Insurance Holding Company Act Amendments of 2012


[authors: Robert L. Pratter and Maria R. Granholm]

Robert Pratter Maria Granholm

During the 2008-09 global financial crisis, no major U.S. insurance company became insolvent. However, the mammoth AIG empire shook to its core and exacerbated a worldwide financial crisis due to the activities of a relatively obscure London-based, noninsurance subsidiary trading derivative securities.

In the wake of this experience, the state insurance regulators, acting through the National Association of Insurance Commissioners, recognized "the need for regulators to assess the enterprise risk within a holding company system and its impact or contagion upon the insurers within that group." In December 2010, the NAIC approved changes to the Model Insurance Holding Company Systems Act that address this concern and mandated states to adopt these provisions to remain accredited regulatory authorities.

On June 20, Pennsylvania passed Act 136 (amending the Insurance Company Law of 1921) to become the eighth state that has enacted the principal substance of the model amendments. As one of the top five insurance markets by premium volume in the United States, Pennsylvania's action provides an important imprimatur of the NAIC effort and will help propel the model law forward nationally. In general terms, Act 136 imposes new requirements on insurance holding companies and their insurer and noninsurer affiliates and substantially increases the insurance commissioner's supervisory, investigative and general regulatory powers in many areas.

Expanded Reporting Requirements

Act 136 requires the ultimate controlling person of an insurer to file an annual "enterprise risk report," which is a new concept in insurance regulation growing out of the 2008-09 financial crisis. The filer must disclose to the regulator material risks within the entire holding company system that could pose an "enterprise risk" to the insurer. An enterprise risk is an activity, circumstance, event or series of events involving one or more affiliates that, if not remedied promptly, would likely have a material, adverse effect on the financial condition or liquidity of an insurer or the holding company system, including triggering a company action level event for the insurer or causing the insurer to be deemed to be in a hazardous financial condition.

In addition, the Pennsylvania Insurance Department may now require the insurance holding company, or any affiliates, to file financial statements with the department and any other "necessary or appropriate information" required by departmental regulations. The annual registration statement must also affirm 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.

Groupwide Supervision and Supervisory Colleges

The AIG crisis demonstrated that there was no formalized structure for effective, cooperative regulation of international insurance entities. Act 136 addresses this regulatory hole by authorizing the creation of a "groupwide supervisor" of internationally active insurance groups. The groupwide supervisor could be the Pennsylvania Insurance Department or the regulator from another jurisdiction, domestic or foreign, that the department determines to have "sufficient significant contacts" with the group, including the ultimate controlling person's legal residence, the location of its executive offices, insurance business, capital, business operations or employees of the insurer. The department must also find that the groupwide supervisor operates under a regulatory system that the department determines is substantially equivalent to Pennsylvania's or is otherwise sufficient and gives mutual equivalency or sufficient recognition to Pennsylvania. Many details of how such groupwide supervision will work are not set forth in the act and will be covered in future regulations. Therefore, how this system will work and the legal issues inherent in it are yet to be defined.

The act also authorizes supervisory colleges, in which the department may join with other insurance or noninsurance regulators, to assess the enterprise risk, business strategy, financial, legal and regulatory position, risk exposure, risk management and governance processes of insurers and their affiliates that are otherwise subject to registration and examination under the 2012 act.

Control Transactions

The 2012 act makes important changes in the definition of "control" and the regulation of change in control transactions. With the advent of companies with more than one class of securities, Act 136 changes the control presumption to voting control more than 10 percent of total votes rather than the prior standard based on ownership of 10 percent or more of outstanding voting securities.

The act also expressly recognizes that there can be multiple control people and creates new provisions for rebutting the presumption of control. A person seeking to rebut the presumption must now file a rebuttal application with the department, with a copy to the insurer. The filing is not effective "unless the department finds that control does not exist or accepts a disclaimer of control" under Section 1404(k). Finally, the act expressly requires that change in control filings be made not only when a person gains control, but also when an existing control person seeks to divest his or her controlling interest in an insurer.

This new provision plugs a loophole in the prior law that was exploited by a controlling person who divested control in an insurer without department approval by giving 5 percent interests to 20 unaffiliated charities. The Commonwealth Court refused to recognize the practical reality that control was indeed transferred to new ownership by this device. (See Pennsylvania Ins. Dept. v. Kingsway Financial Services , 992 A.2d 255 (Pa. Cmwlth. 2010).)

The act also recognizes that control transactions may require approval by multiple states and allows an acquirer to file a request with the NAIC for a consolidated hearing. However, a commissioner from any state may opt out of a consolidated hearing.


The act grants the commissioner materially greater examination powers not only to examine a registered insurer, but also to examine its affiliates to ascertain the insurer's financial condition, including the enterprise risk to the insurer posed by the ultimate controlling person or by any entity or combination of entities within the holding company or by the holding company system on a consolidated basis. The department may also order the production of records, books or "other information papers in the possession of the insurer or its affiliates as are reasonably necessary to ascertain the financial condition of the insurer or to determine compliance with this article."

Even further, the department may order an insurer to produce information not in its possession "if the insurer can obtain access to the information under a contractual relationship, a statutory obligation or other method." If the insurer cannot obtain the information, it must give the department a detailed explanation. If the department is not satisfied with the information or explanation provided, or the insurer fails to comply, the department may suspend or revoke the insurer's license or impose a fine of $1,000 per day until the information is provided. The department also has subpoena power to enforce any order relating to financial examination and production of books, records and other information. It is reasonable to anticipate that there will be disagreements in this new area of the 2012 act as insurers, affiliates or third parties may resist turning over certain information requested by the department.

Dividends, Order of Supervision

Act 136 gives the department an especially powerful new weapon for overall compliance. If it "appears" to the department that any violation "prevents the full understanding of the enterprise risk to the insurer by affiliates or by the insurance holding company system, the violation may serve as an independent basis for disapproving dividends or distributions and for placing the insurer under an order of supervision."

This broad grant of power is liable to be a source of at least disagreement or future litigation between the department and companies as to its meaning, scope and compliance with due process requirements.


With the expanded disclosures to the department required by the new law, the act has enhanced prior confidentiality provisions that should be consulted by all registered companies.

Reinsurance Credits

The act amends Pennsylvania's reinsurance credits law to more closely align with the NAIC model law by creating a new category of "certified" reinsurers. Specifically, the act allows insurers that cede risk to qualified or certified reinsurers to be eligible for reinsurance credit. The act, however, does not provide a process for reinsurer certification as it does for reinsurer qualification. The absence of a separate process for reinsurer certification implies that the certification process will be largely similar to the qualification process as set forth in Section 319.1(g)(1) of the act.

By becoming qualified or certified, a reinsurer can take advantage of reduced collateral requirements based on the reinsurer's financial solvency and domiciliary jurisdiction, thereby reducing the cost and trade requirements to enter Pennsylvania's reinsurance market. It is anticipated that the department will enact regulations to implement these provisions.

Attention Needed

Act 136 requires careful study by all regulated companies and counsel active in the insurance regulatory arena. Although the act is largely based on the NAIC model and underwent extensive review by the General Assembly, the Pennsylvania Insurance Department and the insurance community prior to its passage, various provisions may be subject to interpretation. Hopefully, the department will promulgate regulations that clarify the act where needed and administer the amended Insurance Company Holding Act in an even-handed manner to protect insurer solvency, financial stability and the public interest.

Robert L. Pratter, of counsel at Duane Morris, concentrates his practice on commercial litigation, insurance regulatory and transactional matters and other state and federal administrative issues.

Maria R. Granholm is an associate in the firm's Philadelphia office, where she practices in the area of corporate law. She concentrates her practice on insurance regulatory, banking regulatory and transactional matters.

Published In: Administrative Agency Updates, Finance & Banking Updates, Insurance Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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