U.S. insurance reciprocals — noncorporate statutory entities in which subscribers mutually agree to insure one another — should note recent action by a senior regulatory body that could limit fees payable by a reciprocal to its attorney-in-fact (AIF), or management company.
On November 5, 2025, the Financial Condition (E) Committee (E Committee) of the National Association of Insurance Commissioners (NAIC) adopted charges for 2026. Among these is a charge to a new Reciprocal Exchange Working Group to modify the NAIC’s Insurance Holding Company System Regulatory Act (Model #440) (the Model Act) and/or Insurance Holding Company System Model Regulation (#450) (the Model Regulation) to clarify that fees charged to a reciprocal by the AIF are subject to “fair and reasonable standards,” are subject to approval by the state insurance commissioner and should not exceed the cost of services provided “plus a reasonable profit.” (The original language of the proposal was “modest” profit, but this was amended during the November 5 meeting.) No definition or methodology is provided to interpret the term “reasonable profit” (or “modest” profit as in the original proposal), and this proposal had drawn criticism from industry for being ambiguous and unnecessary.
By way of background, the Model Act and Model Regulation govern relationships between insurers and their “affiliates,” defined generally as those entities controlling, controlled by or under common control with the given insurer. The Model Act requires that transactions between insurers and their affiliates be fair and reasonable and that certain types of affiliate transactions be subject to prior notice to, and non-objection from, the state insurance regulator. The types of agreements that are subject to prior clearance include management and service contracts.
Existing state statutes on reciprocals are not uniform in nature and contain varying requirements for a power of attorney or other AIF contract, including requirements for submission to and/or approval from the state regulator. In other words, it is not universally the case that AIF fees are subject to a fair and reasonable standard under these laws. In addition, at least one commenter during E Committee’s comment period argued that a reciprocal and its AIF are not necessarily “affiliates” and are arm’s-length entities. Therefore, this commenter argued, the fees charged should not be subject to a fair and reasonable standard (or any regulatory scrutiny at all). Another commenter implicitly conceded that a reciprocal and its AIF are affiliated but argued that the “modest profit” language (as in the original proposal) was not a feature of other affiliate-transaction standards in the Model Act or in statutory accounting and was potentially ambiguous. It was in response to this comment that E Committee changed “modest” to “reasonable” at its November 5 meeting.
E Committee’s charge to the new working group to implement a fair and reasonable standard for AIF fees addresses this lack of uniformity and, if such a standard is ultimately adopted by the NAIC, would make clear that all AIF fees are subject to such a standard. It would then fall to the individual states to amend their versions of the Model Act or Model Regulation to include this provision.
[View source.]
