Supervisory approval is required for proposals to acquire significant ownership or an interest in an insurer that results in that person (legal or natural), directly or indirectly, alone or with an associate, exercising control over the insurer. The same applies to portfolio transfers or mergers of insurers.
Description Definition of Control
All states and the District of Columbia have adopted substantially similar language from the Insurance Holding Company System Regulatory Act and its related Regulation regarding changes of control for licensed insurers. The Model Act clearly defines “control” as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person.” In addition, “Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent (10 percent) or more of the voting securities of any other person.”
The Model Holding Company Act requires potential controlling owners to obtain regulatory approval for changes in control. The Form A Statement of the related regulation provides for extensive disclosure and attestation regarding the acquiring party’s intention to control and ability to meet regulatory standards for acquiring such control.
The FRB also has clear definition of Control in the context of SLHC supervision, which is defined as “the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25 per centum or more of any class of voting securities of an insured depository institution”.
Notification of Changes in Control
The Model Holding Company Act requires that the domestic state insurance
departments must be notified of major transactions with affiliated entities which could include material portfolio transfers between related parties. Assumption reinsurance and bulk reinsurance statutes establish thresholds by which material transfers of all or most of an insurer’s business either in total or within a specific line of business are subject to review and approval.
The supervisor approves any significant increase above the predetermined control levels, whether obtained individually or in association with others. Under the Model Holding
Company Act, any controlling person seeking to divest its controlling interest in the insurer must file a confidential notice of its proposed divestiture at least 30 days prior to the cessation of control.
Review of Change in Ownership Application
The Model Holding Company Act (section 3B) requires the acquiring party to provide significant information, under oath or affirmation, including but not limited to listing all offices and positions held during the past five years, any conviction of crimes, source, nature and amount of the consideration used, and other pertinent information. The Act also provides State Regulators to require an annual filling of information related the ultimate controlling party.
Under the Model Holding Company Act (Section 3D(1)(a)), the supervisor will not
approve the acquisition of control if the applicant (after the change of control) would not be able to satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is seeking approval. The Model Holding Company Act (Section 3D(1)(c)) also provides approval power to the supervisor on the acquisition of control if the financial condition of any acquiring party is such as might jeopardize the financial stability of the insurer, or prejudice the interest of its policyholders.
The Model Holding Company Act provides that regulators can deny an application for change of control for any of the following reasons:
After the change of control, the domestic insurer would not be able to satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed;
The effect of the merger or other acquisition of control would be substantially to lessen competition in insurance in the state or tend to create a monopoly;
The financial condition of any acquiring party is such as might jeopardize the financial stability of the insurer, or prejudice the interest of its policyholders;
The plans or proposals which the acquiring party has to liquidate the insurer, sell its assets or consolidate or merge it with any person, or to make any other material change in its business or corporate structure or management, are unfair and unreasonable to policyholders of the insurer or not in the public interest;
The competence, experience and integrity of those persons who would control the operation of the insurer are such that it would not be in the interest of policyholders of the insurer and of the public to permit the merger or other acquisition of control; or
The acquisition is likely to be hazardous or prejudicial to the insurance-buying public.
As part of the evaluation of any application for a change in control, the supervisor requires applicants to meet financial and non-financial resource requirements, which are dependent on the business plan submitted and ultimately accepted by the supervisor. An NBFC must provide prior notice to the FRB for approval before acquiring the shares of an entity which has total consolidated assets of US$ 10 billion or more and is engaged in the activities described in section 4(k) of the BHC Act, which includes insurance and
providing investment advisory services.
Foreign Ownership
In cases where outside jurisdictions are involved, the domestic supervisor collaborates and coordinates, where relevant and necessary, with corresponding supervisors of those persons/entities.
Demutualization and Conversion of Companies
Under state laws that permit demutualization, a change of a mutual company to a stock company is subject to the supervisor’s approval, and is subject to a comprehensive review of its proposed legal structure, including organizational documents and financial projections.
Portfolio Transfer
Portfolio transfers require consent of individual policyholders. In addition, the Model Holding Company Act and Regulation (#440 and #450) requires supervisory approval on the transfer of all or a part of an insurer’s business. As part of the review process, the supervisor will ensure that the interests of the policyholders of both parties are not adversely impacted.
Assessment Observed
Comments Although 2010 amendments to the Model Holding Company Act have not been adopted by all states, all requirements mentioned in ICP 6 have been adopted by all states and District of Columbia.