• New York Department of Financial Services Proposes Third Amendment to Regulation Governing Holding Companies
  • January 9, 2013 | Authors: Frederick J. Pomerantz; Stacey B. Rowland; Sandy M. Smith
  • Law Firms: Wilson Elser Moskowitz Edelman & Dicker LLP - New York Office ; Wilson Elser Moskowitz Edelman & Dicker LLP - Albany Office
  • The New York Department of Financial Services (Department) has proposed a Third Amendment to New York Insurance Regulation 52, 11 NYCRR 80-1 (Proposed Amendment), governing the regulation of holding companies. The amendment is in response to the National Association of Insurance Commissioners’ (NAIC) 2010 adoption of revisions to the Insurance Holding Company System Regulatory Act and Model Regulation (Model Act). The NAIC modified the Model Act as part of its Solvency Modernization Initiative, which is designed to address the solvency issues that arose during the 2008 financial crisis, particularly with respect to risks created by non-insurance companies within an insurance holding company system. Consequently, the changes to the Model Act seek to increase regulatory oversight and examination of insurer groups and to assess overall “enterprise risk.” It is expected that the NAIC will require states seeking NAIC accreditation to have enacted either the Model Act or a “substantially similar” version of the Model Act. The New York Proposed Amendment falls in the latter category.

    Requirements of the Proposed Amendment
    The Proposed Amendment would require an insurer to include a representation in the Registration Statement that the insurer’s board of directors supervises corporate governance and internal controls, and that such procedures continue to be approved, implemented and monitored by the officers or senior management of the insurer.

    Additionally, insurers would have to provide a list identifying each unauthorized insurer in the holding company system in its annual holding company report; and management agreements, service contracts, tax allocation agreements, guarantees and cost-sharing arrangements between the insurer and any affiliate would constitute “material” transactions subject to the prior approval of the Department.

    Finally, unless certain other notice has been given, the Proposed Amendment would require a domestic insurer that is aware of its holding company’s intention to divest its controlling interest in such insurer to notify the Department upon the earlier of 30 days prior to the divestiture or within 10 days of becoming aware of the proposed divestiture. The public comment period for the Proposed Amendment expires on February 24, 2013, i.e., 60 days after publication in the State Register on December 26, 2012.

    The Proposed Amendment and Enterprise Risk Reporting
    The Proposed Amendment does not contain one of the key features of the Model Act, i.e., the completion and submission of the new Form F,  which imposes an annual filing requirement on the “ultimate controlling person” within the holding company system to report any enterprise risk. “Enterprise risk” is defined in the Model Act as “any activity, circumstance, event or series of events involving one or more affiliates of an insurer that is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its holding company system, including anything that would cause the insurer’s risk based capital to fall into the company action level, or would cause the insurer to be in hazardous financial condition.”

    The Department decided to address the enterprise risk mandates through a separate regulation in light of the fact that these requirements apply to subsidiaries of property & casualty and domestic life insurers as well as holding companies. It is important to note that the Department issued Circular Letter No. 14 of 2011 defining “enterprise risk” in substantially the same manner as the Model Act. The Circular Letter outlines the importance of the enterprise risk management function and specifically states that where an insurer is part of a holding company system, such function should “identify, quantify and manage” risks that the insurer may be exposed to through transactions or affiliations with the group. The Department also determined that the NAIC Own Risk and Solvency Assessment should be adopted through a separate regulation based on the same reasoning as it applied to the enterprise risk management requirements.

    The Model Act contains a number of provisions related to a regulator’s ability to examine the books and records of an insurer’s affiliates and the confidentiality of reports or filings, particularly with respect to enterprise risk. While the Proposed Amendment does not address these issues, New York Insurance Law section 1504 (b) makes clear that every holding company is subject to examination by the Department if the operations of that entity may materially impact the controlled insurer. Additionally, New York Insurance Law section 1504 (c) provides that all information obtained under the holding company act shall, subject to certain limitations, remain confidential.

    Additional Provisions of the Proposed Amendment
    Other notable provisions contained in the Proposed Amendment are:

    • Registration statements must be filed electronically unless the insurer requests and receives an exemption.
    • Domestic property & casualty insurers need not file reinsurance agreements where the reinsurance premium or change in the insurer’s liabilities in any of the next three years is less than 5 percent of surplus to policyholders at last year-end.
    • Financial statements may be accompanied by a compilation of a certified public accountant rather than an opinion of such accountant where proper application is made and the Department so approves.