THE GENERAL ASSEMBLY OF PENNSYLVANIA

HOUSE BILL

INTRODUCED BY DeLUCA, CALTAGIRONE, D. COSTA, MURT, KULA AND JOSEPHS, FEBRUARY 14, 2011

REFERRED TO COMMITTEE ON INSURANCE, FEBRUARY 14, 2011  

AN ACT

Amending the act of May 17, 1921 (P.L.682, No.284), entitled "An

act relating to insurance; amending, revising, and

consolidating the law providing for the incorporation of

insurance companies, and the regulation, supervision, and

protection of home and foreign insurance companies, Lloyds

associations, reciprocal and inter-insurance exchanges, and

fire insurance rating bureaus, and the regulation and

supervision of insurance carried by such companies,

associations, and exchanges, including insurance carried by

the State Workmen's Insurance Fund; providing penalties; and

repealing existing laws," further providing for definitions,

for acquisition of control of or merger or consolidation with

domestic insurer, for registration of insurers, for standards

and management of an insurer within a holding company system

and for examination; providing for supervisory colleges; and

further providing for sanctions.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  Section 1401 of the act of May 17, 1921 (P.L.682,

No.284), known as The Insurance Company Law of 1921, is amended

by adding a definition to read:

Section 1401.  Definitions.--As used in this article, and for

the purposes of this article only, the following words and

phrases shall have the meanings given to them in this section:

* * *

"Enterprise risk."  An activity, circumstance, event or

series of events involving one or more affiliates of an insurer

that, if not remedied promptly, is likely to have a material

adverse affect upon the financial condition or liquidity of the

insurer or its insurance holding company system as a whole,

including, but not limited to, anything that would cause the

insurer's risk-based capital to fall into company action level

as set forth in section 505-B of the act of May 17, 1921

(P.L.789, No.285), known as "The Insurance Department Act of

1921," or would cause the insurer to be in hazardous financial

condition under 31 Pa. Code Ch. 160 (relating to standards to

define insurers deemed to be in hazardous financial condition).

* * *

Section 2.  Section 1402(h) of the act, amended July 9, 2008

(P.L.885, No.62), is amended and subsection (b) is amended by

adding paragraphs to read:

Section 1402.  Acquisition of Control of or Merger or

Consolidation with Domestic Insurer.--* * *

(b)  The statement to be filed with the department under this

section shall be made under oath or affirmation and shall

contain the following information:

* * *

(11.1)  An agreement by the person required to file the

statement referred to in subsection (a) that it will provide the

annual report, specified in section 320, for so long as control

exists.

(11.2)  An acknowledgment by the person required to file the

statement referred to in subsection (a) that the person and the

subsidiaries within its control in the insurance holding company

system will provide information to the commissioner upon request

as necessary to evaluate enterprise risk to the insurer.

* * *

(h)  The following shall constitute a violation of this

section:

(1)  the failure to file any statement, amendment or other

material required to be filed pursuant to subsection (a) or (b);

(2)  the effectuation or any attempt to effectuate an

acquisition of control of or divestiture of or merger or

consolidation with a domestic insurer unless the department has

given its approval thereto; or

(3)  a violation of section 819-A.

* * *

Section 3.  Section 1404(a), (b) and (k), added December 18,

1992 (P.L.1519, No.178), are amended to read: 

Section 1404.  Registration of Insurers.--(a)  (1)  Every

insurer which is authorized to do business in this Commonwealth

and which is a member of an insurance holding company system

shall register with the department, except a foreign insurer

subject to registration requirements and standards adopted by

statute or regulation in the jurisdiction of its domicile which

are substantially similar to those contained in this section and

section 1405(a)(1) and (2), (b) and (d). Each registered insurer

shall keep current the information required to be disclosed in

its registration statement by reporting all material changes or

additions within fifteen (15) days after the end of the month in

which it learns of each such change or addition.

(2)  Any insurer which is subject to registration under this

section shall register within fifteen (15) days after it becomes

subject to registration, and annually thereafter by the thirty-

first day of March of each year for the previous calendar year,

unless the department for good cause shown extends the time for

registration, and then within such extended time. The department

may require any insurer authorized to do business in this

Commonwealth which is a member of [a] an insurance holding

company system and which is not subject to registration under

this section to furnish a copy of the registration statement,

the summary specified in subsection (c) or other information

filed by such insurance company with the insurance regulatory

authority of its domiciliary jurisdiction.

(b)  Every insurer subject to registration shall file the

registration statement with the department and the NAIC on a

form and in a format prescribed by the NAIC, which shall contain

all of the following current information:

(1)  The capital structure, general financial condition,

ownership and management of the insurer and any person

controlling the insurer.

(2)  The identity and relationship of every member of the

insurance holding company system.

(3)  All of the following agreements in force and

transactions currently outstanding or which have occurred during

the last calendar year between such insurer and its affiliates:

(i)  Loans and other investments and the purchase, sale or

exchange of securities of an affiliate by the insurer or of the

insurer by an affiliate.

(ii)  Purchases, sales or exchange of assets.

(iii)  Transactions not in the ordinary course of business.

(iv)  Guarantees or undertakings for the benefit of an

affiliate which result in an actual contingent exposure of the

insurer's assets to liability, other than insurance contracts

entered into in the ordinary course of the insurer's business.

(v)  All management agreements, tax allocation agreements, 

service contracts and all cost-sharing arrangements.

(vi)  Reinsurance agreements.

(vii)  Dividends and other distributions to shareholders.

(viii)  Consolidated tax allocation agreements.

(4)  Any pledge of the insurer's stock, including stock of

any subsidiary or controlling affiliate, for a loan made to any

member of the insurance holding company system.

(4.1)  If requested by the department, the insurer shall

include financial statements of or within an insurance holding

company system, including its affiliates. Financial statements

may include, but are not limited to, annual audited financial

statements filed with the Securities and Exchange Commission

(SEC) under the Securities Act of 1933 (48 Stat. 74, 15 U.S.C. §

77a et seq.) or the Securities Exchange Act of 1934 (48 Stat.

881, 15 U.S.C. § 78a et seq.). An insurer required to file

financial statements under this paragraph may satisfy the

request by providing the commissioner with the most recently

filed parent corporation financial statements that have been

filed with the SEC.

(5)  Any other matters concerning transactions between

registered insurers and any affiliates as may be included from

time to time in any registration forms adopted or approved by

the department.

(6)  Statements that the insurer's board of directors is

responsible for and oversees corporate governance and internal

controls and that the insurer's officers or senior management

have approved, implemented and continue to maintain and monitor

corporate governance and internal control procedures.

(7)  Other information required by the department by rule or

regulation.

* * *

(k)  Any person may file with the department a disclaimer of

affiliation with any authorized insurer or such a disclaimer may

be filed by such insurer or any member of an insurance holding

company system. The disclaimer shall fully disclose all material

relationships and bases for affiliation between such person and

such insurer as well as the basis for disclaiming such

affiliation. After a disclaimer has been filed, the insurer

shall be relieved of any duty to register or report under this

section which may arise out of the insurer's relationship with

such person unless and until the department disallows such a

disclaimer. The department shall disallow such a disclaimer only

after furnishing all parties in interest with notice and

opportunity to be heard and after making specific findings of

fact to support such disallowance. A disclaimer of affiliation

shall be deemed to have been granted unless the department,

within thirty (30) days following receipt of a complete

disclaimer, notifies the filing party the disclaimer is

disallowed. In the event of disallowance, the disclaiming party

may request an administrative hearing which shall be granted.

The disclaiming party shall be relieved of its duty to register

under this section if approval of the disclaimer has been

granted by the department or if the disclaimer is deemed to have

been approved.

* * *

Section 4.  Section 1405 heading, (a) and (c) of the act,

amended February 17, 1994 (P.L.92, No.9), December 20, 2000

(P.L.967, No.132) and July 9, 2008 (P.L.885, No.62), are amended

to read: 

Section 1405.  Standards and Management of an Insurer within

[a] an Insurance Holding Company System.--(a)  (1)  Transactions

within [a] an insurance holding company system to which an

insurer subject to registration is a party shall be subject to

all of the following standards:

(i)  The terms shall be fair and reasonable.

(ii)  Charges or fees for services performed shall be

reasonable.

(iii)  Expenses incurred and payment received shall be

allocated to the insurer in conformity with customary insurance

accounting practices consistently applied and all cost-sharing

or expense allocation arrangements must be formalized in writing

and authorized by the board of directors of the domestic

insurer.

(iv)  The books, accounts and records of each party to all

such transactions shall be so maintained as to clearly and

accurately disclose the nature and details of the transactions,

including such accounting information as is necessary to support

the reasonableness of the charges or fees to the respective

parties.

(v)  The insurer's surplus as regards policyholders after any

material transaction with an affiliate and after any dividends

or distributions to shareholder affiliates shall be reasonable

in relation to the insurer's outstanding liabilities and

adequate to its financial needs.

(vi)  Agreements for cost-sharing services and management

shall include the provisions as required by rule and regulation

issued by the department.

(2)  The following transactions involving a domestic insurer

and any person in its insurance holding company system,

including amendments or modifications of affiliate agreements

previously filed under this section, which are subject to

materiality standards contained in subparagraphs (i), (ii),

(iii) and (iv), may not be entered into unless the insurer has

notified the department in writing of its intention to enter

into such transaction at least thirty (30) days prior thereto or

such shorter period as the department may permit and the

department has not disapproved it within such period: 

(i)  Sales, purchases, exchanges, loans or extensions of

credit, guarantees, investments, pledges of assets or assets to

be received by the domestic insurer as contributions to its

surplus, provided that, as of the thirty-first day of December

next preceding, such transactions are equal to or exceed the

lesser of five per centum (5%) of the insurer's admitted assets

or twenty-five per centum (25%) of surplus as regards

policyholders. With respect to life insurers, three per centum

(3%) of the insurer's admitted assets as of the thirty-first day

of December next preceding.

(ii)  Loans or extensions of credit to any person who is not

an affiliate, where the insurer makes such loans or extensions

of credit with the agreement or understanding that the proceeds

of such 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

making such loans or extensions of credit provided that, as of

the thirty-first day of December next preceding, such

transactions are equal to or exceed the lesser of five per

centum (5%) of the insurer's admitted assets or twenty-five per

centum (25%) of surplus as regards policyholders. With respect

to life insurers, three per centum (3%) of the insurer's

admitted assets as of the thirty-first day of December next

preceding.

(iii) Reinsurance agreements or modifications thereto [where

either], including:

(A)  [the] Agreements in which the reinsurance premium or the

projected reinsurance premium or a change in the insurer's

liabilities in any of the next three (3) years equals or exceeds

five per centum (5%) of the insurer's surplus as regards

policyholders as of the thirty-first day of December next

preceding[; or].

(B)  [the] The change in the insurer's liabilities or any

transfer of assets required to fund the transaction equals or

exceeds twenty-five per centum (25%) of the insurer's surplus as

regards policyholders as of the thirty-first day of December

next preceding, including those agreements which 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 such assets

will be transferred to one or more affiliates of the insurer.

Nothing in this paragraph shall affect or limit the requirements

and applicability of section 3 of the act of July 31, 1968

(P.L.941, No.288), entitled "An act providing for reporting to

the Insurance Commissioner by domestic insurance companies,

associations, or exchanges, of certain conveyances of interests

in the assets of such companies, associations, or exchanges."

(C)  Reinsurance pooling agreements.

(D)  Management agreements, service contracts, tax allocation

agreements, guarantees and cost-sharing arrangements.

(E)  Guarantees when made by a domestic insurer, provided a

guarantee that is quantifiable as to amount and is not subject

to the notice requirements of this paragraph unless it exceeds

the lesser of one-half of one per centum (0.5%) of the insurer's

admitted assets or ten per centum (10%) of surplus as regards

policyholders as of the thirty-first day of December next

preceding. Guarantees that are not quantifiable as to amount are

subject to the notice requirements of this paragraph.

(F)  Direct or indirect acquisitions or investments in a

person that controls the insurer or in an affiliate of the

insurer in an amount which, together with its present holdings

in the investments, exceeds two and one-half per centum (2.5%)

of the insurer's surplus to policyholders. Direct or indirect

acquisitions or investments in subsidiaries acquired under

section 1402 or authorized under this chapter, or in

nonsubsidiary insurance affiliates subject to the provisions of

this act, are exempt from this requirement.

(iv)  Any material transactions, specified by regulation,

which the department determines may adversely affect the

interests of the insurer's policyholders.

Nothing in this paragraph shall be deemed to authorize or permit

any transactions which, in the case of an insurer not a member

of the same holding company system, would be otherwise contrary

to law.

(3)  A domestic insurer may not enter into transactions which

are part of a plan or series of like transactions with persons

within the insurance holding company system if the purpose of

those separate transactions is to avoid the statutory threshold

amount and thus avoid the review that would occur otherwise. If

the department determines that such separate transactions were

entered into over any twelve-month period for such purpose, it

may exercise its authority under section 1410.

(4)  The department, in reviewing transactions pursuant to

paragraph (2), shall consider whether the transactions comply

with the standards set forth in paragraph (1) and whether they

may adversely affect the interests of policyholders. The

department may retain at the insurer's expense any attorneys,

actuaries, accountants and other experts not otherwise a part of

the department's staff as may be reasonably necessary to assist

the department in reviewing the transaction.

(5)  The department shall be notified within thirty (30) days

of any investment of the domestic insurer in any one corporation

if the total investment in such corporation by the insurance

holding company system exceeds ten per centum (10%) of such

corporations' voting securities.

* * *

(c)  (1)  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 by law, and the insurer shall be

managed so as to assure its separate operating identity

consistent with this article.

(2)  Nothing herein 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 subsection

(a)(1).

(3)  (i)  Not less than one-third of the directors of a

domestic insurer shall be persons who are not officers or

employes of such insurer or of any entity controlling,

controlled by or under common control with such insurer and who

are not beneficial owners of a controlling interest in the

voting stock of such insurer or any such entity. At least one

such person must be included in any quorum for the transaction

of business at any meeting of the board of directors.

(ii)  Not less than one-third of the members of each

committee of the board of directors of any domestic insurer

shall be persons who are not officers or employes of such

insurer or of any entity controlling, controlled by or under

common control with such insurer. At least one such person must

be included in any quorum for the transaction of business at any

meeting of each committee.

(4)  The board of directors of a domestic insurer shall

establish a committee comprised solely of directors who are not

officers or employes of the insurer or of any entity

controlling, controlled by or under common control with the

insurer and who are not beneficial owners of a controlling

interest in the voting stock of the insurer or any such entity.

The committee shall have responsibility for recommending the

selection of independent certified public accountants and

reviewing the insurer's financial condition, the scope and

results of the independent audit and any internal audit. The

committee may also have the responsibilities described in

paragraph (4.1) if one or more committees described in paragraph

(4.1) are not separately established.

(4.1)  The board of directors of a domestic insurer shall

establish one or more committees comprised solely of directors

who are not officers or employes of the insurer or of any entity

controlling, controlled by or under common control with the

insurer. The committee or committees shall have responsibility

for recommending candidates to be nominated by the board of

directors, in addition to any other nominations by voting

shareholders or policyholders, for election as directors by

voting shareholders or policyholders, evaluating the performance

of officers deemed to be principal officers of the insurer and

recommending to the board of directors the selection and

compensation of the principal officers.

(5)  The provisions of paragraphs (3), (4) and (4.1) shall

not apply to a domestic insurer if the person controlling such

insurer is an insurer, a mutual insurance holding company or

another business entity having a board of directors and

committees thereof which already meet the requirements of

paragraphs (3), (4) and (4.1) regarding the controlling entity.

* * *

Section 5.  Section 1406 of the act, added December 18, 1992

(P.L.1519, No.178), is amended to read: 

Section 1406.  Examination.--(a)  Subject to the limitation

contained in this section and in addition to the powers which

the department has under law relating to the examination of

insurers, the department shall also have the power to examine an

insurer registered under section 1404 and its affiliates to

ascertain the financial condition of the insurer, including the

enterprise risk to the insurer by the ultimate controlling

party, or by an entity or combination of entities within the

insurance holding company system or by the insurance holding

company system on a consolidated basis.

(a.1)  The department may order any insurer registered under

section 1404 to produce such records, books or other information

papers in the possession of the insurer or its affiliates as are

reasonably necessary to ascertain the financial condition of

such insurer or to determine compliance with this article. [In

the event an insurer fails to comply with such order, the

department shall have the power to examine affiliates to obtain

this information.]

(a.2)  To determine compliance with this article, the

department may order an insurer registered under section 1404 to

produce information not in the possession of the insurer if the

insurer can obtain access to the information under contractual

relationships, statutory obligations or other method. If the

insurer cannot obtain the information requested by the

department, the insurer shall provide the department a detailed

explanation of the reason the insurer cannot obtain the

information and the identity of the holder of information.

Whenever it appears to the department the detailed explanation

is without merit, the department may require, after notice and

hearing, the insurer to pay a penalty of one thousand ($1,000)

dollars for each day's delay or may suspend or revoke the

insurer's license.

(b)  The department may retain at the registered insurer's

expense such attorneys, actuaries, accountants and other experts

not otherwise a part of the department's staff as shall be

reasonably necessary to assist in the conduct of the examination

under subsection (a). Any persons so retained shall be under the

direction and control of the commissioner and shall act in a

purely advisory capacity.

(c)  Each registered insurer producing for examination

records, books and papers pursuant to subsection (a) shall be

liable for and shall pay the expense of such examination as

provided for in Article IX of the act of May 17, 1921 (P.L.789,

No.285), known as "The Insurance Department Act of one thousand

nine hundred and twenty-one."

(d)  If the insurer fails to comply with an order, the

commissioner shall have the power to examine the affiliates to

obtain the information. The department shall also have the power

to issue subpoenas, to administer oaths and to examine under

oath a person for purposes of determining compliance with this

section. Upon the failure or refusal of a person to obey a

subpoena, the department may petition a court of competent

jurisdiction, and upon proper showing, the court may enter an

order compelling the witness to appear and testify or produce

documentary evidence. Failure to obey the court order shall be

punishable as contempt of court. When subpoenaed, a person shall

attend as a witness at the place specified in the subpoena. He

shall be entitled to the same fees and mileage, if claimed, as a

witness in the Commonwealth Court. The fees, mileage and expense

necessarily incurred in securing the attendance and testimony of

witnesses shall be itemized and charged against, and be paid by,

the company being examined.

Section 6.  The act is amended by adding a section to read:

Section 1406.1. Supervisory Colleges.--(a)  Regarding an

insurer registered under section 1404 and in accordance with

subsection (c), the department shall have the power to

participate in a supervisory college for a domestic insurer that

is part of an insurance holding company system with

international operations in order to determine compliance by the

insurer with this article. The powers of the department

regarding supervisory colleges include, but are not limited to,

the following:

(1)  Initiating the establishment of a supervisory college.

(2)  Clarifying the membership and participation of other

supervisors in the supervisory college.

(3)  Clarifying the functions of the supervisory college and

the role of other regulators, including the establishment of a

group-wide supervisor.

(4)  Coordinating the ongoing activities of the supervisory

college, including planning meetings, supervisory activities and

processes for information sharing.

(5)  Establishing a crisis management plan.

(b)  A registered insurer subject to this section shall be

liable for and shall pay the reasonable expenses of the

department's participation in a supervisory college in

accordance with subsection (c), including reasonable travel

expenses. For purposes of this section, a supervisory college

may be convened as either a temporary or permanent forum for

communication and cooperation between the regulators charged

with the supervision of the insurer or its affiliates. The

department may establish a regular assessment to the insurer for

the payment of the expenses.

(c)  In order to assess the business strategy, financial

position, legal and regulatory position, risk exposure, risk

management and governance processes, and as part of the

examination of individual insurers in accordance with section

1406, the department may participate in a supervisory college

with other regulators charged with supervision of the insurer or

its affiliates, including international, Federal and other state

regulatory agencies. The department may enter into agreements in

accordance with Article II-A of the act of May 17, 1921

(P.L.789, No.285), known as "The Insurance Department Act of

1921," providing the basis for cooperation between the

department and the other regulatory agencies and the activities

of the supervisory college. Nothing in this section shall

delegate to the supervisory college the authority of the

department to regulate or supervise the insurer or its

affiliates within its jurisdiction.

Section 7.  Section 1410 of the act is amended by adding a

subsection to read: 

Section 1410.  Sanctions.--* * *

(f)  Whenever it appears to the department that a person has

committed a violation of section 1403 which prevents the full

understanding of the enterprise risk to the insurer by

affiliates or by the insurance holding company system, the

violation may serve as an independent basis for disapproving

dividends or distributions and for placing the insurer under an

order of supervision in accordance with section 511 of the act

of May 17, 1921 (P.L.789, No.285), known as "The Insurance

Department Act of 1921."

Section 8.  This act shall take effect in 60 days.