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Code of Virginia
Title 38.2. Insurance
Chapter 13. Reports, Reserves and Examinations, Insurance Holding Companies, Reinsurance Intermediaries, and Managing General Agents
11/30/2020

§ 38.2-1330. Standards for transactions within an insurance holding company system; adequacy of surplus.

A. Transactions within an insurance holding company system to which an insurer subject to registration is a party shall be subject to the following standards:

1. The terms shall be fair and reasonable;

2. Agreements for cost-sharing services and management shall include such provisions as required by rule or regulation promulgated by the Commission;

3. Charges or fees for services performed shall be reasonable;

4. Expenses incurred and payments received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied;

5. The books, accounts, and records of each party shall disclose clearly and accurately the precise 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; and

6. The insurer's surplus as regards policyholders following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer's outstanding liabilities and adequate to meet its financial needs.

B. Transactions described in subdivisions 1 through 7 that involve a domestic insurer and any person in its insurance holding company system, including amendments or modifications of affiliate agreements previously filed pursuant to this section, that are subject to materiality standards contained in such subdivisions may not be entered into unless the insurer has notified the Commission in writing of its intention to enter into the transaction at least 30 days prior thereto, or such shorter period as the Commission may permit, and the Commission 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. Informal notice shall be reported, within 30 days after a termination of a previously filed agreement, to the Commission for determination of the type of filing required, if any. Transactions to which this subsection applies, with their materiality standards, are:

1. Sales, purchases, exchanges, loans, extensions of credit, or investments, provided the transactions are equal to or exceed:

a. With respect to nonlife insurers, the lesser of three percent of the insurer's admitted assets or 25 percent of surplus as regards policyholders as of the immediately preceding December 31; or

b. With respect to life insurers, three percent of the insurer's admitted assets as of the immediately preceding December 31;

2. Loans or extensions of credit to any person who is not an affiliate, where 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:

a. With respect to nonlife insurers, the lesser of three percent of the insurer's admitted assets or 25 percent of surplus as regards policyholders as of the immediately preceding December 31; or

b. With respect to life insurers, three percent of the insurer's admitted assets as of the immediately preceding December 31;

3. Reinsurance agreements or modifications thereto, including:

a. All reinsurance pooling agreements; and

b. 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 the immediately 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 allocation agreements, guarantees, and cost-sharing arrangements;

5. Guarantees when made by a domestic insurer, provided, however, that a guarantee that is quantifiable as to amount is not subject to the notice requirements of this subdivision unless it exceeds the lesser of one-half of one percent of the insurer's admitted assets or 10 percent of surplus as regards policyholders as of the immediately preceding December 31. Further, all guarantees that are not quantifiable as to amount are subject to the notice requirements of this subdivision;

6. 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 such investments, exceeds two and one-half percent of the insurer's surplus to policyholders. The Commission may exempt such a transaction by regulation; and

7. Any material transactions that the Commission determines may adversely affect the interests of the insurer's policyholders.

Nothing in this subsection shall be deemed to authorize or permit any transactions that, in the case of an insurer not a member of the same insurance holding company system, would be otherwise contrary to law.

C. In addition:

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 in this section 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;

3. Not less than one-third of the directors of a domestic insurer, and 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 employees 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 entity. At least one such person shall be included in any quorum for the transaction of business at any meeting of the board of directors or any committee thereof;

4. The board of directors of a domestic insurer shall establish one or more committees composed solely of directors who are not officers or employees 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 or committees shall have responsibility for nominating candidates for director for election by 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 subdivisions 3 and 4 shall not apply to a domestic insurer if the person controlling the insurer, such as an insurer, a mutual insurance holding company, or a publicly held corporation, has a board of directors and committees thereof that meet the requirements of subdivisions 3 and 4 with respect to such controlling entity; and

6. An insurer may make application to the Commission for a waiver from the requirements of this subsection if the insurer's annual direct written and assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and National Flood Insurance Program, is less than $300 million. An insurer may also make application to the Commission for a waiver from the requirements of this subsection based upon unique circumstances. The Commission may consider various factors including the type of business entity, volume of business written, availability of qualified board members, or ownership or organizational structure of the entity.

D. For purposes of this article, 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, 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 different 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 risk;

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 surplus to policyholders;

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

9. The surplus as regards policyholders maintained by other comparable insurers;

10. The adequacy of the insurer's reserves;

11. The quality of the insurer's earnings and the extent to which the reported earnings of the insurer include extraordinary items; and

12. The quality and liquidity of investments in affiliates. The Commission in its judgment may classify any investment as a nonadmitted asset for the purpose of determining the adequacy of surplus as regards policyholders.

E. No domestic insurer shall enter into 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 otherwise would be required. If the Commission determines that separate transactions were entered into over any 12-month period for that purpose, the Commission may exercise its authority under § 38.2-1334.2:2.

F. The Commission, in reviewing transactions pursuant to subsection B, shall consider whether the transactions comply with the standards set forth in subsection A and whether they may adversely affect the interests of policyholders.

G. The Commission shall be notified in writing within 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 10 percent of such corporation's voting securities.

1973, c. 505, § 38.1-178.3; 1986, c. 562; 1987, c. 417; 1992, c. 588; 2006, c. 577; 2014, c. 309.

The chapters of the acts of assembly referenced in the historical citation at the end of this section may not constitute a comprehensive list of such chapters and may exclude chapters whose provisions have expired.