CORRECTION: NAIC Group Solvency Issues Working Group Considers Recommending Changes to MGA Standards as ‘Best Practices’

Though a national task force of state insurance regulators earlier this month rejected the idea of requiring insurers to account for services provided by unregulated affiliates at actual cost or less, the idea may yet resurface as a “best practice” recommended for states implementing revisions to the Insurance Holding Company System Regulatory Act Model #440.

The Group Solvency Issues Working Group (“Working Group”) of the National Association of Insurance Commissioners (“NAIC”) discussed several aspects of the relationship between regulated insurers and unregulated affiliates during its teleconference April 16, 2010.  The Working Group, comprised of insurance commissioners or their representatives from 11 states including Florida, is tasked with proposing revisions to the Regulatory Act and the Insurance Holding Company Model Regulation, Model #450.

The Working Group discussed fees paid by insurers for services rendered by unregulated affiliates, including managing general agents (“MGAs”).  Such fees have been the subject of controversy in recent months in Florida and elsewhere.  Industry representatives call the fees paid to MGAs – and the profits earned by MGAs for those services – normal business transactions.  Critics, however, have alleged that the practice can serve as a mechanism to move profits that would normally be regulated dividends to affiliates outside state regulatory jurisdiction.  That could allow a regulated insurer to appear to be losing money, critics claim, with the losses used to justify premium increases.

Working Group co-Chairwoman Ann M. Frohman said regulators remain concerned about the potential for abuse with MGA expense transactions, even though the Working Group rejected adding more restrictive language to Regulatory Act standards during its April 9, 2010 meeting.

“I would suggest that we save the discussion as to what we should do [until] we get to the point of examining what we should do on best practices,” said Ms. Frohman, who is Director of Nebraska’s Department of Insurance.  “We recognize there is the potential for capital to escape the dividend review process.  But the Working Group felt we needed flexibility. Some of us felt a certain level of profits [earned by MGAs] in some instances is appropriate.”

Ms. Frohman’s comments appeared to summarize sentiments shared by most of the Working Group commissioners.  As a “best practice” recommendation, the NAIC would encourage, but not require, states to account for MGA services at cost or market, if the latter were lower.   

Also during the April 16 meeting, Working Group members considered a proposal by the Pennsylvania Insurance Department (“PID”) that would redefine as required an optional standard in Section 5, paragraph C of the Regulatory Act that at least one-third of a domestic insurer’s board of directors (and at least one-third of any committee of directors) be unaffiliated with the insurer, its holding company or affiliates.  The PID expressed its belief that the change would help insulate states and the industry from the type of problems potentially caused by shared directorships that existed with AIG Corporation before its 2007 collapse.

Steve Johnson, PID Deputy Commissioner, said that about half of the states currently make this rule mandatory.  Two industry representatives, Steve Broadie, who is vice president for tax and financial issues for the Property Casualty Insurers Association of America, and Randi Reichel, who is a consultant with America’s Health Insurance Plans, expressed reservations about the proposed change, adding that their members were studying its implications. 

The Working Group referred this proposal to the NAIC’s Corporate Governance Working Group.

The Group Solvency Issues Working Group next considered proposed changes to Section 6 of the Regulatory Act.  One proposal would give state insurance commissioners the power to examine the financial condition, as well as the risk of “financial contagion,” of any affiliate of an insurer or its holding company.

Other contemplated changes would give regulators more authority, including subpoena power, to request books and records of insurers; to compel companies to obtain records not in their possession; and to fine companies that could not give adequate explanations for failure to produce such records.

“We’re trying to recognize that ascertaining the financial condition of an insurance company sometimes requires we look outside the insurance company to see if [there is any situation] that can lead to contagion of the entire enterprise,” Ms. Frohman explained.

While acknowledging the intended goals of the proposed changes, industry representatives expressed serious concerns that the modifications would represent a material increase in regulatory authority, and could create jurisdictional conflicts as each state commissioner would have authority to investigate potentially dozens of insurer affiliates domiciled in other states – and even other countries.

Ms. Frohman acknowledged the industry concerns, while reiterating the need to give regulators the tools to determine if a financial risk within an unregulated affiliate could pose a danger to a regulated insurer.  She commented that some of the proposed changes to this section might also be considered as “best practices” recommendations rather than changes to formal Regulatory Act standards.  Ms. Frohman invited the industry participants to review the proposed changes to Section 6, paragraphs A, B and C, and return with recommendations in time for the next meeting, scheduled for May 7.

The Working Group also began a discussion of changes to Section 7 of the Regulatory Act in regard to supervisory colleges, but deferred further conversation on the matter until May 7.  

To review a draft of the Insurance Holding Company System Regulatory Act Model #440, with proposed changes and comments, click here.

To review a draft of the changes proposed to Sections 1 and 3 of the Insurance Holding Company Regulatory Act Model #440, with comments, click here.

To review a draft of the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions, Model #450, with proposed changes and comments, click here.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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