Vermont Statutes
Chapter 101 - Insurance Companies Generally
§ 3685. Standards and management of an insurer within an insurance holding company system

§ 3685. Standards and management of an insurer within an insurance holding company system
(a) Transactions within an insurance holding company system to which an insurer subject to registration is a party shall be subject to the following standards:
(1) the terms shall be fair and reasonable;
(2) agreements for cost-sharing services and management shall include such provisions as required by rule adopted by the Commissioner;
(3) charges or fees for services performed shall be reasonable;
(4) expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied;
(5) the books, accounts, and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the precise nature and details of the transactions, including such accounting information as is necessary to support the reasonableness of the charges or fees to the respective parties; and
(6) the insurer’s surplus as regards policyholders following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs.
(b) Adequacy of surplus. For purposes of this subchapter, in determining whether an insurer’s surplus as regards policyholders is reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs, the following factors, among others, shall be considered:
(1) The size of the insurer as measured by its assets, capital and surplus, reserves, premium writings, insurance in force, and other appropriate criteria.
(2) The extent to which the insurer’s business is diversified among the several 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 insured risks.
(5) The nature and extent of the insurer’s reinsurance program.
(6) The quality, diversification, and liquidity of the insurer’s investment portfolio.
(7) The recent past and projected future trend in the size of the insurer’s surplus as regards policyholders.
(8) The surplus as regards policyholders maintained by other comparable insurers.
(9) The adequacy of the insurer’s reserves.
(10) The quality and liquidity of investments in subsidiaries made pursuant to section 3682 of this title. The Commissioner may treat any such investment as a disallowed asset for purposes of determining the adequacy of surplus as regards policyholders whenever in his or her judgment such investment so warrants.
(c) Dividends and other distributions. No insurer subject to registration under section 3684 of this title shall pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until:
(1) 30 days after the Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment; or
(2) the Commissioner shall have approved such payment within such 30-day period.
(d) Limitation on dividends.
(1) For purposes of this section, an extraordinary dividend or distribution includes any dividend or distribution of cash or other property whose fair market value together with that of other dividends or distributions made within the preceding 12 months exceeds the lesser of:
(A) 10 percent of such insurer’s surplus as regards policyholders as of the 31st day of December next preceding; or
(B) the net gains from operations of such insurer, if such insurer is a life insurer, or the net income, if such insurer is not a life insurer, not including realized capital gains, for the 12-month period ending the 31st day of December next preceding, but shall not include pro rata distributions of any class of the insurer’s own securities.
(2) In determining whether a dividend or distribution is extraordinary, an insurer other than a life insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This carry-forward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years. In determining whether a dividend or distribution is extraordinary, a life insurer may exclude dividends or distributions paid only from unassigned surplus that do not exceed the greater of subdivision (1)(A) or (B) of this subsection, provided that a life insurer relying on this provision shall notify the Commissioner of such dividend or distribution within five business days following declaration and at least 10 days, commencing from the date of receipt by the Commissioner, prior to the payment thereof.
(e) Conditional dividends. Notwithstanding any other provision of law, an insurer may declare an extraordinary dividend or distribution that is conditional upon the Commissioner’s approval thereof, and such a declaration shall confer no rights upon shareholders until the Commissioner has:
(1) approved the payment of such dividend or distribution; or
(2) not disapproved such payment within the 30-day period referred to in subsection (c) of this section.
(f) The following transactions involving a domestic insurer and any person in its holding company system, including amendments or modifications of affiliate agreements previously filed under this section, which are subject to any materiality standards contained in subdivisions (1) through (7) of this subsection, may not be entered into unless the insurer has notified the Commissioner in writing of its intention to enter into such transaction at least 30 days prior thereto, or such shorter period as the Commissioner may permit, and the Commissioner has not disapproved it within such period. The notice for amendments or modifications shall include the reasons for the change and the financial impact on the domestic insurer. Informal notice shall be reported within 30 days after a termination of a previously filed agreement to the Commissioner for determination of the type of filing required, if any. Nothing herein contained shall be deemed to authorize or permit any transactions that in the case of an insurer not a member of the same holding company system, would be otherwise contrary to law.
(1) Sales, purchases, exchanges, loans, or extensions of credit or investments, provided such transactions are equal to or exceed:
(A) with respect to nonlife insurers, the lesser of three percent of the insurer’s admitted assets or 25 percent of surplus as regards policyholders as of the 31st day of December next preceding;
(B) with respect to life insurers, three percent of the insurer’s admitted assets; each as of the 31st day of December 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 agreement or understanding that the proceeds of such transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, to purchase assets of, or to make investments in any affiliate of the insurer making such loans or extensions of credit, provided such transactions are equal to or exceed:
(A) with respect to nonlife insurers, the lesser of three percent of the insurer’s admitted assets or 25 percent of surplus as regards policyholders as of the 31st day of December next preceding;
(B) with respect to life insurers, three percent of the insurer’s admitted assets; each as of the 31st day of December next preceding.
(3) Reinsurance agreements or modifications thereto, including:
(A) all reinsurance pooling agreements;
(B) agreements in which the reinsurance premium or a change in the insurer’s liabilities or the projected reinsurance premium or a change in the insurer’s liabilities in any of the next three years equals or exceeds five percent of the insurer’s surplus as regards policyholders, as of the 31st day of December next preceding, including those agreements that may require as consideration the transfer of assets from an insurer to a nonaffiliate, if an agreement or understanding exists between the insurer and nonaffiliate that any portion of such assets will be transferred to one or more affiliates of the insurer.
(4) Any material transactions, specified by regulation, that the Commissioner determines may adversely affect the interests of the insurer’s policyholders.
(5) All management agreements, service contracts, and all cost-sharing arrangements.
(6) Guarantees when made by a domestic insurer; provided, however, that a guarantee that is quantifiable as to amount is not subject to the notice requirements of this subsection unless it exceeds the lesser of one-half of one percent of the insurer’s admitted assets or 10 percent of surplus as regards policyholders as of the 31st day of December next preceding. All guarantees that are not quantifiable as to amount are subject to the notice requirements of this subdivision.
(7) Direct or indirect acquisitions or investments in a person that controls the insurer or an affiliate of the insurer in an amount that together with its present holdings in such investments, exceeds two and one-half percent of the insurer’s surplus to policyholders. Direct or indirect acquisitions or investments in subsidiaries acquired pursuant to section 3682 of this chapter or authorized under any other section of this chapter or in nonsubsidiary insurance affiliates that are subject to the provisions of this chapter are exempt from this requirement.
(g) A domestic insurer may not enter into transactions that are part of a plan or series of like transactions with persons within the holding company system if the purpose of those separate transactions is to avoid the statutory threshold amount and thus avoid the review that would occur otherwise. If the Commissioner determines that such separate transactions were entered into over any 12-month period for such purpose, he or she may exercise his or her authority under this title.
(h) The Commissioner, in reviewing transactions pursuant to subsection (f) of this section, shall consider whether the transactions comply with the standards set forth in subsection (a) of this section and whether they may adversely affect the interests of policyholders.
(i) The Commissioner shall be notified within 30 days of any investment of the domestic insurer in any one corporation if the total investment in such corporation by the insurance holding company system exceeds 10 percent of such corporation’s voting securities.
(j) Management of domestic insurers subject to registration.
(1) Notwithstanding the control of a domestic insurer by any person, the officers and directors of the insurer shall not thereby be relieved of any obligation or liability to which they would otherwise be subject by law, and the insurer shall be managed so as to ensure its separate operating identity consistent with this section.
(2) Nothing in this section shall preclude a domestic insurer from having or sharing a common management or cooperative or joint use of personnel, property, or services with one or more other persons under arrangements meeting the standards of subsection (a) of this section.
(3) Not less than one-third of the directors of a domestic insurer and not less than one-third 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. At least one such person must be included in any quorum for the transaction of business at any meeting of the board of directors or any committee thereof.
(4) The board of directors of a domestic insurer shall establish one or more committees composed of a majority of directors 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 any such entity. The committee or committees shall have responsibility for nominating candidates for director for election by shareholders or policyholders, evaluating the performance of officers deemed to be principal officers of the insurer, and recommending to the board of directors the selection and compensation of the principal officers. For purposes of this subsection, principal officers shall mean the chief executive officer, the president, and any chief operating officer.
(5) The provisions of subdivisions (3) and (4) of this subsection shall not apply to a domestic insurer if the person controlling the insurer, such as an insurer, a mutual insurance holding company, or a publicly held corporation, has a board of directors and committees thereof that meet the requirements of subdivisions (3) and (4) of this subsection with respect to such controlling entity.
(6) An insurer may make application to the Commissioner for a waiver from the requirements of this subsection if the insurer’s annual direct written and assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, is less than $300,000,000.00. An insurer may also make application to the Commissioner for a waiver from the requirements of this subsection based upon unique circumstances. The Commissioner may consider various factors, including the type of business entity, volume of business written, availability of qualified board members, or the ownership or organizational structure of the entity. (Added 1971, No. 72, § 2; amended 1991, No. 101, §§ 14-16; 1991, No. 249 (Adj. Sess.), § 16; 1993, No. 12, § 10, eff. April 26, 1993; 2013, No. 29, § 31, eff. May 13, 2013; 2015, No. 70 (Adj. Sess.), § 1, eff. April 8, 2016; 2021, No. 139 (Adj. Sess.), § 1, eff. May 27, 2022.)

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