Code Section

Insurance Code - INS

DIVISION 1. GENERAL RULES GOVERNING INSURANCE [100 - 1879.8]

  ( Division 1 enacted by Stats. 1935, Ch. 145. )
  

PART 2. THE BUSINESS OF INSURANCE [680 - 1879.8]

  ( Part 2 enacted by Stats. 1935, Ch. 145. )
  

CHAPTER 2. Incorporated Insurers [1140 - 1260]

  ( Chapter 2 enacted by Stats. 1935, Ch. 145. )
  

ARTICLE 4.7. Insurance Holding Company System Regulatory Act [1215 - 1215.18]
  ( Article 4.7 added by Stats. 1969, Ch. 1275. )

  
1215.5.  

(a) Transactions by registered insurers with their affiliates are subject to the following standards:

(1) The terms shall be fair and reasonable and consistent with the current version of Section 19 of the NAIC Insurance Holding Company System Model Regulation, subject to the requirements of this article.

(2) Charges or fees for services performed shall be reasonable.

(3) Expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied.

(4) The books, accounts, and records of each party to all transactions shall be so maintained as to clearly and accurately disclose the precise nature and details of the transactions, including accounting information that is necessary to support the reasonableness of the charges or fees to the parties.

(5) The insurer’s policyholder’s surplus following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs.

(b) The following transactions involving a domestic insurer or commercially domiciled insurer, as defined in Section 1215.14, and any person in its insurance holding company system, including amendments or modifications of affiliate agreements previously filed pursuant to this section, may be entered into only if the insurer has notified the commissioner in writing of its intention to enter into the transaction at least 30 days prior thereto, or a shorter period as the commissioner may permit, and the commissioner has not disapproved it within that period. The notice for amendments or modifications shall include the reasons for the change and the financial impact on the domestic insurer or commercially domiciled insurer. Informal notice shall be reported, within 30 days after a termination of a previously filed agreement, to the commissioner for determination of the type of filing required, if any. The commissioner shall require the payment of two thousand eight hundred twenty-three dollars ($2,823) as a fee for filings pursuant to this subdivision, and the filings shall be on a form and in a format prescribed by the NAIC. The payment shall accompany the filing.

(1) Sales, purchases, exchanges, loans, extensions of credit, or investments, if the transactions are equal to or exceed:

(A) For a nonlife insurer, the lesser of 3 percent of the insurer’s admitted assets or 25 percent of the policyholder’s surplus as of the preceding December 31.

(B) For a life insurer, 3 percent of the insurer’s admitted assets as of the preceding December 31.

(2) Loans or extensions of credit to a person who is not an affiliate, if made with the agreement or understanding that the proceeds of the transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, to purchase assets of, or to make investments in, any affiliate of the insurer, if the transactions are equal to or exceed:

(A) For a nonlife insurer, the lesser of 3 percent of the insurer’s admitted assets or 25 percent of the policyholder’s surplus as of the preceding December 31.

(B) For a life insurer, 3 percent of the insurer’s admitted assets as of the preceding December 31.

(3) Reinsurance agreements and pooling agreements and modifications thereto in which the reinsurance premium or a change in the insurer’s liabilities, or the projected reinsurance premium or a change in the insurer’s liabilities in any of the next three years, equals or exceeds 5 percent of the insurer’s policyholder’s surplus, as of the preceding December 31, including those agreements that may require as consideration the transfer of assets from an insurer to a nonaffiliate, if an agreement or understanding exists between the insurer and nonaffiliate that any portion of the assets will be transferred to one or more affiliates of the insurer.

(4) All management agreements, service contracts, tax sharing agreements, and cost-sharing arrangements. However, subscription agreements or powers of attorney executed by subscribers of a reciprocal or interinsurance exchange are not required to be reported pursuant to this section if the form of the agreement was in use before 1943 and was not amended in any way to modify payments, fees, or waivers of fees or otherwise substantially amended after 1943. Payment or waiver of fees or other amounts due under subscription agreements or powers of attorney forms that were in use before 1943 and that have not been amended in any way to modify payments, fees, or waiver of fees, or otherwise substantially amended after 1943 shall not be subject to regulation pursuant to paragraph (2) of subdivision (a).

(5) Guarantees when initiated or made by a domestic or commercially domiciled insurer, provided that a guarantee that is quantifiable as to amount is not subject to the notice requirements of this paragraph unless it exceeds the lesser of one-half of 1 percent of the insurer’s admitted assets or 10 percent of surplus as regards policyholders as of the 31st day of December next preceding. Further, all guarantees that are not quantifiable as to amount are subject to the notice requirements of this paragraph.

(6) Derivative transactions or series of derivative transactions. The written filing to the commissioner shall include the type or types of derivative transactions, the affiliate or affiliates engaging with the insurer in the derivative transactions, the objective and the rationale for the derivative transaction or series of derivative transactions, the maximum maturity and economic effect of the derivative transactions, and any other information required by the commissioner. Derivative transactions entered into pursuant to this subdivision shall comply with the provisions of Section 1211.

(7) Direct or indirect acquisitions or investments in a person that controls the insurer or in an affiliate of the insurer in an amount that, together with its present holdings in those investments, exceeds 2.5 percent of the insurer’s policyholder’s surplus. Direct or indirect acquisitions or investments in subsidiaries acquired under Section 1215.1, or in nonsubsidiary insurance affiliates that are subject to the provisions of this article, or in subsidiaries acquired pursuant to Section 1199, are exempt from this requirement.

(8) Any material transactions, specified by regulation, that the commissioner determines may adversely affect the interests of the insurer’s policyholders.

(c) A domestic insurer may not enter into transactions that are part of a plan or series of transactions with persons within the holding company system if the purpose of those transactions is to avoid the statutory threshold amount and thus avoid review. If the commissioner determines that separate transactions were entered into over any 12-month period to avoid review, the commissioner may exercise his or her authority under Section 1215.11.

(d) The commissioner, in reviewing transactions under subdivision (b), shall consider whether the transactions comply with the standards set forth in subdivision (a) and whether they may adversely affect the interests of policyholders.

(e) The commissioner shall be notified within 30 days of any investment by the insurer in any one corporation if the total investment in the corporation by the insurance holding company system exceeds 10 percent of the corporation’s voting securities.

(f) For purposes of this article, in determining whether an insurer’s policyholder’s surplus is reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs, the following factors, among others, shall be considered:

(1) The size of the insurer, as measured by its assets, capital and surplus, reserves, premium writings, insurance in force, and other appropriate criteria.

(2) The extent to which the insurer’s business is diversified among the several lines of insurance.

(3) The number and size of risks insured in each line of business.

(4) The extent of the geographical dispersion of the insurer’s insured risks.

(5) The nature and extent of the insurer’s reinsurance program.

(6) The quality, diversification, and liquidity of the insurer’s investment portfolio.

(7) The recent past and projected future trend in the size of the insurer’s investment portfolio.

(8) The recent past and projected future trend in the size of the insurer’s surplus, and the policyholder’s surplus maintained by other comparable insurers.

(9) The adequacy of the insurer’s reserves.

(10) The quality and liquidity of investments in subsidiaries made under Section 1215.1. The commissioner may treat those investments as a disallowed asset for purposes of determining the adequacy of the policyholder’s surplus whenever, in his or her judgment, the investment so warrants.

(11) The quality of the company’s earnings and the extent to which the reported earnings include extraordinary accounting items.

(g) An insurer, subject to registration under Section 1215.4, shall not pay any extraordinary dividend or make any other extraordinary distribution to its stockholders until 30 days after the commissioner has received notice of the declaration thereof and has approved the payment or has not, within the 30-day period, disapproved the payment.

For purposes of this section, an extraordinary dividend or distribution is any dividend or distribution that, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of (1) 10 percent of the insurer’s policyholder’s surplus as of the preceding December 31, or (2) the net gain from operations of the insurer, if the insurer is a life insurer, or the net income, if the insurer is not a life insurer, for the 12-month period ending the preceding December 31.

Notwithstanding any other law, an insurer may declare an extraordinary dividend or distribution that is conditional upon the commissioner’s approval. The declaration confers no rights upon stockholders until the commissioner has approved the payment of the dividend or distribution or until the commissioner has not disapproved the payment within the 30-day period referred to in this subdivision.

(h) Notwithstanding the control of a domestic insurer by any person, the officers and directors of the insurer shall not thereby be relieved of any obligation or liability to which they would otherwise be subject to by law, and the insurer shall be managed to ensure its separate operating identity consistent with the provisions of this article. However, nothing in this article shall preclude a domestic insurer from having or sharing a common management or cooperative or joint use of personnel, property, or services with one or more other persons under arrangements meeting the standards of subdivision (a).

(i) The provisions of this section do not apply to any insurer, information, or transaction exempted by the commissioner.

(Amended by Stats. 2017, Ch. 534, Sec. 29. (AB 1699) Effective January 1, 2018.)