S*421 Session 110 (1993-1994)
S*0421(Rat #0081, Act #0070) General Bill, By Senate Banking and Insurance
Similar(S 351)
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.
02/11/93 Senate Introduced, read first time, placed on calendar
without reference SJ-8
02/17/93 Senate Read second time SJ-23
02/18/93 Senate Read third time and sent to House SJ-5
02/23/93 House Introduced and read first time HJ-12
02/23/93 House Referred to Committee on Labor, Commerce and
Industry HJ-13
04/14/93 House Committee report: Favorable with amendment Labor,
Commerce and Industry HJ-3
04/21/93 House Amended HJ-30
04/21/93 House Read second time HJ-30
04/22/93 House Read third time and returned to Senate with
amendments HJ-19
04/27/93 Senate Concurred in House amendment and enrolled SJ-26
05/11/93 Ratified R 81
05/13/93 Signed By Governor
05/13/93 Effective date Act No. 70
05/13/93 See act for exception to or explanation of
effective date
05/25/93 Copies available
(A70, R81, S421)
AN ACT 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 NONLIFE 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:
Limitations on insurance investments
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 38-11-50(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."
Insurance assets
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 Section 38-11-50
(B),(C), and (D)."
Approval for acquisitions of domestic insurers
SECTION 3. Chapter 21, Title 38 of 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, 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."
Reporting of dividends and other distributions by insurers
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 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."
Consideration of insurer's earnings to determine reasonable
surplus
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;
(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."
Extraordinary dividends and distributions
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
shown in the insurer's most recent annual statement, or
(b) the net gain from operations for life insurers, or the net income,
for nonlife insurers, not including net realized capital gains or losses as
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."
Time effective
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 October 1, 1993.
Approved the 13th day of May, 1993. |