Wisconsin Insurance Holding Company Rule Revisions
Insurance Regulation Law Update 08/26/15 William J. Toman
The Wisconsin Office of the Commissioner of Insurance (OCI) has substantially revised its insurance holding company rules, effective September 1, 2015, to bring them in line with the National Association of Insurance Commissioners (NAIC) model. The biggest change—arising from the AIG meltdown during the financial crisis—will require an insurer’s ultimate parent company to file an “Enterprise Risk Report” (Form F) that discloses any circumstance involving the holding company system that is likely to have a material adverse effect on the insurer or the system as a whole. The first Form F is due October 1, 2015. This report dovetails with the requirement enacted last year requiring insurers to maintain a “risk management framework,” and for some of them to undertake and report on their “own risk and solvency assessment” (ORSA). We described these requirements in our earlier update. In addition, the new holding company rules include changes to pre-existing provisions on acquisitions of insurers, affiliate agreements, and the annual holding company registration.
Enterprise Risk Report (Form F)
The ultimate parent company of any insurer licensed in Wisconsin must file an annual enterprise risk report, unless the insurer is subject to substantially similar holding company rules in its home state, or unless OCI grants a hardship waiver. The ultimate parent must file the Form F with the lead insurance regulator for the holding company system, as determined by the NAIC Financial Analysis Handbook, by October 1 of this year and by June 1 of each subsequent year.
The Form F requires the parent to disclose “enterprise risk,” which is defined as “any activity, circumstance, event, or series of events involving one or more affiliates of an insurer that, if not remedied, is likely to have a material adverse effect on the financial condition or liquidity of the insurer or its insurance holding company system … as a whole, including anything that would cause the insurer's risk-based capital to fall into company action level … or that would cause the insurer to be in a hazardous financial condition.” Given that the definition relates enterprise risk to “affiliates of an insurer,” the Form F arguably need not deal with the insurer’s risk if there is only one insurer in the system. In such a system, a report on the risk management of the insurer itself could wait until the ORSA described below. Otherwise, it probably makes sense for insurers to conduct an ORSA first, in order to facilitate completion of the Form F.
The Form F calls for disclosure of enterprise risk in several areas, including:
- The business plan and strategies of the holding company system for the next year.
- Developments regarding strategy, internal audit findings, compliance, or risk management affecting the system.
- System capital resources and distribution patterns.
- Any actual or potential negative movement in the credit or financial strength ratings of the system, or discussions with rating agencies that may cause such negative movement.
- Developments in investigations, regulatory activities, or litigation that may have a significant impact on the system.
- Acquisition or disposal of insurance entities and reallocating of existing financial or insurance entities within the system.
- Corporate guarantees throughout the system and the expected funding for such guarantees.
While some of these areas seem to request the specified information—the business plan and strategies, for example—the Form F makes it clear that no response is required unless the area “could produce enterprise risk.” Thus, “none” should be an acceptable response to all these areas if they do not present enterprise risk. Of course, the filing company should document its review of each area. OCI has stated that it will be happy to provide guidance in completing the Form F.
Given the sensitive nature of the information potentially included in the Form F, the Wisconsin public records law does not apply to the form or to any information submitted to OCI in connection with it.
Acquisition of Control of an Insurer (Forms A and E)
The process for obtaining OCI approval of the acquisition of control of a Wisconsin insurer—and the process for sidestepping such approval by a disclaimer of control—will change in several ways:
- The commissioner now has authority to hold a consolidated hearing on a Form A for an acquisition involving insurers domiciled in multiple states.
- The Form A will now require biographical affidavits and a third party background check on the directors and officers of the acquiring party.
- The Form A will now require three years of financial projections for the insurer or insurers to be acquired.
- The previously informal disclaimer of control process—under which a person may rebut the presumption of control that comes with owning more than 10 percent of an insurer—will now be formalized, and OCI will have 30 days to act before the rule deems the presumption to be rebutted.
In a new requirement, a person acquiring an insurer licensed in Wisconsin—regardless of its domicile—is required to file a statement of potential competitive impact (Form E) in certain situations. Thus, a person acquiring a Wisconsin insurer may be required to file both a Form A and a Form E.
Under another new requirement, which will have much less application, a person controlling an insurer must notify OCI at least 30 days before divesting that controlling interest; however, the requirement does not apply if there is a related Form A filing. In other words, the requirement would only apply in the highly unusual case of a divesture where no other person acquires the controlling interest.
Report of Affiliate Transactions (Form D)
The Form D process for obtaining OCI permission for transactions between a Wisconsin insurer and its affiliates also will change in several ways:
- Additional filing requirements:
- The rules will formalize OCI's position that amendments to previously filed agreements also must be filed; the filing must include the reasons for the amendment and the financial impact on the insurer.
- An insurer must now provide informal notice to OCI, within 30 days after termination of a previously filed agreement, if termination is other than according to the terms of the agreement. Based on that notice, OCI will determine whether a formal filing is required.
- Additional requirements for management agreements, exclusive agency agreements, service contracts, tax allocation agreements, and cost-sharing arrangements, including that such agreements must:
- require timely settlement, on at least a quarterly basis, which formalizes OCI's prior position;
- state that the insurer will maintain oversight of functions provided by the affiliate, including that the insurer will monitor services annually for quality assurance;
- specify that all books and records of the insurer, including all books and records developed or maintained under or related to the agreement, are and remain the property of the insurer and are subject to control of the insurer (this broad language would extend to the affiliate's records, but OCI declined to change it after comments to that effect);
- include standards for termination of the agreement with and without cause;
- require that the affiliate indemnify the insurer in the event of the affiliate's gross negligence or willful misconduct; and
- include provisions protecting the receiver if OCI commences delinquency proceedings against the insurer.
- Additional disclosures on the Form D:
- The Form D must now include a statement as to how the transaction meets the "fair and reasonable" standard applicable to affiliate transactions. It is not clear how to demonstrate that an agreement is “fair and reasonable,” a standard that conjures up a "we know it when we see it" response. The gold standard is an arm's-length transaction, but affiliates generally do not have any basis for comparing their agreements with those negotiated at arm's length.
- The Form D will now include additional statements regarding cost-sharing arrangements; while this is the same approach taken by the NAIC model, it is not clear why these statements do not apply to other affiliate agreements:
- A brief statement on the effect of the arrangement on the insurer's surplus. It is not clear how cost-sharing arrangements would have more than a negligible effect on surplus, so presumably that will be the most common response.
- "A statement regarding the cost allocation methods that specifies whether proposed charges are based on 'cost or market.' If market based, rationale for using market instead of cost, including justification for the company's determination that amounts are fair and reasonable." It is not clear how this distinction is relevant to cost-sharing arrangements (e.g., if an insurer and its affiliate are allocating a person's salary, the allocation would be based on the employer's cost, but a market rate of pay would be allocated).
- "A statement regarding compliance with the NAIC Accounting Practices and Procedure Manual regarding expense allocation."Presumably, the statement must be that the arrangement complies.
Annual Registration Statement (Form B)
An insurer's annual holding company registration statement on Form B must now include “[s]tatements that the insurer's board of directors oversees corporate governance and internal controls and that the insurer's officers or senior management have approved, implemented, and continue to maintain and monitor corporate governance and internal control procedures.”
For more information on the Insurance Regulation Group, please contact William Toman at (608) email@example.com or your Quarles & Brady attorney.