a domestic property-casualty insurer may not enter into certain transactions with a subsidiary unless it has notified the Superintendent at least 30 days prior thereto (45 days for reinsurance treaties or agreements) and the Superintendent has not disapproved it within such period. The 30-day prior notice requirement applies to management agreements, service contracts, tax allocation agreements, guarantees, and all cost-sharing agreements, regardless of their materiality.

3 Page 3 The 30-day prior notice requirement also applies to sales, purchases, exchanges, loans, extensions of credit or investments with a subsidiary if the transactions are equal to or exceed the lesser of 3% of the insurer s admitted assets or 25% of policyholders surplus at last year-end. Further, the 30-day prior notice rule also applies to loans or extensions of credit to any person who is not a subsidiary, where the insurer makes loans or extensions of credit with the agreement or understanding that the proceeds of such transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, purchase assets of, or make investments in, any subsidiary of the insurer making the loans or extensions of credit (provided the transactions are equal to or exceed the lesser of 3% of the insurer s admitted assets or 25% of policyholders surplus). A reinsurance treaty or agreement between an insurer subject to Article 16 and a subsidiary requires 45 days prior notice to the Superintendent, unless the insurer has otherwise submitted the agreement to the Superintendent, where the reinsurance premium, change in the insurer s liabilities, or the projected reinsurance premium or a change in the insurer s liabilities in any of the next three years, is less than 5% of the insurer s policyholders surplus. The insurer need not submit a copy of the reinsurance agreement unless requested by the Superintendent. As with the amendment to Article 15, the 45-day prior notice requirement additionally applies to agreements that may require, as consideration, the transfer of assets from an insurer to a non-subsidiary, if an agreement or understanding exists between the insurer and non-subsidiary that any portion of the assets will be transferred to one or more subsidiaries of the insurer. Article 17 - Transactions with Subsidiaries (Life) Article 17 s affiliate transaction provisions are similar to those in Article 16. An insurer subject to Article 17 may not enter into certain transactions with a subsidiary unless it has notified the Superintendent at least 30 days prior thereto (45 days for reinsurance treaties or agreements) and the Superintendent has not disapproved the transaction within such period. The 30-day prior notice requirement applies to management agreements, service contracts, tax allocation agreements, guarantees, and all cost-sharing agreements, regardless of their materiality. The 30-day prior notice requirement also applies to sales, purchases, exchanges, loans, extensions of credit or investments with a subsidiary if the transactions are equal to or exceed the lesser of: (i) for domestic life insurers, 3% of the insurer s admitted assets; or (ii) for domestic corporations subject to Article 43 of the Insurance Law, the lesser of 3% of its admitted assets or 25% of capital and surplus, in each case at last year-end. Similar to the new provision in Article 16, the legislation applies the 30-day prior notice requirement to loans or extensions of credit to any person who is not a subsidiary, where the insurer or corporation makes loans or extensions of credit with the agreement or understanding that the proceeds of such transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, purchase assets of, or make investments in, any subsidiary of the insurer or corporation making the loans or extensions of credit (provided the transactions are equal to or exceed the lesser of 3% of a domestic life insurer s admitted assets or, in the case of an Article 43 corporation, the lesser of 3% of its admitted assets or 25% of capital and surplus). Unlike Article 16, all reinsurance treaties and agreements between an Article 17 insurer and a subsidiary are subject to the 45-day prior notice requirement, without regard to materiality, and copies of the agreement must always be submitted. Like Article 16, the filing requirement is triggered by agreements that require, as consideration, the transfer of assets from the insurer or corporation to a non-subsidiary, if an agreement or understanding exists between the insurer or corporation and non-subsidiary that any portion of the assets will be transferred to one or more subsidiaries of the insurer or corporation.

4 Page 4 ENTERPRISE RISK REPORTING The legislation addresses enterprise risk and implements the NAIC Model Act sections concerning identification of enterprise risks and annual enterprise risk report filings that analyze such risks. Enterprise risk is defined as: any activity, circumstance, event, or series of events involving the holding company system that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its holding company system, including anything that would cause the insurer s Risk-Based Capital to fall into company action level as set forth in [ Insurance Law Sections 1322 or 1324], or that would cause further transaction of business to be hazardous to the insurer s policyholders or creditors or the public. Like the NAIC Model Act, the new legislation requires insurers to maintain enterprise risk management functions and to file annual reports with the Superintendent. Notably, the DFS has already been requiring insurers, pursuant to a 2011 Circular Letter, to adopt plans that identify, measure and manage exposure to enterprise risk. Article 15 Enterprise Risk Reports filed by Holding Company The legislation adds a new section to Article 15 requiring a holding company directly or indirectly controlling an insurer to adopt a formal enterprise risk management function and file an enterprise risk report with the Superintendent by April 30 of each year. The enterprise risk report must, to the best of the holding company s knowledge and belief, identify the material risks within the holding company system that could pose enterprise risk to the controlled insurer. Articles 16 and 17 Enterprise Risk Reports Addressing Risks Within Subsidiaries While the enterprise risk definition in Article 15 focuses upon activities of the insurer s holding company system, the corresponding definitions in Articles 16 and 17 addresses the activities of the insurer or Article 43 corporation s subsidiaries. Insurers subject to Articles 16 and 17 (except domestic insurers or Article 43 corporations required to register as a controlled insurer under Article 15) must adopt a formal enterprise risk management function and file an enterprise risk report by April 30 of each year. The report is similar to those filed under Article 15, but addresses material risks within any subsidiary that could pose enterprise risk to the insurer or corporation. SUPERVISORY COLLEGES Consistent with the NAIC Model Act, the legislation authorizes the Superintendent to participate in supervisory colleges with respect to insurers registered under Articles 15, 16 or 17 and having international operations, in order to determine compliance with the Insurance Law. The Superintendent has the power to initiate and/or participate in supervisory colleges with other regulators charged with supervising the insurer or its parent, affiliates or subsidiaries, including other state, federal and international regulatory agencies. Participation can include coordinating functions of the college, information-sharing, establishing a crisis management plan and clarifying the role of other regulators, including establishment of a group-wide supervisor. At supervisory colleges, regulators will, among other things, assess an insurer s business strategy, risk exposure and financial position. Insurers registered under Articles 15, 16 or 17 are responsible for the costs of supervisory colleges. REPORTING/EXAMINATIONS The new legislation amends Article 15 to give the Superintendent power to order any Controlled Insurer to produce information not in the insurer s possession if the insurer can obtain access to the information pursuant to contractual relationships, statutory obligations, or other methods. If the insurer cannot obtain such information, it must provide a detailed explanation of the reason and identify the holder of information. If it appears to the Superintendent that the explanation is without merit, the Superintendent may (after notice and an opportunity to be heard), in addition to other

5 Page 5 penalties, levy a penalty against the Controlled Insurer up to $500 per day for each day the insurer has not produced the information. ACQUISITIONS OF CONTROL AND DIVESTMENTS The legislation amends Articles 15, 16 and 17 to add a 30-day prior notice requirement when a person seeks to divest its controlling interest in a domestic insurer in any manner. The notice must be filed with the Superintendent (and with the insurer subject to the divestment) by a holding company (in the case of Article 15) or by an insurer or corporation subject to Article 16 or 17). Additionally, the legislation amends Article 16 to expressly require the prior approval of the Superintendent in order for an insurer subject to Article 16 to acquire control of any other insurer subject to Article 16, whether by purchase of its securities or otherwise. PENALTIES New penalties are imposed for persons violating Section 1506 of the Insurance Law (governing acquisitions, retention and divestiture of control of domestic insurers). If it appears to the Superintendent that the violation has prevented the full understanding of the enterprise risk posed to the insurer by the holding company system, the violation may serve as an independent basis for disapproving dividends or distributions or as grounds for rehabilitation or liquidation under Article 74 of the Insurance Law. OTHER PROVISIONS Other changes to the Insurance Law effected by the new legislation include the following: The Superintendent may examine non-profit charitable annuity societies exempt from obtaining special permits under Insurance Law Section 1110(d). The Superintendent may accept an electronic filing of a foreign insurer s annual statement that does not contain the signatures or verification of the insurer s officers if the insurer has filed in its state of domicile a statement verified by oath of at least two of its principal officers. Changes to Article 74 governing rehabilitation and liquidation proceedings allow for disposition of certain real estate or personal property without court approval.

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