Morris Manning & Martin, LLP

NAIC Adopts Revised Holding Company System Model Act Requiring Enterprise Risk Disclosure


In December 2010, the Plenary Committee of the NAIC adopted a significant revision to the Insurance Holding Company System Regulatory Act (Model 440) and the Insurance Holding Company System Model Regulation (Model 450) (“Model Act and Regulation”).  The Model Act and Regulation were modified by the NAIC in response to the perceived risk to insurance company entities from non-regulated entities within their holding company structure.  Specifically, the revisions were a response to the contagion within the AIG holding company system which for a time appeared to be a threat to AIG’s insurers.  

The revisions resulted from two years of efforts by regulators to determine the best methods to better understand the risks and activities of non-insurance entities within a holding company system.  Given this backdrop, it is not surprising that the main focus of the revisions has been to put into the Model Act and Regulation the concept of enterprise risk and to enact provisions designed to provide regulators with additional information and authority to manage this new concept.  

“Enterprise Risk” is defined as “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 insurers Risk-Based Capital to fall into company action level … or would cause the insurer to be in a hazardous financial condition.”  Holding companies will be required to report their Enterprise Risk at least annually on a newly created “Form F.”  

Form F requires the holding company to disclose information regarding ten different areas of its operations which could potentially pose Enterprise Risk to a regulated insurer, including the business plans of the insurance holding company system for the next 12 months, information on corporate or parental guarantees and identification of any material activity of the insurance holding company system that could adversely affect the insurance holding company system.  Insurance holding company systems that are filing similar information with the Securities and Exchange Commission (“SEC”) may attach the appropriate form in lieu of completing a new response.  Foreign holding company systems may attach their most recent public audited financial statement filed in their country of domicile.  The Form F filing will be exempt from open records requests and is not subject to subpoena.

In addition to the new requirement for Enterprise Risk reports, the revisions include the following significant changes:

  • Requiring controlling persons of an insurance company seeking to divest their controlling interest to provide notice of divestiture at least 30 days before their cessation of control.
  • Permitting consolidated public hearings on an application to acquire control of an insurance holding company system with insurers domiciled in multiple states.
  • Requiring insurers to provide, if requested by the Commissioner, financial statements for all affiliates of the insurer.  This requirement may be satisfied by providing the most recently filed parent corporation financial statements if filed with the SEC.  
  • Including a statement in the annual holding company registration 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 or, alternatively, include a statement that the insurer’s board of directors is responsible for and 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.
  • Requiring prior approval to amendments or modifications to previously approved agreements between an insurer and its affiliates as well as all reinsurance pooling agreements regardless of materiality.  In addition, the revised Model Regulation mandates specific provisions that must be included in cost-sharing and management service contracts.
  • Expanding the Commissioner’s examination authority to include the insurer’s affiliates when examined to ascertain the insurer’s financial condition including the Enterprise Risk to the insurer.  The examination authority includes the power to issue subpoenas, administer oaths and examine any person to determine compliance with examination requirements.  Insurers are also required to produce information not in their possession if they can obtain access to such information through a contractual relationship, statutory obligation or other method.

Finally, the Model Act’s privacy provision has been expanded to apply to all information filed with the NAIC.  It is now up to the states to adopt the amended Model Act and Regulation.  The NAIC is considering making the amendments part of the new accreditation standards which will create pressure for states to act quickly in revising their statutes and promulgating a new regulation.  Legislation will have to be closely tracked to determine if states are modifying the NAIC Model Act and Regulation.

Tony Roehl is an Associate and member of Morris, Manning & Martin’s Insurance and Reinsurance and Corporate Practices. Mr. Roehl’s principal areas of concentration are insurance regulation and corporate matters involving entities within the insurance industry. Mr. Roehl received his bachelor’s degree from the University of Florida and his law degree from the University of Michigan.