26.1-10-05. Standards and management of an insurer with an insurance holding company system

26.1-10-05. Standards and management of an insurer with an insurance holding

company system.

1. Transactions within an insurance holding company system to which an insurer subject

to registration is a party are subject to the following standards:

a. The terms must be fair and reasonable.

b. Agreements for cost-sharing services and management must include provisions

as required by rules adopted by the commissioner.

c. The books, accounts, and records of each party must clearly and accurately

disclose the precise nature and details of the transactions, including that

accounting information that is necessary to support the reasonableness of the

charges or fees to the respective parties.

d. The insurer's surplus as regards to policyholders following any dividends or

distributions to shareholder affiliates must be reasonable in relation to the

insurer's outstanding liabilities and adequate to its financial needs.

e. Charges or fees for services performed must be reasonable.

f. Expenses incurred and payment received must be allocated to the insurer in

conformity with statutory accounting practices consistently applied.

g. If an insurer subject to this chapter is deemed by the commissioner to be in a

hazardous financial condition as defined by North Dakota Administrative Code

chapter 45-03-13 or a condition that would be grounds for supervision,

conservation, or a delinquency proceeding, the commissioner may require the

insurer to secure and maintain a deposit, held by the commissioner, or a bond, as

determined by the insurer at the insurer's discretion, for the protection of the

insurer for the duration of the contracts or agreements, or the existence of the

condition for which the commissioner is required to secure and maintain the

deposit or the bond. In determining whether a deposit or a bond is required, the

commissioner must consider whether concerns exist with respect to the affiliated

person's ability to fulfill the contracts or agreements if the insurer were to be put

into liquidation. Once the insurer is deemed to be in a hazardous financial

condition or a condition that would be grounds for supervision, conservation or a

delinquency proceeding, and a deposit or bond is necessary, the commissioner

may determine the amount of the deposit or bond, not to exceed the value of the

contracts or agreements in any one year, and whether such deposit or bond

should be required for a single contract, multiple contracts, or a contract only with

specific persons.

h. All records and data of the insurer held by an affiliate are and remain the property

of the insurer, are subject to the control of the insurer, are identifiable, and are

segregated or readily capable of segregation, at no additional cost to the insurer,

from all other persons' records and data. This includes all records and data that

are otherwise the property of the insurer, in whatever form maintained, including

claims and claim files, policyholder lists, application files, litigation files, premium

records, rate books, underwriting manuals, personnel records, financial records,

or similar records within the possession, custody or control of the affiliate. At the

request of the insurer, the affiliate shall permit the receiver to obtain a complete

set of all records of any type that pertain to the insurer's business, obtain access

to the operating systems on which the data is maintained, obtain the software that

runs those systems either through assumption of licensing agreements or

otherwise, and restrict the use of the data by the affiliate if it is not operating the

insurer's business. The affiliate shall provide a waiver of any landlord lien or other

encumbrance to give the insurer access to all records and data in the event of the

affiliate's default under a lease or other agreement.

i. Premiums or other funds belonging to the insurer which are collected by or held

otherwise, and restrict the use of the data by the affiliate if it is not operating the

insurer's business. The affiliate shall provide a waiver of any landlord lien or other

encumbrance to give the insurer access to all records and data in the event of the

affiliate's default under a lease or other agreement.

i. Premiums or other funds belonging to the insurer which are collected by or held

by an affiliate are the exclusive property of the insurer and are subject to the

control of the insurer. Any right of offset in the event an insurer is placed into

receivership shall be subject to chapter 26.1-06.1.

2. The following transactions involving a domestic insurer and any person in its insurance

holding company system, including an amendment or modification of an affiliate

agreement previously filed pursuant to this section, which is subject to any materiality

standards contained in subdivisions a through g, may not be entered unless the

insurer has notified the commissioner in writing of its intention to enter into the

transaction at least thirty 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 an amendment or modification must include the reason for the change and the

financial impact on the domestic insurer. Within thirty days after a termination of a

previously filed agreement, informal notice must be reported to the commissioner for

determination of the type of filing required, if any.

a. Sales, purchases, exchanges, loans, or extensions of credit, or investments

provided the transactions are equal to or exceed:

(1) With respect to nonlife insurers, the lesser of three percent of the insurer's

admitted assets or twenty-five percent of surplus as regards policyholders

as of December thirty-first next preceding.

(2) With respect to life insurers, three percent of the insurer's admitted assets

as of December thirty-first next preceding.

b. Loans or extensions of credit to any person that is not an affiliate, if the insurer

makes loans or extensions of credit 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 making the loans or extensions of credit

provided the transactions are equal to or exceed:

(1) With respect to nonlife insurers, the lesser of three percent of the insurer's

admitted assets or twenty-five percent of surplus as regards policyholders

as of December thirty-first next preceding.

(2) With respect to life insurers, three percent of the insurer's admitted assets

as of December thirty-first next preceding.

c. Reinsurance agreements or modifications thereto, including:

(1) All reinsurance pooling agreements.

, the lesser of three percent of the insurer's

admitted assets or twenty-five percent of surplus as regards policyholders

as of December thirty-first next preceding.

(2) With respect to life insurers, three percent of the insurer's admitted assets

as of December thirty-first next preceding.

c. Reinsurance agreements or modifications thereto, including:

(1) All reinsurance pooling agreements.

(2) Agreements 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 five percent of

the insurer's surplus as regards policyholders, as of December thirty-first

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.

d. All management agreements, service contracts, tax allocation agreements,

guarantees, and cost-sharing arrangements.

e. Any guarantee made by a domestic insurer; however, a guarantee that is

quantifiable as to amount is not subject to the notice requirements of this

subsection unless the guarantee exceeds the lesser of one-half of one percent of

the insurer's admitted assets or ten percent of surplus as regards policyholders

as of December thirty-first next preceding. Additionally, all guarantees that are not

quantifiable as to amount are subject to the notice requirements of this

subsection.

f. Any direct or indirect acquisition or investment in a person that controls the

insurer or in an affiliate of the insurer in an amount that, together with its present

holdings in such investments, exceeds two and one-half percent of the insurer's

surplus to policyholders. A direct or indirect acquisition or investment in a

subsidiary acquired pursuant to section 26.1-10-02, or authorized under any other

section of this chapter, or in a nonsubsidiary insurance affiliate that is subject to

this chapter, is exempt from this requirement.

g. Any material transactions, specified by rule, which the commissioner determines

may adversely affect the interests of the insurer's policyholders.

Nothing in this subsection may be deemed to authorize or permit any transactions

which, in the case of an insurer which is not a member of the same insurance holding

company system, would be otherwise contrary to law.

3. A domestic insurer may not enter transactions that 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 commissioner determines that the

separate transactions were entered over any twelve-month period for that purpose, the

commissioner may exercise the commissioner's authority under the penalty sections of

this chapter.

4. The commissioner, in reviewing transactions pursuant to subsection 2, shall consider

whether the transactions comply with the standards set forth in subsection 1 and

whether they may adversely affect the interests of the policyholders.

5. The commissioner must be notified within thirty days of any investment of the domestic

insurer in any one corporation if the total investment in that corporation by the

insurance holding company system exceeds ten percent of the corporation's voting

securities.

6. For purposes of this chapter, in determining whether an insurer's surplus as regards

policyholders is reasonable in relation to the insurer's outstanding liabilities and

adequate to meet its financial needs, the following factors, among others, must be

considered:

a. The size of the insurer as measured by its assets, capital and surplus, reserves,

t of the corporation's voting

securities.

6. For purposes of this chapter, in determining whether an insurer's surplus as regards

policyholders is reasonable in relation to the insurer's outstanding liabilities and

adequate to meet its financial needs, the following factors, among others, must be

considered:

a. The size of the insurer as measured by its assets, capital and surplus, reserves,

premium writings, insurance in force, and other appropriate criteria.

b. The extent to which the insurer's business is diversified among the several lines

of insurance.

c. The number and size of risks insured in each line of business.

d. The extent of the geographical dispersion of the insurer's insured risks.

e. The nature and extent of the insurer's reinsurance program.

f. The quality, diversification, and liquidity of the insurer's investment portfolio.

g. The recent past and projected future trend in the size of the insurer's investment

portfolio.

h. The surplus as regards policyholders maintained by other comparable insurers.

i. The adequacy of the insurer's reserves.

j. The quality and liquidity of investments in affiliates. The commissioner may treat

the investment as a disallowed asset for purposes of determining the adequacy of

surplus as regards policyholders whenever in the commissioner's judgment the

investment so warrants.

7. A domestic insurer may not pay any extraordinary dividend or make any other

extraordinary distribution to its shareholders until thirty days after the commissioner

has received notice of the declaration thereof and has not within that period

disapproved the payment, or until the commissioner has approved the payment within

the thirty-day period.

8. For purposes of this section, an extraordinary dividend or distribution includes any

dividend or distribution of cash or other property, when the fair market value together

with that of other dividends or distributions made within the preceding twelve months

exceeds the lesser of:

a. Ten percent of the insurer's surplus as regards policyholders as of December

thirty-first next preceding; or

b. The net gain from operations of the insurer, if the insurer is a life insurer, or the

net income, if the company is not a life insurer, not including realized capital

gains, for the twelve-month period ending December thirty-first next preceding,

but shall not include pro rata distributions of any class of the insurer's own

securities.

9. In determining whether a dividend or distribution is extraordinary under subsection 8,

an insurer other than a life insurer may carry forward net income from the previous two

calendar years which has not already been paid out as dividends. This carry-forward

must be computed by taking the net income from the second and third preceding

calendar years, not including realized capital gains, less dividends paid in the second

and immediate preceding calendar years.

10. Notwithstanding any other provision of law, an insurer may declare an extraordinary

dividend or distribution which is conditional upon the commissioner's approval, and the

declaration confers no rights upon shareholders until:

a. The commissioner has approved the payment of the dividend or distribution; or

b. The commissioner has not disapproved the payment within the thirty-day period

referred to in subsection 7.

11. An affiliate that is a party to an agreement or contract with a domestic insurer that is

subject to subdivision d of subsection 2 shall be subject to the jurisdiction of any

supervision, seizure, conservatorship, or receivership proceedings against the insurer

and to the authority of any supervisor, conservator, rehabilitator, or liquidator for the

insurer appointed under chapters 26.1-06.1 and 26.1-06.2 for the purpose of

interpreting, enforcing, and overseeing the affiliate's obligations under the agreement

or contract to perform services for the insurer that are:

pervision, seizure, conservatorship, or receivership proceedings against the insurer

and to the authority of any supervisor, conservator, rehabilitator, or liquidator for the

insurer appointed under chapters 26.1-06.1 and 26.1-06.2 for the purpose of

interpreting, enforcing, and overseeing the affiliate's obligations under the agreement

or contract to perform services for the insurer that are:

a. An integral part of the insurer's operations, such as management, administrative,

accounting, data processing, marketing, underwriting, claims handling,

investment, or any other similar functions; or

b. Essential to the insurer's ability to fulfill its obligations under insurance policies.

12. The commissioner may require that an agreement or contract under subdivision d of

subsection 2 for the provision of services in subdivision a and b specify the affiliate

consents to the jurisdiction as set forth in subsection 11.