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Angela Ables, Esq.
Angela Ables, Esq.
KERR, IRVINE, RHODES & ABLES, P.C.
(405) 272-9221
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AMENDATORY PROVISIONS IN THE OKLAHOMA HOLDING COMPANY ACT

As anyone who is involved in regulatory insurance work knows, the National Association of Insurance Commissioners (“NAIC”) has become the national governing entity that provides the various state regulators with recommended changes in state law to meet whatever mandate or issue confronts the insurance industry at the time. The NAIC has become much more involved in mandating changes to state laws through its accreditation process in the last ten years and that activity will continue if history runs true. Changes to the Insurance Holding Company Act have been recommended by the NAIC to the states and without passage a state risks its NAIC accreditation, which as we all know, is serious to state regulators.

The 2017 Oklahoma Legislature, pursuant to the Oklahoma Insurance Department’s request, amended the Holding Company Act to meet the NAIC Model requirements. That is normally not too tragic, but this year they put the Emergency Clause on the Bill, and those changes are already effective and have been effective since May 31 of this year. Consequently, many domestic insurers are out of compliance automatically.

This memorandum will bring you up to date on the substantial changes which include a change in reporting time lines for an initial report when creating a new insurer and adding a new provision to the Form B Holding Company Registration filings. Additionally, the serious change is in the composition of the Board requirements which now must be comprised of at least one-third (1/3) disinterested Directors and the nominating committee and compensation committee must be solely made up of disinterested Directors. There is a waiver you can request, and I will detail hereinafter what and how to do this, as these statutory changes will impact most Oklahoma insurers except insurers that report pursuant to SEC requirements.

Form A . Requirements for filing Form As for the acquisition of Oklahoma domestic insurers is now set forth in § 1633 rather than § 1653 as the section numbers have changed. The main change in the Form A requirements set forth in the amendatory language is that now a shareholder seeking to divest his/her/its controlling interest in the domestic insurer must file with the Commissioner a confidential notice of his/her/its proposed divesture at least thirty (30) days prior to the cessation of control. Formerly a Form A was filed when a new entity or person sought control of the domestic insurer by that new entity, i.e., the applicant who was acquiring the company. After the amendatory change, the shareholder holding such shares prior to the sale must notify the Insurance Department at least thirty (30) days prior to any cessation of control. The Form A information must still be filed by the applicant and the information contained in the Form A has only changed slightly. Additionally, a pre-acquisition notification (Form E) is required to be filed to determine whether the acquisition would violate the competitive standards set forth in the Act. The required information may include an opinion of an economist while prior to this time the Form E provision existed but there were no specific requirements as to percentages and the new Act goes into great detail as to market share to be reviewed and considered when there is an acquisition of an insurer.

The Form A requires, as a new item, an agreement by the applicant stating that it will provide the Enterprise Risk Management Annual Report for so long as control exists. Additionally, the new statute requires an acknowledgement by the person required to file the statement (Form A Applicant) that the person and all subsidiaries within its control in the Insurance Holding Company system will provide information to the Insurance Commissioner upon request as necessary to evaluate Enterprise Risk to the insurer as well as any such additional information as the Commissioner by Rule and Regulation requests. If the Form A Applicant is a partnership, then such information must be given on each partner or limited partner.

Form B . A new provision in the Holding Company Registration filing (Form B) is required pursuant to §1635 (formerly § 1654) which requires a statement that the insurer’s Board of Directors oversees Corporate Governance and Internal Controls and that the insurer’s Officers or Senior Management have approved, implemented, and continue to maintain and monitor Corporate Governance and Internal Control procedures. This last sentence must be included in the Form B and obviously must be truthful and set forth as an item in the Form B statement. Not only must the name of the insurer be the first item in the Form B (as always) but the capital structure, general financial condition, ownership and management of the insurer and any person controlling the insurer must be included also. This is new. The management and person controlling the insurer is generally set forth in item 3 but it is new to set forth the “capital structure, general financial condition” and “management of the insurer” in the Form B. I assume this latter provision relating to the “management” of the insurer would require a statement if the insurer has a management agreement with any third party.

BOARD OF DIRECTORS AND COMMITTEES

The most serious change in the Holding Company Act that will affect most Oklahoma domestic insurers is set forth at §1636 of Title 36. This provision states that not less than one-third (1/3) of the Directors of a domestic insurer and not less than one-third (1/3) 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. Additionally, at least one such “nonaffiliated” person with the domestic insurer must be included in any quorum for the transaction of business at the meeting of the Board of Directors or any committee thereof. (See §1636 (C) (3)). This “disinterested” 1/3 of the Board of Directors will drastically affect smaller insurers who are privately or family owned unless a waiver is obtained.

NOMINATING COMMITTEE

The Nominating Committee and the Compensation Committee are required to be comprised solely of disinterested Board members who are not employees or officers of the insurer or of any entity who controls the insurer. (see §1636 (C) (4)). (The provisions above regarding Directors and the Nominating and Compensation committee shall not apply to a domestic insurer if the insurer has a mutual insurance holding company or is a publicly held corporation that has a Board of Directors and committees that meet the requirements set forth).

REQUEST FOR WAIVER

36 O.S. §1636 (C) (6) sets forth a provision for an insurer to make application to the Commissioner for a waiver from the requirements of the 1/3 disinterested composition of the Board and the further even more restrictive mandates for the Nominating Committee and Compensation Committee. This waiver may be requested if the insurer has annual direct written and assumed premium (excluding premiums reinsured with the federal crop insurance corporation and federal flood program), of less than three hundred million dollars ($300,000,000). As I read that statute anyone may make a request for a waiver from the two provisions set forth above (1/3 Disinterested directors and all disinterested directors comprising the Nominating and Compensation Committee) if the insurer has less than three hundred million dollars ($300,000,000) in annual direct written and assumed premium. Additionally, the statute provides that an insurer “may also make application” to the Commissioner for a waiver from the requirement of this “Disinterested directors” subsection based upon “unique circumstances”. The statute goes on to state that the Commissioner may consider various factors including but not limited to, “the type of business entity, volume of business written, availability of qualified Board members, or the ownership or organizational structure of the entity.”

Comment: This additional “unique circumstances” basis for a waiver could include that the insurer is a family owned company and that the family has built the company, invested their money in the company and consequently it is difficult to find outside Directors. The insurer could list its AM Best Rating, if any, or any other factors that prove reflect that the management of the insurer has been solid, such as the fact that the company has grown, that the last exam report had no comments of any consequence or anything else that might be pertinent to the Commissioner granting a Waiver.] I read the statute to state that the “unique circumstances” filing is a separate opportunity to request a waiver over and above the three hundred million ($300,000,000) annual direct written and assumed premium basis; consequently, an insurer really have two opportunities to state its case and obtain a waiver from the new statutory requirement that a third of the Board must be disinterested Directors and that all of the Nominating Committee and Compensation Committee must be comprised of disinterested Directors.

These are the pertinent changes in the new Holding Company Act, but the amendatory provisions further provide bolstering of the Department’s authority with regard to affiliate agreements and any inter-company agreements with subsidiaries, affiliates, or parent corporations. The NAIC has really insisted on expanding review by the Insurance Departments of agreements that an insurer enters with affiliates. This amendatory Holding Company Act even gives the Department the authority to go into the insurer’s Holding Company and review financial information and operations of the Holding Company.

The Oklahoma Insurance Department has not yet adopted a “form” of the request for waiver but I have drafted and filed many waiver requests and the Department has granted them almost immediately based upon the insurer’s premium being under three hundred million ($300,000,000). Provided there are reasons for such a waiver, the Department will review and provide a responsive waiver or provide information as to why such a waiver is not permissible.