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ARIZONA STATE SENATE
Fifty-Sixth Legislature, First Regular Session
insurance; liquidity; financial assessment
Purpose
Conforms Insurance Holding Company System statutes to the National Association of Insurance Commissioners (NAIC) Insurance Holding Company System Regulatory Act (Act).
Background
The NAIC is the U.S. standard-setting and regulatory support organization governed by state chief insurance regulators. The NAIC provides expertise, data and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The Act regulates certain activities of entities that are affiliated with insurance companies that would not otherwise be subject to regulation. The Lead State is generally considered to be the state that takes the lead with respect to conducting group-wide supervision within the U.S. solvency system (Act).
The Department of Insurance and Financial Institutions (DIFI) regulates and monitors insurance companies and professionals operating in Arizona to protect the public and help ensure that these entities follow applicable state and federal law (Ariz. Const. art. 15 § 5). The Director of DIFI (Director) may consider certain standards in determining whether the continued operation of any insurer transacting an insurance business in Arizona may be deemed to be hazardous to its policyholders or creditors or the general public (A.R.S. § 220.01).
The ultimate controlling person of each insurer subject to registration (ultimate controlling person) must file an annual enterprise risk report identifies the material risks within the insurance holding company system that could pose enterprise risk to the insurer. The report must be filed according to the procedures of the NAIC Financial Analysis Handbook (A.R.S. § 20-481.01).
Transactions within an insurance holding company system to which an insurer subject to registration is a party are subject to outlined standards. All management agreement, service contract, tax allocation agreement, guarantee and cost sharing arrangement transactions involving a domestic insurer and any person in its insurance holding company system may not be entered into unless the insurer notifies the Director within 30 days of entering the transaction and the Director does not disapprove (A.R.S. § 20-481.12).
The Director may share nonpublic documents, materials or other information with other state, federal and international regulatory agencies, with the NAIC and its affiliates and subsidiaries and with state, federal and international law enforcement authorities, if the recipient agrees and warrants that it has the authority to maintain the confidentiality and privileged status of the documents, materials or other information and has verified in writing the legal authority to maintain confidentiality (A.R.S. § 20-481.21).
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Group Capital Calculation Report
1. Requires, for enterprise risk filings, the ultimate controlling person to:
a) concurrently file an annual group capital calculation report as directed by the Lead State Director or Commissioner; and
b) if the ultimate controlling person is selected into the NAIC liquidity stress test framework, file the results of a specific year's liquidity stress test with the Lead State Director or Commissioner according to the procedures prescribed in the NAIC Financial Analysis Handbook.
2. Requires the annual group capital calculation report to be:
a) completed in accordance with the NAIC Group Capital Calculation Instructions; and
b) filed with the Lead State Director or Commissioner in accordance with the procedures outlined in the NAIC Financial Analysis Handbook.
3. Requires the Director to maintain the confidentiality of certain information contained in a group capital calculation report, including:
a) the group capital calculation and group capital ratio produced within the calculation; and
b) any group capital calculation information received from an insurance holding company system supervised by the Federal Reserve Board or any U.S. group-wide supervisor.
Insurance Holding Company Exemptions
4. Exempts the following insurance holding companies from filing the group capital calculation report:
a) a company that has only one insurer within its holding company structure, that writes only business and is licensed only in its domestic state and that assumes no business from any other insurer;
b) a company that is required to perform a group capital calculation specified by the Federal Reserve Board, unless the Federal Reserve Board cannot share the calculation, in which case the company is not exempt from the reporting requirement;
c) a company whose non-U.S. group-wide supervisor is located within certain reciprocal jurisdictions that recognizes the U.S. state regulatory approach to group supervision and group capital; and
d) a company that provides information that meets requirements for accreditation as prescribed and whose non-U.S. group-wide supervisor accepts the group capital calculation as a worldwide group capital assessment for U.S. insurance groups that operate in that jurisdiction.
5. Requires the Lead State Director or Commissioner to require the group capital calculation for U.S. operations of any non-U.S. based insurance holding company where it is deemed appropriate for prudential oversight and solvency monitoring purposes or for ensuring the competitiveness of the insurance marketplace.
6. Grants the Lead State Director or Commissioner discretion to exempt an ultimate controlling person from filing an annual group capital calculation report or to accept a limited group capital filing or report as prescribed in regulation.
7. Requires an insurance holding company to file a group capital calculation report at the next annual filing date unless granted an extension, if the Lead State Director or Commissioner determines that an exemption from filing the report no longer exists.
Liquidity Stress Test Framework
8. Specifies that the liquidity stress test framework includes scope criteria that are applicable to a specific data year and requires the scope criteria to be reviewed at least annually by the NAIC Financial Stability Task Force (Task Force).
9. Defines scope criteria as the designated exposure bases and minimum magnitudes that may be used to establish a preliminary list of insurers that are selected into the liquidity stress test framework for a specific year and that are detailed in the liquidity stress test framework.
10. Requires an insurance holding company system to perform and file a specific year's liquidity stress test in accordance with the liquidity stress test framework's instructions and reporting templates for that specific year and any Lead State Director or Commissioner determinations.
11. Requires any change to the liquidity stress test framework or to a data year for which the scope criteria is to be measured to be effective on January 1 of the year following the calendar year when the changes are adopted.
12. Deems insurers that meet at least one threshold of the scope criteria as selected into the liquidity stress test framework for the specified data year, unless the Lead State Director or Commission, in consultation with the Task Force, determines that the insurer should not be included for that data year.
13. Allows the Director, in consultation with the Task Force, to determine whether an insurer that does not meet at least one threshold of the scope criteria should be included in the liquidity stress test framework for that data year.
14. Requires the Director to maintain the confidentiality of the stress test results and supporting disclosures and any liquidity stress test framework information received from an insurance holding company system supervised by the Federal Reserve Board or any non-U.S. group-wide supervisor.
15. Defines liquidity stress test framework as a separate publication by the NAIC that may include any amendment adopted in accordance with NAIC procedures and instructions and reporting templates for a specific data year and that may contain:
a) a history of the regulatory liquidity stress testing; and
b) the scope criteria applicable for a specific data year.
Insurance Holding Company System Transactions
16. Adds, to the standards for transactions within an insurance holding company system to which an insurer subject to registration is a party, the following:
a) the Director may require the insurer to submit a deposit or bond to protect the insurer for the duration of outstanding contracts or agreements if the Director deems that an insurer is in a hazardous financial condition or that a condition exists that constitutes grounds for supervision, conservation or a delinquency proceeding;
b) all records and data of the insurer that are held by an affiliate are the property of the insurer and are subject to the insurer's control and must be maintained in an identifiable manner and be segregated or readily able to be segregated; and
c) premiums or other funds that belong to the insurer and 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, with an offset for insurers placed into receivership.
17. Requires the Director, in determining whether to require an insurer to submit a deposit or bond, to consider whether an affiliated person would be able to fulfill the contract or agreement if the insurer were to be placed into liquidation.
18. Allows the Director to determine the amount of the deposit or bond, not to exceed the value of the contract or agreement in any one year, and whether the deposit or bond should be required for a single contract, multiple contracts or a contract with a specific person.
19. Requires an affiliate, at the request of an insurer, to allow the receiver to:
a) obtain a complete set of all records of any type that pertain to the insurer's business;
b) obtain access to the operating systems on which the data is maintained;
c) obtain the software that runs those systems; and
d) restrict the use of the data by the affiliate if it is not operating the insurer's business.
20. Requires an affiliate to 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.
21. Subjects, for the purposes of supervision, seizure, conservatorship or receivership proceedings, an affiliate that is a party to an agreement or contract with a domestic insurer that is subject to approval by the Director to the jurisdiction of the proceedings against the insurer and to the authority of a person appointed for the purpose of interpreting, enforcing and overseeing the affiliate's obligations under the agreement or contract to perform services for the insurer that are an integral operation or essential function.
22. Allows, for the purposes of supervision, seizure, conservatorship or receivership proceedings, the Director to require that an agreement or contract with a domestic insurer that is subject to approval by the Director for the provision of integral or essential services must specify that the affiliate consents to the applicable jurisdiction.
23. Defines all records and data.
Confidential Records Disclosure
24. Specifies that all documents, materials or other information in the possession or control of DIFI that are obtained or disclosed in the course of a filing, examination or investigation are recognized by the state as being proprietary and containing trade secrets.
25. Adds third-party consultants designated by the Director to the entities with whom the Director must enter into an agreement, as prescribed, to govern the sharing and using of confidential information.
26. Adds proprietary and trade secret documents and materials to the materials that the Director may share with, or receive from, statutorily authorized entities.
27. Deems documents, materials or other information in the possession or control of a third-party consultant designated by the Director as confidential and privileged and exempts the materials from subpoena, discovery and inspection.
28. Requires an agreement entered into to govern the sharing and using of confidential information to provide:
a) that the recipient agrees in writing to maintain the confidentiality and privileged status of the documents, materials or other information and has verified in writing the legal authority to maintain such confidentiality; and
b) notification of the identity of any third-party consultant to all applicable insurers, if the agreement involves the liquidity stress test framework.
29. Adds third-party consultants designated by the Director to the entities with which the Director may share, and from which the Director may receive, nonpublic documents, materials or other information.
30. Prohibits the NAIC or a third-party consultant designated by the Director from storing confidential information in a permanent database after the underling analysis is complete, except as prescribed for the liquidity stress test framework.
Miscellaneous
31. States that the group capital calculation and resulting group capital ratio and the liquidity stress test along with its results and disclosures are regulatory tools for assessing group risks and capital adequacy and group liquidity risks and are not intended as a means to rank insurers or insurance holding company systems.
32. Prohibits any information related to the group capital calculation, group capital ratio or the liquidity stress test results or supporting disclosures from being publicly shared, as it would be misleading.
33. Allows an insurer to publish a rebuttal of materially false statements relating to the group capital calculation, group capital ratio or the liquidity stress test results or supporting disclosures, if the insurer demonstrates the falsity of the statement or the inappropriate comparison.
34. Excludes the group capital calculation and liquidity stress test framework from the exemption for nonmaterial items relating to a registration statement.
35. Defines group capital calculation instructions as the NAIC Group Capital Calculation Instructions as adopted and amended in accordance with NAIC procedures.
36. Makes technical and conforming changes.
37. Becomes effective on the general effective date.
House Action
COM 1/24/23 DP 10-0-0-0
3rd Read 2/21/23 60-0-0
Prepared by Senate Research
March 2, 2023
MG/sr