Proposed Statutory Revisions to Holding Company Requirements (Part 2 in Series)
In yesterday’s blog, I mentioned pending legislative proposal to modernize Florida’s holding company regulations. I looked at the existing holding company requirements. Today we’ll consider the statutory revisions contained in this year’s legislative proposals.
Proposed Statutory Revisions
The existing statutes and rules are less comprehensive than model requirements adopted by the NAIC that are beginning to appear in other jurisdictions. As implementation of the more modern regulations has become a standard considered in the accreditation process for state insurance departments, the FLOIR seeks to ensure its regulatory oversight and authority remains consistent with the current trends.
The FLOIR in the months leading up to the 2013 legislative session prepared draft legislation that would modify various statutes to conform to the model act’s provisions and allow for updates to its rules. This culminated in the introduction of Senate Bill 836 in the Florida Senate, sponsored by Senator David Simmons, Chairman of the Senate Banking & Insurance Committee, and the identical House Bill 821 introduced in the Florida House of Representatives, sponsored by Representative Clay Ingram, a member of the House’s Insurance and Banking Subcommittee. SB 836 has been referred to the Senate’s Banking & Insurance, Judiciary and Rules committees. HB 821 has been referred to the House of Representatives’ Insurance and Banking Subcommittee, Governmental Operations Appropriations Subcommittee and Regulatory Affairs Committee.
Statutory Definitions of Affiliation and Control
The bills first would create a new section 624.085, Florida Statutes, setting for several definitions to be used throughout the Florida Insurance Code. The new statute would define an “affiliate” as any entity that exercises control over or is controlled by the insurer, directly or indirectly, through equity ownership or common managerial control. The new statute likewise would define an “affiliated person” to include, among other things, relationships involving ownership of ten percent or more of another person. The term “control” is defined to mean the power to direct the management or policies of another person, whether through ownership, contract or otherwise. Control is presumed to exist if a person directly or indirectly owns, with the power to vote, ten percent or more of the securities of another person. These definitions in part replace definitions found in an administrative rule recently repealed by the FLOIR.
Updates to Risk-Based Capital Requirements
The legislature next proposes to modify Florida’s risk-based capital (“RBC”) provisions at section 624.4085, Florida Statutes. The existing statute establishes thresholds below which an insurer or the FLOIR must develop and implement corrective measures to address financial concerns. Although the current statutes applies to life and health insurers, the pending legislative proposals would expand the RBC statute to encompass health maintenance organizations that are authorized in Florida and one or more other states as well as prepaid health service organizations that are authorized in Florida and one or more other jurisdictions. The bills would make corresponding changes to provisions granting the FLOIR regulatory authority to place insurers under regulatory control, including rehabilitation and liquidation, in the event mandatory control level events are triggered.
The bills also would change the scope of company action level events as defined in the existing section 624.4085, Florida Statutes. The bills would add that a company action level event occurs for a life and health insurer or property and casualty insurer reporting on the health insurance annual statement form if the organization has total adjusted capital that is greater than or equal to its company action level RBC but is less than the product of its authorized control level RBC and 3.0 and triggers the trend test calculation included in the RBC instructions updated annually by the NAIC. A similar requirement would extend to property and casualty insurers reporting using the property and casualty reporting form.
Annual Statement Requirements
The bills would specify that in conjunction with their annual statement filings insurers would need to provide their actuarial opinion summaries. The FLOIR has been requesting actuarial opinion summaries from insurers over the last few years as part of its general authority to investigate and examine insurers. The bills therefore might represent a clarification of the requirement and the formal adoption of protections for the information in the hands of the FLOIR rather than a new regulatory requirement. The bills would specify that the actuarial opinion summaries are exempt from Florida’s broad public records laws. To properly enact an exemption to Florida’s public records laws, the legislature must do so in a separate bill. SB 836 and HB 821 therefore have companion bills filed in their respective chambers confirming the important public records exemptions found in the main bills. The companion bills are discussed further below.
The bills also update the FLOIR’s authority to adopt rules implementing the annual statement filing requirements. Current law allows the FLOIR to adopt rules consistent with a 1998 model rule relating to annual financial reporting. This year’s legislative proposals will update this reference to the 2006 Annual Financial Reporting Model Regulation.
Acquisition Statements (Form A Filings)
The Florida Insurance Code at section 628.461, Florida Statutes, has long required acquiring parties to submit acquisition statements to the FLOIR and the target company when seeking to acquire five percent or more of a domestic insurer or its controlling parent. The filing process is commonly referred to throughout the industry as a Form A filing, although Florida’s acquisition statement filing statutes contains several unique aspects that differ from other states’ Form A filing processes. One difference that many acquiring parties first note is that Florida has a five percent threshold for requiring acquisition statements whereas many other states have ten percent thresholds. In addition, current Florida law allows an acquiring party to disclaim control if that party’s ownership interest will not equal or exceed ten percent, but the statute does not provide for disclaimers at higher ownership percentages.
If adopted, the House and Senate bills would make several changes to the acquisition statute. These include:
Requiring an acquiring party to assert that it will file the enterprise risk report newly required under section 628.801(2), Florida Statutes, if control exists;
Requiring an acknowledgment by the acquiring party that it and its subsidiaries will file information necessary for the FLOIR to evaluate enterprise risk.
Allowing an acquiring party to rebut a presumption of control by filing a disclaimer statement. The acquiring party then would be relieved of registering or reporting under Section 628.461, Florida Statutes, unless the FLOIR disallows the disclaimer. Unlike the current statute, this new provision is not necessarily limited to direct or indirect acquisitions of less than ten percent of voting interests in domestic insurers;
Requiring a controlling person to provide notice of its intent to divest control unless the transaction in which the divesture would occur is the subject of an acquisition statement filing.
Eliminating definitions of “affiliated person” and “controlling company.” These are no longer necessary because the bills create the new section 624.085 discussed above.
A new provision added to Section 628.803, Florida Statutes, would specify that if any person violates Section 628.461, Florida Statutes, in a manner that prevents the FLOIR’s full understanding of an organization’s enterprise risk, the violation constitutes independent grounds for disapproving dividends or distributions or placing the insurer under an order of administrative supervision.
With the proposed amendments, Florida’s general acquisition statement filing requirement will remain intact for transactions involving five percent or more of the voting interests in domestic insurers or their controlling persons. However, the disclaimer of control provisions will be new and more similar to those found in other states. In addition, persons with controlling interests in domestic insurers or their parents will need to familiarize themselves with the new divestiture notice provisions.
Insurance Holding Company Statutes
Under an amendment to section 628.801, Florida Statutes, insurers would be required to submit their holding company registration statements by April 1 of each year. The FLOIR currently requests that insurers submit holding company registration statements with their annual statement filings by March 1 of each year. Allowing the filings to be made by April 1 may be helpful to insurers’ accounting and compliance staffs as the days and weeks leading up to the current March 1 deadline are consumed by preparing annual statements and related obligations. Another proposed statutory change will ensure that insurers file material transactions with their affiliates according to a rule promulgated by the FLOIR.
The 2013 legislative proposals also will add a new subsection (2) to Section 628.801, Florida Statutes. The new subsection will require the ultimate controlling person of every insurer filing a registration statement to submit an enterprise risk report by April 1 of each year. The report is to be filed with the lead state office of the holding company system as determined in accordance with the NAIC’s Financial Analysis Handbook. The report must identify to the best of the reporting person’s knowledge and belief the material risks within the holding company system that could pose enterprise risk to the insurer. For purposes of the statute, “enterprise risk” means any activity or event involving one or more affiliates of an insurer that, if not remedied promptly, would be likely to have a material adverse effect on the financial condition or liquidity of the insurer or the holding company system as a whole. This includes any circumstance 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 bills further would extend the FLOIR’s general examination authority under Chapter 624, Florida Statutes, to the insurer and affiliates for the purpose of ascertaining the financial condition of the insurer, including the enterprise risk to the insurer by the ultimate controlling person or any combination of persons within the holding company system.
Tomorrow we’ll identify changes to other related laws and conclude the series.