INSURANCE DEPARTMENT [31 PA. CODE CH. 27] Disclosure of Material Transactions [26 Pa.B. 752] The Insurance Department (Department) proposes to adopt Chapter 27 (relating to disclosure of material transactions), to read as set forth in Annex A. These regulations are proposed under the authority of section 320 of The Insurance Company Law of 1921 (act) (40 P. S. § 443). Under section 320 of the act, insurers transacting business in this Commonwealth are required to file financial statements with the Department on at least an annual basis, and the Department has the discretion to require additional statements as necessary. The proposed regulations would require domestic insurers to file interim statements relating to specific transactions in order to allow the Department to monitor better the financial condition of the insurers.
Purpose
The Department is primarily responsible for regulation of the financial solvency of insurers domiciled in this Commonwealth. Under section 320 of the act, insurers transacting business in this Commonwealth are required to file financial statements with the Department on at least an annual basis. Section 320 of the act further provides the Department with the discretion to require insurers to file additional statements concerning their affairs and financial condition.
This proposed rulemaking would require domestic insurers to file with the Department interim statements of specific transactions that may have a material effect on their financial condition. Unless otherwise excluded from the filing requirement under the proposed regulations, the general types of transactions required to be filed are:
(1) Acquisitions and dispositions of assets (as described in § 27.6 (relating to nature and scope of material acquisitions and dispositions of assets)) that are nonrecurring and not in the ordinary course of business and involve more than 5% of the reporting insurer's total admitted assets.
(2) Nonrenewals, cancellations or revisions of ceded reinsurance agreements (as described in § 27.8 (relating to nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to property and casualty insurers)) that relate to reinsurance cessions which generate either: 50% or more of the insurer's ceded written premiums as reported in the most recent annual statutory financial statement filed by the insurer; or 50% or more of the insurer's total ceded indemnity loss and loss adjustment expense reserves.
Without knowledge of these types of extraordinary transactions as they occur, the Department is at a disadvantage in monitoring the financial condition of domestic insurers. Therefore, the regulations are needed to enable the Department to better monitor insurer solvency between annual financial statement filing dates.
Explanation of Regulatory Requirements
Section 27.1 (relating to definitions) contains definitions of ''domestic'' and ''insurer'' as key terms used in identifying the types of insurance entities that fall within the scope of the proposed regulations. Section 27.3 (relating to application) specifies that the proposed regulations apply to those insurers required to file financial statements under section 320 of the act. Section 27.3 also clarifies that the proposed regulations do not affect a separate statute which requires insurers to provide prior notice to the Department of certain transactions involving disposals of assets or reinsurance cessions.
Section 27.4 (relating to statements disclosing material transactions) identifies the general types of transactions that must be reported under the proposed regulations and establishes a 30-day time frame for filings. This section also provides an example of how the 30-day filing requirement is applied to a series of related material acquisitions or dispositions of assets.
Section 27.5 (relating to confidentiality of statements disclosing material transactons) provides for confidential treatment to be given to statements filed under the proposed regulations, except that the Department may share information with the National Association of Insurance Commissioners (NAIC) and other states or jurisdictions if those parties can and will protect its confidentiality. This section protects the confidentiality of information which would not otherwise be reported in public documents while providing the Department with the discretion to share information with the NAIC and other regulators when appropriate, particularly in situations involving domestic insurers that have a significant number of policyholders in other states.
Section 27.6 (relating to nature and scope of material acquisitions and dispositions of assets) establishes the parameters for material acquisitions and dispositions of assets that fall within the scope of the proposed regulations and provides examples of specific types of transactions that are required to be reported. Section 27.7 (relating to content of statements disclosing material acquisitions or dispositions of assets) lists the information that must be included in statements of material acquisitions or dispositions of assets.
Section 27.8 (relating to nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to property and casualty insurers) defines the type of nonrenewals, cancellations or revisions of ceded reinsurance agreements that are required to be reported by property and casualty insurers. This section also provides exemptions for certain transactions that meet the definition but are not required to be filed. In general, the exemptions include transactions (1) where the amount of premium ceded to reinsurers is less than 10% of the insurer's total premiums; and (2) where existing reinsurance is replaced with an agreement with another licensed or qualified reinsurer and there is no significant increase in the amount of risk retained by the ceding insurer. Revisions to inter-company pooling reinsurance agreements among affiliated insurers are also exempted from the filing requirement.
Section 27.9 (relating to nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to life insurers) includes provisions for life insurers comparable to provisions in § 27.8 for property and casualty insurers for reporting of material transactions relating to reinsurance agreements. Section 27.10 (relating to contents of statements disclosing material nonrenewal, cancellation or revision of ceded reinsurance agreements) lists the information that must be included in statements of material nonrenewal, cancellation or revision of ceded reinsurance agreements filed by both property and casualty insurers and life insurers. This section also permits reporting on a consolidated basis when the reporting insurer is part of a group of insurers which utilizes a pooling arrangement or 100% reinsurance agreement.
Section 27.11 (relating to penalties) provides for penalties consistent with the authorizing statute for failure to file or for willfully filing a false statement. Finally, Appendix A (relating to certification for statement disclosing material transaction) is a certification form to be executed by an officer of an insurer filing a statement disclosing a material transaction.
Fiscal Impact
State Government
Review of reports filed under these proposed regulations will not have a measurable impact on Department costs associated with the analyses of financial statements filed by domestic insurers.
General Public
The proposed regulations have no immediate fiscal impact on the general public. However, the general public will benefit to the extent that adoption of the proposed regulations enhance the ability of the Department to monitor the financial solvency of domestic insurers.
Political Subdivisions
The proposed regulations have no impact on costs to political subdivisions.
Private Sector
The reporting requirements in these proposed regulations will impose no significant costs on domestic insurers.
Paperwork
The proposed regulations require additional reporting by domestic insurers. However, the disclosure requirements established by the proposed regulations are necessary in order for the Department to determine whether material transactions may have an adverse impact on the interests of policyholders or on the financial stability of a domestic insurer.
Effectiveness/Sunshine Date
The proposed regulations will become effective upon publication in the Pennsylvania Bulletin as final rulemaking. The regulations will be monitored annually. No sunset date has been assigned.
Contact Person
Questions or comments regarding the proposed rulemaking may be addressed in writing to Elaine M. Leitzel, Administrative Officer, Office of Regulation of Companies, 1345 Strawberry Square, Harrisburg, PA 17120, (717) 787-8840, within 30 days following publication of this notice in the Pennsylvania Bulletin.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), the Department submitted a copy of these proposed regulations on February 8, 1996, to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Committee on Insurance and the Senate Committee on Banking and Insurance. In addition to submitting these proposed regulations, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the agency in compliance with Executive Order 1982-2, ''Improving Government Regulations.'' A copy of this material is available to the public upon request.
If IRRC has any objections to any portion of the proposed regulations, it will notify the Department within 30 days after the close of the public comment period. The notification shall specify the regulatory review criteria which have not been met by that portion. The Regulatory Review Act specifies detailed procedures for review prior to final publication of the regulations by the Department, the General Assembly and the Governor of objections raised.
LINDA S. KAISER,
Insurance CommissionerFiscal Note: 11-132. No fiscal impact; (8) recommends adoption.
Annex A TITLE 31. INSURANCE PART I. GENERAL PROVISIONS Subpart B. SECURITIES AND STOCK TRANSACTIONS CHAPTER 27. DISCLOSURE OF MATERIAL TRANSACTIONS Sec.
27.1. Definitions. 27.2. Purpose. 27.3. Application. 27.4. Statements disclosing material transactions. 27.5. Confidentiality of statements disclosing material transactions. 27.6. Nature and scope of material acquisitions and dispositions of assets. 27.7. Content of statements disclosing material acquisitions or dispositions of assets. 27.8. Nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to property and casualty insurers. 27.9. Nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to life insurers. 27.10. Contents of statements of material nonrenewal, cancellation or revision of ceded reinsurance agreements. 27.11. Penalties. § 27.1. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
Act--The Insurance Company Law of 1921 (40 P. S. §§ 341--991.1718).
Commissioner--The Insurance Commissioner of the Commonwealth.
Department--The Insurance Department of the Commonwealth.
Domestic--Incorporated or organized under the laws of the Commonwealth.
Insurer--A company, association or exchange as defined in section 101 of the act (40 P. S. § 361).
§ 27.2. Purpose.
Section 320 of the act (40 P. S. § 443), requires every stock and mutual insurance company, association and exchange doing business in this Commonwealth to file a financial statement with the Department on at least an annual basis and further provides the Department with the discretion to require insurers to file additional statements concerning their affairs and financial condition. The Department is primarily responsible for regulation of the financial solvency of insurers domiciled or organized in this Commonwealth. This chapter provides for the interim filing of statements of transactions that may have a material effect on the financial condition of a domestic insurer. The filing of statements disclosing material transactions will provide the Department with significant information needed to monitor domestic insurer solvency on a timely basis.
§ 27.3. Application.
(a) This chapter applies to licensed domestic insurers subject to section 320 of the act (40 P. S. § 443) relating to filing of statements of financial condition.
(b) This chapter does not supersede or in any way affect an insurer's duty to comply with the act of July 31 1968 (P. L. 941, No. 288) (40 P. S. §§ 995.1--995.4), relating to prior notice to the Commissioner of disposal of assets and certain reinsurance cessions.
§ 27.4. Statements disclosing material transactions.
(a) Insurers subject to this chapter shall file statements with the Department disclosing the following material transactions:
(1) Acquisitions and dispositions of assets.
(2) Material nonrenewals, cancellations or revisions of ceded reinsurance agreements.
(b) Notwithstanding subsection (a), if statements disclosing material transactions have been submitted to the Department for review, approval or informational purposes under other laws, regulations or requirements, no filing is required under this chapter.
(c) A statement disclosing a material transaction shall be filed with the Department within 30 days after the date on which the transaction was closed.
(d) When a statement is required as the result of a series of related material acquisitions or dispositions of assets during a 30-day period, the statement shall be filed within 30 days after any transaction within a 30-day period which results in the aggregate of transactions within that 30-day period involving more than 5% of the reporting insurer's total admitted assets as reported in that insurer's most recent annual statutory financial statement filed with the Department. For example:
§ 27.5. Confidentiality of statements disclosing material transactions.
(a) Statements obtained by or disclosed to the Department under this chapter shall be given confidential treatment, unless one or more of the following occur:
(1) The insurer to which the information pertains gives its prior written consent that the information may be disclosed.
(2) The Commissioner, after giving the affected insurer notice and an opportunity to be heard, determines that the interest of policyholders, shareholders or the public would be served by the publication, in which event the Commissioner may publish all or any part thereof in a manner that the Commissioner deems appropriate.
(3) The statements are subpoenaed. The Department will notify the affected insurer prior to providing the information subject to subpoena.
(b) Notwithstanding this section, the Department may share statements obtained by or disclosed to the Department under this chapter with the National Association of Insurance Commissioners and with insurance departments of other states or jurisdictions, as long as, prior to the Department's disclosure, those parties demonstrate the necessary authority and intent to provide the same confidential treatment required by this chapter.
§ 27.6. Nature of scope of material acquisitions and dispositions of assets.
(a) For purposes of this chapter, a material acquisition (or the aggregate of a series of related acquisitions during a 30-day period) or a material disposition (or the aggregate of a series of related dispositions during a 30-day period) is a transaction that is nonrecurring and not in the ordinary course of business and involves more than 5% of the reporting insurer's total admitted assets as reported in that insurer's most recent annual statutory financial statement filed with the Department.
(b) Acquisitions of assets subject to this chapter include every purchase, lease, exchange, succession or other acquistion, other than the following:
(1) The purchase, construction or development of real property occupied or to be occupied by the insurer for the transaction of its business or the acquisition of materials for that purpose.
(2) Electronic data processing hardware and operating software acquired by the insurer to support the transaction of its business.
(c) Dispositions of assets subject to this chapter include every sale, lease, transfer, exchange, mortgage, hypothecation, assignment (whether for the benefit of creditors or otherwise), abandonment, destruction, alienation or other conveyance of an interest in assets.
§ 27.7. Content of statements of material acquisitions or disposition of assets.
(a) Statements of material acquisitions or dispositions of assets shall include the following information:
(1) The dates of the transactions.
(2) The manner of acquisition or disposition.
(3) A description of the assets involved.
(4) The nature and amount of the consideration given or received.
(5) The purpose of or reason for the transactions.
(6) The manner by which the amount of consideration was determined.
(7) The gain or loss recognized or realized as a result of the transaction.
(8) The name of the person from whom the assets were acquired or to whom they were disposed.
(9) The name, title, address and telephone number of the individual to whom notices and correspondence concerning the statements should be addressed.
(10) A certification of an officer of the insurer as provided in Appendix A (relating to certification for statement disclosing material transaction).
(b) Material acquisitions and dispositions of assets shall be reported on a nonconsolidated basis.
§ 27.8. Nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to property and casualty insurers.
(a) For purposes of this chapter, a nonrenewal, cancellation or revision of a ceded reinsurance agreement with respect to property and casualty business--including accident and health business written by a property and casualty insurer--is material if it relates to reinsurance cessions which generate one or more of the following:
(1) Fifty percent or more of the insurer's ceded written premiums as reported in the most recent annual statutory financial statement filed by the insurer.
(2) Fifty percent or more of the insurer's total ceded indemnity loss and loss adjustment expense reserves.
(b) Notwithstanding subsection (a), a statement under this chapter is not required if one or more of the following conditions are met:
(1) The total ceded written premium of a property and casualty insurer represents, on an annualized basis, less than 10% of the sum of the insurer's total written premium for direct and assumed business as reported in the insurer's most recent annual statutory financial statement filed with the Department.
(2) A ceded reinsurance agreement which is nonrenewed or canceled is replaced under the following conditions:
(i) The replacement reinsurer is licensed or on the Department's list of qualified reinsurers.
(ii) The percentage increase in the net aggregate retention by the domestic ceding insurer is less than 50%.
(3) A revision to a ceded reinsurance agreement does not increase the ceding insurer's retention of risk or exposure to loss.
(4) A revision is made to an intercompany pooling reinsurance agreement among affiliated insurers.
(c) A material revision of a ceded reinsurance agreement shall be reported if one or more of the following events occur:
(1) A reinsurer which represents more than 10% of a total cession and which is licensed to transact business in this Commonwealth or included on the Department's list of qualified reinsurers is replaced by one or more reinsurers that are neither licensed nor on the Department's list of qualified reinsurers.
(2) Previously established collateral requirements have been reduced or waived for one or more reinsurers that are neither licensed nor on the Department's list of qualified reinsurers, representing collectively more than 10% of a total cession.
(3) The percentage increase in the net aggregate retention by the domestic ceding insurer is equal to or greater than 50%.
(d) Statements filed under this section shall be prepared in compliance with § 27.10 (relating to content of statements disclosing material nonrenewal, cancellation or revision of ceded reinsurance agreements).
§ 27.9. Nature and scope of material nonrenewals, cancellations or revisions of ceded reinsurance agreements with respect to life insurers.
(a) For purposes of this chapter, a material nonrenewal, cancellation or revision of a ceded reinsurance agreement with respect to life, annuity and accident and health business written by a life insurer is a transaction that affects more than 50% of the total reserve credit taken for business ceded as reported in the insurer's most recent annual statutory financial statement filed with the Department.
(b) Notwithstanding subsection (a), a statement under this chapter is not required if one or more of the following conditions are met:
(1) The total reserve credit taken for business ceded represents less than 10% of the amount of gross reserves reported in the insurer's most recent annual statutory financial statement filed with the Department.
(2) A ceded reinsurance agreement which is nonrenewed or canceled is replaced under the following conditions:
(i) The replacement reinsurer is licensed or on the Department's list of qualified reinsurers.
(ii) The percentage increase in the amount of reserve credit taken by the domestic ceding insurer under the replacement agreement does not exceed 50% of the reserve credit which was taken under the agreement being replaced.
(3) A revision to a ceded reinsurance agreement does not increase the ceding insurer's retention of risk or exposure to loss.
(4) A revision is made to an inter-company pooling reinsurance agreement among affiliated insurers.
(b) A material revision of a ceded reinsurance agreement shall be reported if one of the following events occur:
(1) A reinsurer which represents more than 10% of a total cession and which is licensed to transact business in this Commonwealth or included on the Department's list of qualified reinsurers is replaced by one or more reinsurers that are neither licensed nor on the Department's list of qualified reinsurers.
(2) Previously established collateral requirements have been reduced or waived with regard to one or more reinsurers that are neither licensed nor on the Department's list of qualified reinsurers, representing collectively more than 10% of a total cession.
(c) Statements filed under this section shall be prepared in compliance with § 27.10 (relating to contents of statements disclosing material nonrenewal, cancellation or revision of ceded reinsurance agreements).
§ 27.10. Contents of statements of material nonrenewal, cancellation or revision of ceded reinsurance agreements.
(a) Statements of material nonrenewal, cancellation or revision of ceded reinsurance agreements shall include the following information:
(1) The effective date of the nonrenewal, cancellation or revision.
(2) A description of the transaction.
(3) Identification of the party which initiated the transaction.
(4) The purpose of or reason for the transaction.
(5) The identity of replacement reinsurers, if applicable.
(6) Quantification of additional risk to the insurer resulting from the transaction.
(7) The name, title, address and telephone number of the individual to whom notices and correspondence concerning the statements should be addressed.
(8) A certification of an officer of the insurer as provided in Appendix A (relating to certification for statement disclosing material transaction).
(b) Material nonrenewals, cancellations or revisions of ceded reinsurance agreements shall be reported on a nonconsolidated basis. If the reporting insurer is part of a consolidated group of insurers which utilizes a pooling arrangement or 100% reinsurance agreement which affects the solvency and integrity of the reporting insurer's reserves and that insurer ceded substantially all of its direct and assumed business to the pool, material nonrenewals, cancellations or revisions of ceded reinsurance agreements may be reported on a consolidated basis. An insurer is deemed to have ceded substantially all of its direct and assumed business to a pool if the insurer has less than $1 million total direct plus assumed written premiums during a calendar year that are not subject to a pooling arrangement and the net income of the business not subject to the pooling arrangement represents less than 5% of the insurer's capital and surplus as reported in its most recent annual statutory financial statement filed with the Department.
§ 27.11. Penalties.
(a) An insurer that neglects to make and file a statement in the form or within the time required by this chapter shall be subject to the penalty for late filing of statements concerning its financial condition and affairs as provided in section 320(e)(1) of the act (40 P. S. § 443(e)(1)).
(b) For willfully filing a false statement required by this chapter, an insurer and the persons making oath to or subscribing the statement shall be subject to the penalties as provided in section 320(e)(2) of the act (40 P. S. § 443(e)(2)).
APPENDIX A CERTIFICATION FOR STATEMENT DISCLOSING MATERIAL TRANSACTION CERTIFICATION The undersigned deposes and says that (s)he has executed the attached Statement of Material Transaction dated ______ , ____ , for and on behalf of (NAME OF INSURER); that (s)he is the (TITLE OF OFFICER) of such company and that (s)he is authorized to execute and file the attached statement on such company's behalf. Deponent further says that (s)he is familiar with the statement and the contents thereof, and that the facts therein set forth are true and correct to the best of her/his knowledge, information and belief.
(SEAL)
(SIGNATURE OF OFFICER)
(NAME AND TITLE)Attest:
(SIGNATURE OF OFFICER)
(NAME AND TITLE)[Pa.B. Doc. No. 96-242. Filed for public inspection February 23, 1996, 9:00 a.m.]
