S 351 Session 110 (1993-1994)
S 0351 General Bill, By Saleeby, Courtney, Land, McConnell and Rankin
Similar(S 421)
A Bill to amend Section 38-11-50, as amended, Code of Laws of South Carolina,
1976, relating to insurance investments and limitations on certain
investments, so as to delete a reference to Section 38-11-40(F) and replace it
with a reference to Section 38-11-50(A)(7); to amend Section 38-11-100,
relating to insurance investments, certain assets as being considered admitted
assets, and valuation, so as to change certain Code section references; to
amend the 1976 Code by adding Section 38-21-95 so as to provide, among other
things, that, for purposes of the Insurance Holding Company Regulatory Act, no
acquisition of a domestic insurer, whether a member of a holding company
system or not, by a controlling producer in another state may be approved
unless the acquiring party demonstrates compliance with certain requirements;
to amend Section 38-21-170, relating to the Insurance Holding Company
Regulatory Act and the requirements that dividends and distributions must be
reported, so as to provide, among other things, that each registered insurer
shall report to the Chief Insurance Commissioner all dividends and other
distributions to shareholders within five, rather than fifteen, business days
following the declaration thereof and at least ten days prior to the payment
thereof; to amend Section 38-21-260, relating to the Insurance Holding Company
Regulatory Act and the determination of the adequacy of an insurer's surplus,
so as to require for consideration the source of the insurer's earnings and
the extent to which the reported earnings include extraordinary items, such as
surplus relief reinsurance transactions and reserve destrengthening; and to
amend Section 38-21-270, as amended, relating to the Insurance Holding Company
Regulatory Act and the requirement for notice and approval of extraordinary
dividends or distributions, so as to provide that an extraordinary dividend or
distribution includes a dividend or distribution of cash or other property
whose fair market value together with that of other dividends or distributions
made within the preceding twelve months exceeds the greater of ten percent of
the insurer's surplus as regards policyholders as shown in the insurer's most
recent annual statement, or the net gain from operations for life insurers or
the net income for non-life insurers, not including net realized capital gains
or losses as shown in the insurer's most recent annual statement.
02/03/93 Senate Introduced and read first time SJ-4
02/03/93 Senate Referred to Committee on Banking and Insurance SJ-5
A BILL
TO AMEND SECTION 38-11-50, AS AMENDED, CODE OF LAWS
OF SOUTH CAROLINA, 1976, RELATING TO INSURANCE
INVESTMENTS AND LIMITATIONS ON CERTAIN
INVESTMENTS, SO AS TO DELETE A REFERENCE TO SECTION
38-11-40(F) AND REPLACE IT WITH A REFERENCE TO SECTION
38-11-50(A)(7); TO AMEND SECTION 38-11-100, RELATING TO
INSURANCE INVESTMENTS, CERTAIN ASSETS AS BEING
CONSIDERED ADMITTED ASSETS, AND VALUATION, SO AS TO
CHANGE CERTAIN CODE SECTION REFERENCES; TO AMEND
THE 1976 CODE BY ADDING SECTION 38-21-95 SO AS TO
PROVIDE, AMONG OTHER THINGS, THAT, FOR PURPOSES OF
THE INSURANCE HOLDING COMPANY REGULATORY ACT, NO
ACQUISITION OF A DOMESTIC INSURER, WHETHER A
MEMBER OF A HOLDING COMPANY SYSTEM OR NOT, BY A
CONTROLLING PRODUCER IN ANOTHER STATE MAY BE
APPROVED UNLESS THE ACQUIRING PARTY DEMONSTRATES
COMPLIANCE WITH CERTAIN REQUIREMENTS; TO AMEND
SECTION 38-21-170, RELATING TO THE INSURANCE HOLDING
COMPANY REGULATORY ACT AND THE REQUIREMENTS
THAT DIVIDENDS AND DISTRIBUTIONS MUST BE REPORTED,
SO AS TO PROVIDE, AMONG OTHER THINGS, THAT EACH
REGISTERED INSURER SHALL REPORT TO THE CHIEF
INSURANCE COMMISSIONER ALL DIVIDENDS AND OTHER
DISTRIBUTIONS TO SHAREHOLDERS WITHIN FIVE, RATHER
THAN FIFTEEN, BUSINESS DAYS FOLLOWING THE
DECLARATION THEREOF AND AT LEAST TEN DAYS PRIOR TO
THE PAYMENT THEREOF; TO AMEND SECTION 38-21-260,
RELATING TO THE INSURANCE HOLDING COMPANY
REGULATORY ACT AND THE DETERMINATION OF THE
ADEQUACY OF AN INSURER'S SURPLUS, SO AS TO REQUIRE
FOR CONSIDERATION THE SOURCE OF THE INSURER'S
EARNINGS AND THE EXTENT TO WHICH THE REPORTED
EARNINGS INCLUDE EXTRAORDINARY ITEMS, SUCH AS
SURPLUS RELIEF REINSURANCE TRANSACTIONS AND
RESERVE DESTRENGTHENING; AND TO AMEND SECTION 38-21-270, AS AMENDED, RELATING TO THE INSURANCE
HOLDING COMPANY REGULATORY ACT AND THE
REQUIREMENT FOR NOTICE AND APPROVAL OF
EXTRAORDINARY DIVIDENDS OR DISTRIBUTIONS, SO AS TO
PROVIDE THAT AN EXTRAORDINARY DIVIDEND OR
DISTRIBUTION INCLUDES A DIVIDEND OR DISTRIBUTION OF
CASH OR OTHER PROPERTY WHOSE FAIR MARKET VALUE
TOGETHER WITH THAT OF OTHER DIVIDENDS OR
DISTRIBUTIONS MADE WITHIN THE PRECEDING TWELVE
MONTHS EXCEEDS THE GREATER OF TEN PERCENT OF THE
INSURER'S SURPLUS AS REGARDS POLICYHOLDERS AS
SHOWN IN THE INSURER'S MOST RECENT ANNUAL
STATEMENT, OR THE NET GAIN FROM OPERATIONS FOR LIFE
INSURERS OR THE NET INCOME FOR NON-LIFE INSURERS,
NOT INCLUDING NET REALIZED CAPITAL GAINS OR LOSSES
AS SHOWN IN THE INSURER'S MOST RECENT ANNUAL
STATEMENT.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Section 38-11-50(A)(8) of the 1976 Code, as last
amended by Act 13 of 1991, is further amended to read:
"(8) Investments in Section 38-11-40(p) may not exceed
ten percent of the insurer's policyholder obligations. Where a life
insurer does not, wholly or in part, avail itself of Section 38-11-40(o),
as limited by Section 38-11-40(f) 38-11-50(A)(7), the
investments under Section 38-11-40(p) may be increased to the extent
of the unused portion, but the life insurer's investments under Section
38-11-40(p) may not exceed fifteen percent of the insurer's policyholder
obligations. However, this limitation does not apply to real estate
acquired by bona fide mortgage foreclosure if the insurer has had title to
the real estate for less than five years."
SECTION 2. Section 38-11-100 of the 1976 Code is amended to read:
"Section 38-11-100. The assets enumerated in Section 38-11-40 and other assets not prohibited under Section 38-11-90 nor required
to be scheduled as nonadmitted assets in the annual statement, as
prescribed by the commissioner, are considered admitted assets and all
these assets must be valued in accordance with the standards prescribed
in item (l) of Section 38-11-50 (B),(C), and (D)."
SECTION 3. The 1976 Code is amended by adding:
"Section 38-21-95. (A) No acquisition of a domestic insurer,
whether a member of a holding company system or not, by a controlling
producer in another state may be approved by the commissioner unless
the acquiring party demonstrates, to the satisfaction of the
commissioner, compliance with the requirements contained in
subsection (B) of this section. For the purposes of this section,
`controlling producer' means:
(1) a broker or brokers in a foreign state which permits a broker
to place business on behalf of an insured with a licensed insurer;
(2) which controls or seeks to control a domestic insurer as that
term is defined in Section 38-21-10(2); and
(3) which places, in any calendar year, an aggregate amount of
gross written premium with the controlled insurer which is equal to or
greater than five percent of the admitted assets of the controlled insurer
as reported in the insurer's quarterly statement filed as of September
thirtieth of the prior year.
(B) Approval of the acquisition of a domestic insurer, whether a
member of a holding company system or not, by a foreign controlling
producer may not be approved unless the following requirements are
met:
(1) Required Contract Provisions. A controlled insurer shall not
accept business from a controlling producer and a controlling producer
shall not place business with a controlled insurer unless there is a written
contract between the controlling producer and the controlled insurer
specifying the responsibilities of each party, which contract has been
approved by the board of directors of the controlled insurer and which
contains the following:
(a) A provision that the controlled insurer may terminate the
contract for cause, upon written notice to the controlling producer. The
controlled insurer shall suspend the authority of the controlling producer
to write business during the pendency of any dispute regarding the cause
for the termination;
(b) A provision that the controlling producer shall render
accounts to the controlled insurer detailing all material transactions,
including information necessary to support all commissions, charges,
and other fees received by, or owing to, the controlling producer;
(c) A provision that the controlling producer shall remit all
funds due under the terms of the contract to the controlled insurer on at
least a monthly basis. The due date shall be fixed so that premiums or
installments thereof collected shall be remitted no later than ninety days
after the effective date of any policy placed with the controlled insurer
under this contract;
(d) A provision that all funds collected for the controlled
insurer's account shall be held by the controlling producer in a fiduciary
capacity, in one or more appropriately identified bank accounts in banks
that are members of the Federal Reserve System;
(e) A provision that the controlling producer shall maintain
separately identifiable records of business written for the controlled
insurer;
(f) A provision that the contract shall not be assigned in whole
or in part by the controlling producer;
(g) A provision that the controlled insurer shall provide the
controlling producer with its underwriting standards, rules, and
procedures, manuals setting forth the rates to be charged, and the
conditions for the acceptance or rejection of risks. The controlling
producer shall adhere to the standards, rules, procedures, rates, and
conditions. The standards, rules, procedures, rates, and conditions shall
be the same as those applicable to comparable business placed with the
controlled insurer by a producer other than the controlling producer;
(h) A provision establishing the rates and terms of the
controlling producer's commissions, charges, or other fees and the
purposes for those charges or fees. The rates of the commissions,
charges, and other fees shall be no greater than those applicable to
comparable business placed with the controlled insurer by producers
other than controlling producers. For purposes of this subitem and
subitem (g), examples of `comparable business' include the same lines
of insurance, same kinds of insurance, same kinds of risks, similar policy
limits, and similar quality of business;
(i) A provision that, if the contract provides that the
controlling producer, on insurance business placed with the insurer, is
to be compensated contingent upon the insurer's profits on that business,
then such compensation shall not be determined and paid until at least
five years after the premiums on liability insurance are earned and at
least one year after the premiums are earned on any other insurance. In
no event shall the commissions be paid until the adequacy of the
controlled insurer's reserves on remaining claims has been independently
verified pursuant to subsection (B)(3)(a);
(j) A provision limiting the controlling producer's writings in
relation to the controlled insurer's surplus and total writings. The
controlled insurer may establish a different limit for each line or subline
of business. The controlled insurer shall notify the controlling producer
when the applicable limit is approached and shall not accept business
from the controlling producer if the limit is reached. The controlling
producer shall not place business with the controlled insurer if it has
been notified by the controlled insurer that the limit has been reached;
and
(k) A provision that the controlling producer may negotiate but
shall not bind reinsurance on behalf of the controlled insurer on business
the controlling producer places with the controlled insurer, except that
the controlling producer may bind facultative reinsurance contracts
pursuant to obligatory facultative agreements if the contract with the
controlled insurer contains underwriting guidelines, including, for both
reinsurance assumed and ceded, a list of reinsurers with which such
automatic agreements are in effect, the coverages and amounts or
percentages that may be reinsured, and commission schedules.
(2) Audit Committee. Every controlled insurer shall have an audit
committee of the board of directors composed of independent directors.
The audit committee shall annually meet with management, the
controlled insurer's independent certified public accountants, and an
independent casualty actuary or other independent loss reserve specialist
acceptable to the commissioner to review the adequacy of the controlled
insurer's loss reserves.
(3) Reporting Requirements. (a) In addition to any other
required loss reserve certification, the controlled insurer shall annually,
on April first of each year, file with the commissioner an opinion of an
independent casualty actuary, or such other independent loss reserve
specialist acceptable to the commissioner, reporting loss ratios for each
line or subline of business written and attesting to the adequacy of loss
reserves established for losses incurred and outstanding as of year-end,
including incurred but not reported losses, on business placed by the
controlling producer; and
(b) The controlled insurer shall annually report to the
commissioner the amount of commissions paid to the controlling
producer, the percentage such amount represents of the net premiums
written, and comparable amounts and percentages paid to noncontrolling
producers for placements of the same kinds of insurance.
(4) Disclosure Requirements. The controlling producer, prior to the
effective date of the policy, shall deliver written notice to the
prospective insured disclosing the relationship between the controlling
producer and the controlled insurer, except that, if the business is placed
through a subproducer who is not a controlling producer, the controlling
producer shall retain in his records a signed commitment from the
subproducer that the subproducer is aware of the relationship between
the controlled insurer and the controlling producer and that the
subproducer has or will notify the insured.
(5) Penalties. (a) If the commissioner believes that the
controlling producer or any other person has not materially complied
with this section, or any regulation or order promulgated hereunder, after
notice and opportunity to be heard, the commissioner may order the
controlling producer to cease placing business with the controlled
insurer; and
(b) If it was found that because of such material noncompliance
that the controlled insurer or any policyholder thereof has suffered any
loss or damage, the commissioner may maintain a civil action or
intervene in an action brought by or on behalf of the controlled insurer
or policyholder for recovery of compensatory damages for the benefit of
the controlled insurer or policyholder or other appropriate relief.
(c) If an order for liquidation or rehabilitation of the controlled
insurer has been entered pursuant to Section 38-27-10, et seq., and the
receiver appointed under that order believes that the controlling
producer or any other person has not materially complied with this
section, or any regulation or order promulgated hereunder, and the
controlled insurer suffered any loss or damage therefrom, the receiver
may maintain a civil action for recovery of damages or other appropriate
sanctions for the benefit of the controlled insurer.
(d) Nothing contained in this section shall affect the right of the
commissioner to impose any other penalties provided for in the
insurance law.
(e) Nothing contained in this section is intended to or shall in any
manner alter or affect the rights of policyholders, claimants, creditors,
or other third parties."
SECTION 4. Section 38-21-170 of the 1976 Code is amended to read:
"Section 38-21-170. (A) Subject to Section 38-21-270, each registered insurer shall report to the commissioner all
dividends and other distributions to shareholders within fifteen
five business days following the declaration thereof.
and at least ten days prior to the payment thereof. The
commissioner shall promptly consider this report as information, and
such considerations shall include the factors as set forth in Section 38-21-260. If an insurer's surplus as regards policyholders is determined by
the commissioner not to be reasonable in relation to the insurer's
outstanding liabilities and adequate to its financial needs, the
commissioner shall have the authority, within the ten-day period prior
to payment thereof, to limit the amount of such dividends or
distributions.
(B) No dividend or other distribution may be declared or paid at any
time except out of earned surplus, as distinguished from contributed
surplus, nor when the surplus of the insurer is less than the surplus
required by law for the kinds of business authorized to be transacted by
such insurer, nor when the payment of a dividend or other distribution
would reduce its surplus to less than such amount.
(C) Except in the case of share dividends, earned surplus for
determining whether dividends or other distributions may be declared
shall not include surplus arising from unrealized appreciation in value,
or revaluation of assets, or from unrealized profits upon investments.
(D) No dividend or other distribution may be declared or paid
contrary to any restriction contained in the insurer's articles of
incorporation.
(E) Notwithstanding any other provision of law, the insurer may
declare, conditional upon the commissioner's approval, a dividend or
other distribution to shareholders from other than earned surplus, and
such declaration confers no rights until the commissioner:
(1) has approved the payment of the dividend or distribution, or
(2) has not disapproved the payment within thirty days after
receiving notice of the declaration."
SECTION 5. Section 38-21-260 of the 1976 Code is amended to read:
"Section 38-21-260. 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 its financial needs, the following factors, among others, are
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
the several 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 insured risks;
(5) the nature and extent of the reinsurance
program;
(6) the quality, diversification, and liquidity of the investment
portfolio;
(7) the recent past and projected future trend in the size of the
insurer's investment portfolio;
(8) the surplus as regards policyholders maintained by other
comparable insurers;
(9) the adequacy of the reserves; and
(10) the source of the insurer's earnings and the extent to which
the reported earnings include extraordinary items, such as surplus relief
reinsurance transactions and reserve destrengthening; and
(11) the quality and liquidity of investments in affiliates.
The commissioner may treat any such investment as a disallowed asset
for purposes of determining the adequacy of surplus as regards
policyholders whenever in his judgment the investment so
warrants."
SECTION 6. Section 38-21-270 of the 1976 Code, as last amended by
Act 13 of 1991, is further amended to read:
"Section 38-21-270. (A) No domestic insurer may pay an
extraordinary dividend or make another extraordinary distribution to its
shareholders until the commissioner:
(1) has approved the payment;, or
(2) has not disapproved the payment within thirty days after
receiving notice of the declaration.
(B) (1) For purposes of this section, an extraordinary dividend or
distribution includes a dividend or distribution of cash or other property
whose fair market value together with that of other dividends or
distributions made within the preceding twelve months exceeds the
greater of:
(a) ten percent of the insurer's surplus as regards policyholders
as reflected shown in the insurer's most recent annual
statement;, or
(b) the net gain from operations of the insurer for
life insurers, if the insurer is a life insurer, or the net
investment income, if the insurer is not a life insurer
for nonlife insurers, not including net realized capital
gains or losses as reflected shown in the
insurer's most recent annual statement.
(2) It does not include pro rata distributions of a class of the
insurer's own securities.
(C) An insurer may declare an extraordinary dividend or distribution
which is conditional upon the commissioner's approval. The declaration
confers no rights upon shareholders until the commissioner:
(1) has approved the payment of the dividend or
distribution;, or
(2) has not disapproved the payment within thirty days after
receiving notice of the declaration."
SECTION 7. Sections 1, 2, and 3 of this act take effect upon approval
by the Governor and Sections 4, 5, and 6 take effect January 1, 1994.
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