Locke Lord QuickStudy: Updated Illinois Requirements for Insurance Company Affiliate Services Agreements

Locke Lord LLP
January 14, 2019
The Illinois Department of Insurance (“IL DOI”) recently adopted amendments to the holding company systems prior notice of transactions regulation, 50 Ill. Adm. Code 654, commonly known as the Form D requirements. Article VIII ½ of the Illinois Insurance Code (Insurance Holding Company Systems) was most recently amended in 2014 based on 2010 amendments to the National Association of Insurance Commissioners (“NAIC”) Model Law #440. These amendments to related regulations were based on updated requirements of the NAIC’s Holding Companies Model Law #440 and Model Regulation #450.

Among the new changes to the regulations, 50 Ill. Adm. Code 654.30 provides substantive changes for required minimum provisions that must be included in an Illinois domestic insurer’s affiliated cost sharing and management services agreements. Pursuant to 50 Ill. Adm. Code 654.30(2)(C), such cost sharing agreements and management services agreements must contain:

  • provisions requiring at least quarterly settlements of services fee payments that comply with the 2018 edition of the NAIC’s Accounting Practices and Procedures Manual, 
  • a prohibition on advancement of funds by the insurer to its affiliate except for the payment of services fees under the agreement,
  • provisions for oversight and ownership by the insurer of assets and books and records created for transactions occurring under the agreement, and
  • indemnification rights for the insurer in the event of gross negligence or willful misconduct by its affiliate in rendering services. 

Other changes include added definitions in 50 Ill. Adm. Code 654.20, a new section 50 Ill. Adm. Code 654.50 that provides for a severability provision and added requirements to the Form D-1 (50 Ill. Adm. Code 654 Illustration A Form D-1). The Form D-1 now requires:

  • a statement of how the transaction meets the “fair and reasonable” standard required by 215 ILCS 5/131.20(1)(a),
  • tax allocation agreements to be disclosed under Item 6 of the Form D-1and to include a description of the tax allocation method and compliance with the NAIC’s Accounting Practices and Procedures Manual, and
  • cost sharing agreements to include (a) a statement addressing the effect of the transaction on the insurer’s policyholder surplus, (b) a statement whether the cost allocation used is based on “cost or market” methodology and (c) the rationale for the charges, including a statement expressing compliance with the NAIC’s Accounting Practices and Procedures Manual.

These amendments became effective on December 21, 2018.