§ 3685. Standards and management of an insurer within an insurance holding company system
(a) Transactions within an insurance holding company system.
(1) Transactions within an insurance holding company system to which an insurer subject
to registration is a party shall be subject to the following standards:
(A) The terms shall be fair and reasonable.
(B) Agreements for cost-sharing services and management shall include such provisions
as required by rule adopted by the Commissioner.
(C) Charges or fees for services performed shall be reasonable.
(D) Expenses incurred and payment received shall be allocated to the insurer in conformity
with customary insurance accounting practices consistently applied.
(E) The books, accounts, and records of each party to all such transactions shall be maintained
so as to clearly and accurately disclose 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.
(F) 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 its financial needs.
(G) If an insurer subject to this subchapter is deemed by the Commissioner to be in a
hazardous financial condition as defined by Regulation I-1993-02, Defining Standards
and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition,
or a condition that would be grounds for supervision, conservation, or a delinquency
proceeding, then the Commissioner may require the insurer to secure and maintain either
a deposit, held by the Commissioner, or a bond, as determined by the insurer at the
insurer’s discretion, for the protection of the insurer for the duration of a contract
or agreement, or the existence of the condition for which the Commissioner required
the deposit or the bond. In determining whether a deposit or a bond is required, the
Commissioner shall consider whether concerns exist with respect to the affiliated
person’s ability to fulfill a contract or agreement if the insurer were to be put
into liquidation. Once the insurer is deemed to be in a hazardous financial condition
or a condition that would be grounds for supervision, conservation, or a delinquency
proceeding, and a deposit or bond is necessary, the Commissioner has discretion to
determine the amount of the deposit or bond, not to exceed the value of a contract
or agreement in any one year, and whether such deposit or bond should be required
for a single contract or agreement, multiple contracts or agreements, or a contract
or agreement only with a specific person or persons.
(H) All records and data of the insurer held by an affiliate are and remain the property
of the insurer, are subject to control of the insurer, are identifiable, and are segregated
or readily capable of segregation, at no additional cost to the insurer, from all
other persons’ records and data. This includes all records and data that are otherwise
the property of the insurer, in whatever form maintained, including claims and claim
files, policyholder lists, application files, litigation files, premium records, rate
books, underwriting manuals, personnel records, financial records, or similar records
within the possession, custody, or control of the affiliate. At the request of the
insurer, the affiliate shall provide that the receiver can obtain a complete set of
all records of any type that pertain to the insurer’s business; obtain access to the
operating systems on which the data is maintained; obtain the software that runs those
systems either through assumption of licensing agreements or otherwise; and restrict
the use of the data by the affiliate if it is not operating the insurer’s business.
The affiliate shall provide a waiver of any landlord lien or other encumbrance to
give the insurer access to all records and data in the event of the affiliate’s default
under a lease or other agreement.
(I) Premiums or other funds belonging to the insurer that are collected by or held by
an affiliate are the exclusive property of the insurer and are subject to the control
of the insurer. Any right of offset in the event an insurer is placed into receivership
shall be subject to chapter 145 of this title.
(2) The following transactions involving a domestic insurer and any person in its holding
company system, including amendments or modifications of affiliate agreements previously
filed under this section, that are subject to any materiality standards contained
in subdivisions (A)–(G) of this subdivision, shall not be entered into unless the
insurer has notified the Commissioner in writing of its intention to enter into such
transaction at least 30 days prior to the transaction, or such shorter period as the
Commissioner may permit, and the Commissioner has not disapproved it within such period.
The notice for amendments or modifications shall include the reasons for the change
and the financial impact on the domestic insurer. Within 30 days following a termination
of a previously filed agreement, informal notice shall be reported to the Commissioner
for determination of the type of filing required, if any. Nothing in this subdivision
shall be deemed to authorize or permit any transactions that, in the case of an insurer
not a member of the same holding company system, would otherwise be contrary to law.
(A) Sales, purchases, exchanges, loans, or extensions of credit or investments, provided
such transactions are equal to or exceed:
(i) 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 31st day of December
next preceding; or
(ii) with respect to life insurers, three percent of the insurer’s admitted assets; each
as of the 31st day of December next preceding.
(B) Loans or extensions of credit to any person who is not an affiliate, where the insurer
makes such loans or extensions of credit with the agreement or understanding that
the proceeds of such transactions, in whole or in substantial part, are to be used
to make loans or extensions of credit to purchase assets of or to make investments
in any affiliate of the insurer making such loans or extensions of credit, provided
such transactions are equal to or exceed:
(i) 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 31st day of December
next preceding; or
(ii) with respect to life insurers, three percent of the insurer’s admitted assets; each
as of the 31st day of December next preceding.
(C) Reinsurance agreements or modifications of reinsurance agreements, including:
(i) all reinsurance pooling agreements; and
(ii) 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 31st day of December next preceding, 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 such assets will be transferred to one or more affiliates
of the insurer.
(D) All management agreements, service contracts, tax allocation agreements, guarantees,
and all cost-sharing arrangements.
(E) 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
(2) 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 31st day of December
next preceding. All guarantees that are not quantifiable as to amount are subject
to the notice requirements of this subdivision.
(F) 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.
Direct or indirect acquisitions or investments in subsidiaries acquired pursuant to
section 3682 of this subchapter or authorized under any other Vermont insurance law
or in nonsubsidiary insurance affiliates that are subject to the provisions of this
subchapter, are exempt from the notice requirement of this subdivision (2).
(G) Any material transactions, as specified in a rule adopted by the Commissioner, that
the Commissioner determines may adversely affect the interests of the insurer’s policyholders.
(H) Nothing in this subdivision (2) shall be deemed to authorize or permit any transaction
that, in the case of an insurer not a member of the same insurance holding company
system, would otherwise be contrary to law.
(3) A domestic insurer shall not 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 would otherwise occur. If the Commissioner determines
that such separate transactions were entered into over any 12-month period for such
purpose, the Commissioner may exercise the Commissioner’s authority under this title.
(4) The Commissioner, in reviewing transactions pursuant to subsection (b) of this section,
shall consider whether the transactions comply with the standards established in this
subsection (a) and whether they may adversely affect the interests of policyholders.
(5) The Commissioner shall be notified within 30 days following 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.
(6)(A) Any affiliate that is party to an agreement or contract with a domestic insurer that
is subject to subdivision (2)(D) of this subsection (a) shall be subject to the jurisdiction
of any supervision, seizure, conservatorship, or receivership proceedings against
the insurer and to the authority of any supervisor, conservator, rehabilitator, or
liquidator for the insurer appointed pursuant to chapter 145 of this title for the
purpose of interpreting, enforcing, and overseeing the affiliate’s obligations under
the agreement or contract to perform services for the insurer that:
(i) are an integral part of the insurer’s operations, including management, administrative,
accounting, data processing, marketing, underwriting, claims handling, investment,
or any other similar functions; or
(ii) are essential to the insurer’s ability to fulfill its obligations under insurance
policies.
(B) The Commissioner may require that an agreement or contract for the provision of services
described in subdivisions (2)(A)(i) and (ii) of this subsection specify that the affiliate
consents to the jurisdiction as set forth in this subdivision (a)(6).
(b) Adequacy of surplus. For purposes of this subchapter, 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, 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 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 insurer’s insured risks.
(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 as
regards policyholders.
(8) The surplus as regards policyholders maintained by other comparable insurers.
(9) The adequacy of the insurer’s reserves.
(10) 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 the Commissioner’s judgment such investment
so warrants.
(c) Dividends and other distributions.
(1) A domestic insurer shall not pay any extraordinary dividend or make any other extraordinary
distribution to its shareholders until:
(A) 30 days after the Commissioner has received notice of the declaration of the dividend
or distribution and has not within such period disapproved such payment; or
(B) the Commissioner shall have approved such payment within such 30-day period.
(2) For purposes of this subsection, an extraordinary dividend or distribution includes
any dividend or distribution of cash or other property whose fair market value together
with that of other dividends or distributions made within the preceding 12 months
exceeds the lesser of:
(A) 10 percent of such insurer’s surplus as regards policyholders as of the 31st day of
December next preceding; or
(B) the net gains from operations of such insurer, if such insurer is a life insurer,
or the net income, if such insurer is not a life insurer, not including realized capital
gains, for the 12-month period ending the 31st day of December next preceding, but
shall not include pro rata distributions of any class of the insurer’s own securities.
(3) In determining whether a dividend or distribution is extraordinary, an insurer other
than a life insurer may carry forward net income from the previous two calendar years
that has not already been paid out as dividends. This carry-forward shall be computed
by taking the net income from the second and third preceding calendar years, not including
realized capital gains, less dividends paid in the second and immediate preceding
calendar years. In determining whether a dividend or distribution is extraordinary,
a life insurer may exclude dividends or distributions paid only from unassigned surplus
that do not exceed the greater of subdivision (2)(A) or (B) of this subsection, provided
that a life insurer relying on this provision shall notify the Commissioner of such
dividend or distribution within five business days following declaration and at least
10 days, commencing from the date of receipt by the Commissioner, prior to the payment
thereof.
(4) Notwithstanding any other provision of law to the contrary, an insurer may declare
an extraordinary dividend or distribution that is conditional upon the Commissioner’s
approval, and such a declaration shall not confer any rights upon shareholders until
the Commissioner has:
(A) approved the payment of such dividend or distribution; or
(B) not disapproved such payment within the 30-day period referred to in subdivision (1)
of this subsection (c).
(d) Management of domestic insurers subject to registration.
(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 ensure its separate operating identity consistent with this section.
(2) Nothing in this subsection 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 subdivision
(a)(1) of this section.
(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. For purposes of this subsection, principal officers shall mean the chief
executive officer, the president, and any chief operating officer.
(5) The provisions of subdivisions (3) and (4) of this subsection 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) of this
subsection with respect to such controlling entity.
(6) An insurer may make application to the Commissioner 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 Federal Flood Program,
is less than $300,000,000.00. An insurer may also make application to the Commissioner
for a waiver from the requirements of this subsection based upon unique circumstances.
The Commissioner may consider various factors, including the type of business entity,
volume of business written, availability of qualified board members, or the ownership
or organizational structure of the entity. (Added 1971, No. 72, § 2; amended 1991, No. 101, §§ 14-16; 1991, No. 249 (Adj. Sess.), § 16; 1993, No. 12, § 10, eff. April 26, 1993; 2013, No. 29, § 31, eff. May 13, 2013; 2015, No. 70 (Adj. Sess.), § 1, eff. April 8, 2016; 2021, No. 139 (Adj. Sess.), § 1, eff. May 27, 2022; 2023, No. 110 (Adj. Sess.), § 26, eff. July 1, 2024.)