COMPANY QUESTIONNAIRE On September 18, 1967, Superintendent Stewart, on behalf of the Special Committee, forwarded a questionnaire to the Insurance Commissioners of all states and the District of Columbia, Guam, Puerto Rico and the Virgin Islands. Thirty-five states responded to the questionnaire and a summary of their responses to selected questions follows. This summary covers three areas of major concern to the Special Committee: More than half of the controlling financial institutions in this category were finance companies. Finance-oriented holding companies were the next most frequent type of parent financial institution with insurer subsidiaries. Significantly lower incidences of control of insurance companies were reported for banks, mutual funds and diversified holding companies. Insurers Controlled by Non-Insurance Corporations Non-finance-oriented holding companies accounted for almost sixty per cent of all the controlling corporations in this category. Next most numerous were membership organizations (i.c., farm bureaus, motor clubs, etc.). Among other non-insurance, non-financial controlling corporations reported, were manufacturing firms, mail order sales companies, insurance agencies, management corporations, realty companies and diversified operating companies. Insurers Controlling Non-Insurance Premium finance companies were the only type of non-insurance financial institution that was reported in this category. Property insurers were cited as controlling a significantly larger number of such premium finance companies than life insurers. Insurers Controlling Non-Insurance Corporations Other than Financial Institutions Realty companies, business service organizations and insurance agencies were most frequently cited in this category. Radio and TV broadcasting companies, diversified companies, a mutual fund and a holding company were among the other non-insurance, non-financial corporations reported as being controlled by insurance companies. Making due allowance for possible misclassifications, analysis of the questionnaire responses suggests further that: 1. 2. 3. 4. control of insurance companies by non-insurance organizations is much more prevalent than insurance company control of non-insurance organizations: among those controlling insurance companies, corporations other than financial institutions predominate; among insurance companies controlling non-insurance corporations, the enterprises so controlled are predominently non-financial in character; and the only significant difference revealed, as between life and property insurance companies, is a stronger tendency of the latter to control premium finance companies. II Actual Abuses Approximately half of the responding states reported that they had experienced regulatory problems with domestic insurance companies. which arose from intercorporate transactions among affiliated insurance and non-insurance corporations; the control of insurance companies by holding companies; and concern regarding the integrity of holding company management. A summary outline of the actual abuses cited, together with a selection of descriptive comments by state regulatory officials, follows: "Problems involving transferring of assets between holding company and insurance subsidiary." "Substitution of assets, i.e. admitted assets vs. non-admitted assets; e.g., accounts receivable substituted for securities.” "Problems arise from a tendency to obscure the value of assets passing from one corporation to another.” "Donation of real estate by parent insurer to subsidiary insurer "The holding company pledged assets belonging to the insurance "Entries between the insurance company and a non-insurance "... Entries concerning non-insurance transactions shown as amounts due from affiliates creating a false or misleading asset." "Assets of the insurance company were siphoned off by the holding company and used to form other companies - premium finance and motor bike sales." "Some of the liabilities of the young life companies have been assumed by their holding companies thereby giving the life companies the appearance of being profit-making concerns prematurely." "Controlling non-insurer corporation controls investments resulting in undesirable loans and advances to affiliated interests." Improper Allocation of Expenses "Problems involving-payment by insurance company of holding company expenses.” "Some transactions have been questionable because they are not true armslength transactions. Certain items of expenses are borne by one: whereas, others should be charged." Difficulties Encountered in Verifying Financial "On occasion, accounting records have interwoven the affairs of the affilated corporations and created department examination problems." "Ownership or affiliation with finance companies and other non-insurance entitics has complicated examination work frequently." "Valuation of securities in inter-company transactions becomes a problem." "Use of common statistical and/or data processing facility has caused delay in receipt of necessary statistics by the Insurance Department." "Multi-purchases and/or sales of blocks of securities by a non-insurance company (holding company) and resale to the insurance company without proper documentation." "Intercompany transactions and intermingling of records and books of account making a determination of true financial condition difficult and impeding the progress of an examination." Lack of Jurisdiction "Refusal by the holding company to submit its books and "The Department of Insurance is unable to ascertain who Improper Management or Employment Contracts "Several insurers now in liquidation engaged in such [intercorporate transactions] with resulting loss to policyholders. Some were so-called management contracts." Reinsurance agreement problems 66 with its affiliate, Co. had fraudulent reinsurance agreements Co. - both were ordered into liquidation." "Reinsurance of profitable business from one insurer to another." Integrity of Holding Company Management ... the senior officer of the operating life insurance company [is also the major stockholder in the holding company that controls a majority of the stock in the life insurance company. I feel that his conduct in the operation of the life company requires his removal. Unfortunately, I can foresee that his removal would just result in the appointment of someone he could control to the management of the life company.” "In one or two, instances, integrity was questionable. In others, insurance expertise was lacking among inter-locking Board members who often fail to understand significance of intercorporate dealings between insurers and affiliated non-insurers.” "...the manipulations available where non-insurance is involved creates a temptation to any management regardless of integrity..." "A few situations exist such as insurer owned by parent non-admitted insurer whose principal shareholder is individual of dubious reputation." III Patterns of State Regulation Further inquiries posed by the questionnaire were designed to elicit information as to the existence and nature of current and proposed state legislation and regulation concerning holding companies in the insurance business. Almost half of the responding states have already enacted some form of insurance holding company legislation. Moreover, almost 80 percent of the states surveyed either already have adopted or intend soon to adopt laws or administrative regulations concerning holding companies. Not surprisingly, state action in the insurance holding company area has not been wholly random. Few states have adopted laws or regulations which are totally dissimilar from those adopted by any other state. Thus, a number of broad patterns or categories of state regulatory approaches are distinguishable and these are outlined below, |