Maryland Enacts Revisions to Insurance Acquisitions Disclosure and Control Act

by Saul Ewing Arnstein & Lehr LLP


With the 2013 Maryland General Assembly’s passage of House Bill 431, Maryland became the 16th state to enact new and revised standards and reporting requirements for insurers and their parents/affiliates that are part of an insurance holding company system (IHCS). While the provisions of House Bill 431 do not become effective until January 1, 2014, Maryland domestic insurers should begin to prepare now for the significant new requirements, in order to avoid the potential of being subject to civil and criminal penalties for noncompliance.

The new Maryland IHCS provisions implement many of the changes to the Model Insurance Holding Company Act adopted by the National Association of Insurance Commissioners (NAIC) in 2010. These changes are part of the broader Solvency Modernization Initiative of the NAIC intended to update the U.S. solvency regulation framework in light of “lessons learned” from the recent financial crisis as well as developments in both federal and international insurance supervision.

A few of the key provisions of House Bill 431 are set forth below and demonstrate the NAIC’s focus on improving regulatory oversight of insurer solvency by (1) strengthening the “walls” around insurers to protect them from potential abuses by affiliates; (2) adding “windows” to the activities of parents/affiliates to allow regulators to be able to assess the “enterprise risk” posed by such activities to insurers; and, (3) assuring adequate corporate governance and internal control practices by insurers.

Strengthening Regulatory “Walls”

  • Additional Affiliate Transactions Subject to Prior Notice: Additional transactions that are subject to prior notice include: amendments/modifications of affiliate agreements previously filed on a Form D (such notice must indicate the reasons for the change and the projected financial impact on the insurer); all reinsurance pooling agreements; certain guarantees made by a domestic insurer; and direct or indirect investments in a person that controls an insurer or an affiliate of the insurer. Further, in determining whether an affiliate reinsurance agreement or modification thereto is subject to prior notice, an insurer must calculate the reporting triggers as of the date of the agreement or modification as well as for each of the subsequent three years.
  • Affiliate Agreements - Required Provisions: The Commissioner is authorized to specify, by regulation, provisions that must be included in management agreements, service contracts, tax allocation agreements and cost sharing agreements.

Adding Regulatory “Windows”

  • Enterprise Risk Management Report - Beginning in 2015, the ultimate controlling person of every Maryland domestic insurer that is subject to registration must annually file an enterprise risk report (Form F). This report must identify the material risks within the IHCS that could pose enterprise risk to the insurer. It is important to note that the focus of the enterprise risk report is not on risk posed by the activities of a regulated insurer, but is instead focused on risk posed by the activities of the insurer’s parent and affiliates (while not specified in House Bill 431, the NAIC Model Form F requires reporting on such things as business plan of the IHCS and summarized strategies for the upcoming 12-month period, corporate or parental guarantees throughout the IHCS and expected source of liquidity if the guarantees are called upon, and material developments regarding strategy, internal audit findings, compliance or risk management affecting the IHCS).
  • Disclosure of Financial Statements of Parents & Affiliates: Upon request of the Maryland Insurance Commissioner, an insurer must include with its Form B – Registration Statement the financial statements of all entities within the IHCS.
  • Expansion of Authority to Examine Insurer Affiliates: The Commissioner’s authority to examine affiliates of an insurer is expanded to allow for verification of information reported by the ultimate controlling person in the Form F Annual Enterprise Risk Report.

Assuring Adequate Corporate Governance & Internal Control Practices

  • Corporate Governance/Internal Controls: Form B - Registration Statements (which are certified as to accuracy by an officer of the insurer) must include two new statements: (1) the insurer’s Board of Directors oversees corporate governance and internal controls, and (2) the insurer’s officers and senior management have approved, implemented, and continue to maintain and monitor corporate governance and internal controls.

New and increased penalties for noncompliance include, among others, Commissioner authority to set aside and rescind affiliate transactions with an insurer that do not conform to standards in the law; assessment of fines up to $10,000 for the first day of violation and up to $1,000 for each additional day of violation (up from $1,000 and $100, respectively) for willful violations of the IHCS requirements; and the authority to impose fines on individual directors, officers, employees or agents of the insurer or the IHCS (such fines must be paid by such persons in their individual capacities) and/or to institute criminal proceedings for willful violations of the requirements.

The revisions to the Insurance Acquisitions Disclosure and Control Act reflect a significant, but only partial implementation of the standards and requirements in the process of adoption by the NAIC as part of its Solvency Modernization Initiative. Now more than ever, insurance companies must remain diligent in updating their regulatory compliance checklists to ensure that they are compliant with the new requirements.

For a more in-depth understanding of the Act’s requirements that impact insurer corporate governance as well as other corporate governance initiatives of the NAIC’s Solvency Modernization Initiative, please plan to attend the Maryland Insurance Company Corporate Governance Workshop sponsored by Saul Ewing on September 12, 2013.

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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