Summary

Pennsylvania insurers should be prepared to comply now with significant new requirements for intercompany agreements – management agreements, service contracts, tax allocation agreements, guarantees and cost-sharing arrangements (including leases) with affiliates.

The Pennsylvania Insurance Department published its final Rules and Procedural Requirements for Insurance Holding Company Systems in the May 17, 2014 Pennsylvania Bulletin to be effective June 16, 2014. The purpose of the new regulations is to implement 2012 revisions to Pennsylvania’s Insurance Holding Companies Act (IHCA).  

While there were only a few changes from the proposed regulations published in October 2013, one change makes an important clarification to the requirements for intercompany agreements, i.e. that lease agreements are considered cost-sharing arrangements. Although the Department’s traditional interpretation of the IHCA provisions is that the list of intercompany agreements is not exhaustive and that the requirements apply to all “similar” agreements, including affiliate lease agreements, this clarification is important for insurers who were not aware of the Department’s interpretation and have not previously made IHCA filings for affiliate lease agreements.

This Alert provides information on Department expectations for affiliate lease agreements that have not previously been filed and a brief summary of the new requirements applicable to all intercompany agreements.

Department Expectations for Existing Affiliate Lease Agreements Not Previously Filed:

• Get the lease agreement “on record” immediately, but no later than June 16, by filing a Form B Amendment explaining that although the agreement has been in effect, it is being filed now based upon the clarification in the final IHCA regulations.
• Thereafter, all requirements applicable to intercompany agreements must be met if the lease agreement is to be amended or replaced with a new agreement.   

Requirements for All Intercompany Agreements:

• Form D Prior Notice Filings: All new intercompany agreements and all amendments to existing agreements must be filed on a Form D (whether or not previously filed on a Form D) and include a copy of the agreement or amendment. It is important to note that the regulations specify only 2 situations that do not constitute an amendment to an existing agreement: (1) the continuation of an agreement with no specified term or that is automatically renewed if provisions are not altered; and (2) the addition of an affiliate, but only if a filing evidencing notification of the addition is made with a domiciliary regulator in another state. In all other circumstances, any amendment – including the addition of an affiliate – must be filed with the Department on a Form D.
• Content of Form D Filings: All Form Ds (for any type of reportable transaction) must include a statement on how the transaction meets the “fair and reasonable” standard of the IHCA, and Form Ds for intercompany agreements must include new disclosures specific to the type of agreement being filed.
• Required Provisions in Agreements: All new and amended intercompany agreements must include specified provisions that seldom have been included in affiliate agreements in the past. Required provisions include, but are not limited to, insurer indemnification rights; insurer oversight and quality assurance monitoring of functions performed for the insurer; a prohibition on insurer advancement of funds for any purpose other than payment for services defined in the agreement; and, rights of a receiver and the Insurance Commissioner in the event the insurer is placed in receivership. It is important to note that when a Form D is filed for an amendment to an existing agreement, the Department will expect that the required provisions be added if not already in the agreement, and failure to do so may result in disapproval of the Form D.  
• Notice of Termination: When any type of agreement subject to Form D filing is terminated, a notice must be provided to the Department within 30 days of the termination. No format is specified for this notice, so that it may be provided as a Form B Amendment or via a letter to the Department.

Pennsylvania insurers should prepare now for implementing these requirements – for both new and existing intercompany agreements.