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VI. Principal Regulatory Developments Affecting Insurance Companies
d. Model Audit Rule Revisions
In 2014, the NAIC adopted revisions to the Annual Financial Reporting Model Regulation (the “Model Audit Rule”) to respond to a finding in the 2010 FSAP report that the Model Audit Rule did not require insurers to maintain an internal audit function. The 2014 revisions to the Model Audit Rule thus require insurers meeting certain premium thresholds to maintain an internal audit function. As of November 17, 2015, the NAIC’s SMI dashboard reported that the 2014 revisions to the Model Audit Rule have been adopted in Georgia, Indiana, and Ohio. The NAIC exposed for a one-year comment period a proposal to make the 2014 revisions to the Model Audit Rule an accreditation standard. It is expected that such proposal will, if adopted by the NAIC, become effective January 1, 2020.
I. New York Developments
1. NYDFS Opens the Door to Compromise on PBR
In November 2015, it was reported by a trade association that the NYDFS has discussed with the NAIC the possibility of the NYDFS supporting PBR if the NAIC were to agree to make certain revisions to the net premium reserve/formulaic floor in the Valuation Manual. It is not yet known what changes would be required to satisfy the NYDFS.
2. Significant Legislative Changes for New York Domestic Life Insurers
a. Independent Board Member Requirements
On December 22, 2015, the Governor of the State of New York signed legislation that authorizes the independent board members of a parent insurance company, mutual insurance holding company, or publicly held corporation to fulfill the independent board requirements of the New York Insurance Law on behalf of a domestic life subsidiary. This legislation was intended to conform to the independent audit committee requirements of the Model Audit Rule. However, the Governor signed this legislation with the understanding that a “Chapter” amendment will be passed by the legislature early in 2016, which will revise the enacted law to restrict this authorization of such parent or holding companies to those that are based in the U.S. The amendment will also clarify that the parent board
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
must meet the standards that would have applied to the board at the subsidiary insurer level.
b. Amendment of Dividend Test
On December 28, 2015, the Governor signed into law legislation that expands the limitations on the distribution of dividends by domestic stock life insurers from a “lesser of” test to a “greater of” test. The “lesser of” test limited the aggregate amount of dividends in any calendar year to the lesser of (i) 10% of surplus to policyholders as of the prior calendar year and (ii) net gain from operations for the prior calendar year, not including realized capital gains. The “greater of” test limits the aggregate amount to the greater of (i) and (ii), but includes a cap on (ii). However, the Governor signed this legislation with the understanding that a “Chapter” amendment will be passed by the legislature early in 2016, which will revise the enacted law to require that any dividend distribution made as a result of utilizing the “greater of” dividend standard must come from “earned surplus,” while domestic stock life insurers that have no “earned surplus” may continue to distribute dividends acceptable under the current “lesser of” dividend test. This amendment is intended to resolve the Governor’s concern that the initially enacted law does not support the NYDFS’s accredited status with the NAIC.
3. Amendments to New York’s “Doing Business” Laws
On July 2, 2015 a new law went into effect that permits New York-licensed brokers to perform specified activities in New York with regard to sales to multinational clients of coverage issued by unauthorized alien insurers. Prior to this legislation, New York insurance law prohibited anyone from acting on behalf of an unauthorized insurer in the state of New York. The new law was promoted by industry members in order to allow a limited exception to that prohibition with respect to a “multinational entity,” defined as a member of a multinational group operating globally where (i) at least one institution in the group is formed under the laws of the United States or has significant operations here and (ii) at least one institution in the group has offices outside of the United States.
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