Current Status Introducing Body:
SenateBill Number: 421Ratification Number: 81Act Number: 70Primary Sponsor: Committee (02)Type of Legislation: GBSubject: Insurance investmentsDate Bill Passed both Bodies: 19930427Computer Document Number: 421Governor's Action: SDate of Governor's Action: 19930513Introduced Date: 19930211Date of Last Amendment: 19930421Last History Body: ------Last History Date: 19930513Last History Type: Act No. 70Scope of Legislation: StatewideSponsor Committee: Banking and InsuranceSponsor Committee Number: 02Type of Legislation: General Bill
Bill Body Date Action Description CMN Leg Involved ---- ------ ------------ ------------------------------ --- ------------ 421 ------ 19930513 Act No. 70 421 ------ 19930513 Signed by Governor 421 ------ 19930511 Ratified R 81 421 Senate 19930427 Concurred in House amendment, enrolled for ratification 421 House 19930422 Read third time, returned to Senate with amendment 421 House 19930421 Amended, read second time 421 House 19930414 Committee Report: Favorable 26 with amendment 421 House 19930223 Introduced, read first time, 26 referred to Committee 421 Senate 19930218 Read third time, sent to House 421 Senate 19930217 Read second time 421 Senate 19930211 Introduced, read first time, placed on Calendar without referenceView additional legislative information at the LPITS web site.
(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."
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."
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.