40-3306. Material transactions by registered insurers with affiliates; standards; reasonableness of insurer's surplus; notification of certain transactions to commissioner; extraordinary dividends
40-3306
40-3306. Material transactions by registered insurers withaffiliates; standards; reasonableness of insurer's surplus;notification of certain transactions to commissioner; extraordinary dividendsand distributions.(a) Material transactions by registered insurers with their affiliatesshall be subject to the following standards:
(1) The terms shall be fair and reasonable;
(2) the charges or fees for services performed shall bereasonable;
(3) expenses incurred and payment received shall be allocatedto the insurer in conformity with customary insurance accounting practicesconsistentlyapplied;
(4) the books, accounts and records of each party to all such transactionsshall be so maintained as to clearly and accurately disclose the nature anddetails of the transactions including such accounting informationnecessary to support the reasonableness of the charges or fees to therespective parties; and
(5) the insurer's surplus as regards policyholders following anytransactions, dividendsor distributions to shareholder affiliates shall be reasonable in relation tothe insurer's outstanding liabilities and adequate to its financial needs.
(b) The following transactions involving a domestic insurer andany personin such insurer's holding company system may not be entered into unless theinsurer hasnotified the commissioner in writing of such insurer's intention to enter intosuchtransaction at least 30 days prior thereto, or such shorter period as thecommissioner may permit, and the commissioner has not disapproved suchtransaction withinsuch period.
(1) Sales, purchases, exchanges, loans or extensions of credit,guarantees or investments provided such transactions are equal to or exceed:
(A) With respect to nonlife insurers, the lesser 3% of theinsurer'sadmitted assets or 25% of surplus as regards policyholders;
(B) with respect to life insurers, 3% of the insurer's admitted assets,each as of December 31 next preceding.
(2) Loans or extensions of credit to any person who is not an affiliate,where the insurer makes such loans or extensions of credit with the agreementor understanding that the proceeds of such transactions, in whole or insubstantial part, are to be used to make loans or extensions of credit to,purchase assets of, or make investments in, any affiliate of the insurer makingsuch loans or extensions of credit provided such transactions are equal to orexceed:
(A) With respect to nonlife insurers, the lesser of 3% of the insurer'sadmitted assets or 25% of surplus as regards policyholders;
(B) with respect to life insurers, 3% of the insurer's admitted assets,each as of December 31 next preceding.
(3) Reinsurance agreements or modifications thereto in which thereinsurancepremium or a change in the insurer's liabilities equals or exceeds 5% of theinsurer's surplus as regards policyholders, as of December 31 nextpreceding, including those agreements which may require as consideration thetransfer of assets from an insurer to a nonaffiliate, if an agreement orunderstanding exists between the insurer and nonaffiliate that any portion ofsuch assets will be transferred to one or more affiliates of the insurer;
(4) all management agreements, service contracts and all cost-sharingarrangements; and
(5) any material transactions, specified by regulation, which thecommissioner determines may adversely affect the interests of the insurer'spolicyholders.
Nothing herein contained shall be deemed to authorize or permit anytransactions which, in the case of an insurer not a member of the same holdingcompany system, would be otherwise contrary to law.
(c) A domestic insurer may not enter into transactions which are part of aplan or series of like transactions with persons within the holding companysystem if the purpose of those separate transactions is to avoid the statutorythreshold amount and thus avoid the review that would occur otherwise. If thecommissioner determines that such separate transactions were entered into overany 12 month period for such purpose, the commissioner may exercise authorityunder K.S.A. 40-3311 and amendments thereto.
(d) The commissioner, in reviewing transactions pursuant tosubsection (b), shall consider whether the transactions comply with thestandards set forth in subsection (a), and whether they mayadversely affect the interests of policyholders.
(e) The commissioner shall be notified within 30 days of any investment ofthe domestic insurer in any one corporation if the total investment in suchcorporation by the insurance holding company system exceeds 10% of suchcorporation's voting securities.
(f) (1) No insurer subject to registration under K.S.A.40-3305, andamendments thereto, shall pay any extraordinary dividend or make any otherextraordinarydistribution to such insurer's shareholders until: (A)Thirty days after thecommissioner of insurance has received notice of the declaration thereofand has not within such period disapproved such payment; or(B) thecommissioner of insurance shall have approved such payment within such 30-dayperiod.
(2) For purposes of this section, an extraordinary dividend ordistribution includes any dividend or distribution of cash or otherproperty, whose fair market value together with that of other dividendsor distributions made within the preceding 12 months exceedsthe greater of: (A) Ten percent of such insurer's surplus asregards policyholders as of December 31next preceding; or (B) the net gain from operations of such insurer, if suchinsureris alife insurer, or the net income, if such insurer is not alife insurer, not including realized capital gains for the 12-month periodending December 31 next preceding,but shall notinclude pro rata distributions ofany class of the insurer's own securities. An extraordinary dividend ordistribution shall also include any dividend or distribution made or paidout of any funds other than earned surplus arising from theinsurer'sbusiness, as defined in K.S.A. 40-233, and amendments thereto. Theprovisions of K.S.A. 40-233, and amendments thereto, shall not be construedso as to prohibit an insurer, subject to registration under K.S.A. 40-3305,and amendments thereto, from making or paying an extraordinary dividend ordistribution in accordance with this section.
(3) Notwithstanding any other provisions of law, an insurer may declarean extraordinary dividend or distribution which is conditional upon thecommissioner's approval thereof, and such a declaration shall confer norights upon shareholders until: (A) The commissioner of insurancehasapproved the payment of such dividend or distribution; or (B)thecommissioner of insurance has not disapproved such payment within the 30-dayperiod referred to above.
(g) (1) Notwithstanding the control of a domestic insurer by any person,the officers and directors of the insurer shall not thereby be relieved of anyobligation or liability to which they would otherwise be subject by law, andthe insurer shall be managed so as to assure its separate operating identityconsistent with this act.
(2) Nothing herein shall preclude a domestic insurer from having orsharing a common management or cooperative or joint use of personnel, propertyor services with one or more other persons under arrangements meeting thestandards of K.S.A. 40-3306, and amendments thereto.
(h) For purposes of this act, in determining whether an insurer's surplusas regards policyholders is reasonable in relation to the insurer's outstandingliabilities and adequate to such insurer's financial needs, the followingfactors, among others, shall be considered:
(1) The size of the insurer as measured by such insurer's assets, capitaland surplus, reserves, premium writings, insurance in force and otherappropriate criteria;
(2) the extent to which the insurer's business is diversified among theseveral 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 insurer's insuredrisks;
(5) the nature and extent of the insurer's reinsurance program;
(6) the quality, diversification, and liquidity of the insurer'sinvestment portfolio;
(7) the recent past and projected future trend in the size of theinsurer's surplus as regards policyholders;
(8) the surplus as regards policyholders maintained by other comparableinsurers;
(9) the adequacy of the insurer's reserves;
(10) the quality and liquidity of investments in affiliates. Thecommissioner of insurance may treat any such investment as a disallowed assetfor purposes of determining the adequacy of surplus as regards policyholderswhenever in the commissioner's judgment such investment so warrants;and
(11) the quality of the insurer's earnings and the extent to which thereported earnings include extraordinary items.
History: L. 1974, ch. 183, § 6;L. 1988, ch. 164, § 1;L. 1991, ch. 138, § 5;L. 1992, ch. 288, § 4;L. 1993, ch. 45, § 3; July 1.