(A) An acquisition of a domestic insurer, whether a member of a holding company system or not, by a controlling producer may not be approved by the director or his designee unless the acquiring party demonstrates, to the satisfaction of the director or his designee compliance with the requirements contained in subsection (B) of this section. For the purposes of this section, "controlling producer" means a broker that:

(1) places business on behalf of an insured with a licensed insurer;

(2) controls or seeks to control a domestic insurer as that term is defined in Section 38-21-10(2); and

(3) places, in any calendar year, an aggregate amount of gross written premium with the controlled insurer which is equal to or greater than five percent of the admitted assets of the controlled insurer as reported in the insurer's quarterly statement filed as of September thirtieth of the prior year.

(B) Approval of the acquisition of a domestic insurer, whether a member of a holding company system or not, by a controlling producer may not be approved unless the following requirements are met:

(1) A controlled insurer may not accept business from a controlling producer and a controlling producer may not place business with a controlled insurer unless there is a written contract between the controlling producer and the controlled insurer specifying the responsibilities of each party, which contract has been approved by the board of directors of the controlled insurer and which contains a provision:

(a) that the controlled insurer may terminate the contract for cause, upon written notice to the controlling producer. The controlled insurer shall suspend the authority of the controlling producer to write business during the pendency of any dispute regarding the cause for the termination;

(b) that the controlling producer shall render accounts to the controlled insurer detailing all material transactions, including information necessary to support all commissions, charges, and other fees received by, or owing to, the controlling producer;

(c) that the controlling producer shall remit all funds due under the terms of the contract to the controlled insurer on at least a monthly basis. The due date must be fixed so that premiums or installments of it collected must be remitted no later than ninety days after the effective date of any policy placed with the controlled insurer under this contract;

(d) that all funds collected for the controlled insurer's account must be held by the controlling producer in a fiduciary capacity, in one or more appropriately identified bank accounts in banks that are members of the Federal Reserve System;

(e) that the controlling producer shall maintain separately identifiable records of business written for the controlled insurer;

(f) that the contract may not be assigned in whole or in part by the controlling producer;

(g) that the controlled insurer shall provide the controlling producer with its underwriting standards, rules, procedures, manuals setting forth the rates to be charged, and the conditions for the acceptance or rejection of risks. The controlling producer shall adhere to the standards, rules, procedures, rates, and conditions. The standards, rules, procedures, rates, and conditions must be the same as those applicable to comparable business placed with the controlled insurer by a producer other than the controlling producer;

(h) establishing the rates and terms of the controlling producer's commissions, charges, or other fees and the purposes for those charges or fees. The rates of the commissions, charges, and other fees must be no greater than those applicable to comparable business placed with the controlled insurer by producers other than controlling producers. For purposes of this subitem and subitem (g), examples of "comparable business" include the same lines of insurance, same kinds of insurance, same kinds of risks, similar policy limits, and similar quality of business;

(i) that, if the contract provides that the controlling producer, on insurance business placed with the insurer, is to be compensated contingent upon the insurer's profits on that business, then that compensation must not be determined and paid until at least five years after the premiums on liability insurance are earned and at least one year after the premiums are earned on any other insurance. The commissions may not be paid until the adequacy of the controlled insurer's reserves on remaining claims has been independently verified pursuant to subsection (B)(3)(a);

(j) limiting the controlling producer's writings in relation to the controlled insurer's surplus and total writings. The controlled insurer may establish a different limit for each line or subline of business. The controlled insurer shall notify the controlling producer when the applicable limit is approached and may not accept business from the controlling producer if the limit is reached. The controlling producer may not place business with the controlled insurer if it has been notified by the controlled insurer that the limit has been reached; and

(k) that the controlling producer may negotiate but does not bind reinsurance on behalf of the controlled insurer on business the controlling producer places with the controlled insurer, except that the controlling producer may bind facultative reinsurance contracts pursuant to obligatory facultative agreements if the contract with the controlled insurer contains underwriting guidelines including, for both reinsurance assumed and ceded, a list of reinsurers with which these automatic agreements are in effect, the coverages and amounts or percentages that may be reinsured, and commission schedules.

(2) Each controlled insurer shall have an audit committee of the board of directors composed of independent directors. The audit committee shall meet annually with management, the controlled insurer's independent certified public accountants, and an independent casualty actuary, or other independent loss reserve specialist acceptable to the director or his designee to review the adequacy of the controlled insurer's loss reserves.

(3)(a) In addition to another required loss reserve certification, the controlled insurer shall file annually, on April first of each year, with the director or his designee an opinion of an independent casualty actuary, or other independent loss reserve specialist acceptable to the director or his designee, reporting loss ratios for each line or subline of business written and attesting to the adequacy of loss reserves established for losses incurred and outstanding as of year-end, including incurred but not reported losses, on business placed by the controlling producer.

(b) The controlled insurer shall report annually to the director or his designee the amount of commissions paid to the controlling producer, the percentage the amount represents of the net premiums written, and comparable amounts and percentages paid to noncontrolling producers for placements of the same kinds of insurance.

(4) The controlling producer, before the effective date of the policy, shall deliver written notice to the prospective insured disclosing the relationship between the controlling producer and the controlled insurer, except that, if the business is placed through a subproducer who is not a controlling producer, the controlling producer shall retain in his records a signed commitment from the subproducer that the subproducer is aware of the relationship between the controlled insurer and the controlling producer and that the subproducer has or will notify the insured.

(5)(a) If the director or his designee believes that the controlling producer or other person has not materially complied with this section, or regulation or order promulgated pursuant to the provisions of this section, after notice and opportunity to be heard, the director or his designee may order the controlling producer to cease placing business with the controlled insurer.

(b) If it was found that because of the material noncompliance that the controlled insurer or any policyholder of it has suffered any loss or damage, the director or his designee may maintain a civil action or intervene in an action brought by or on behalf of the controlled insurer or policyholder for recovery of compensatory damages for the benefit of the controlled insurer or policyholder or other appropriate relief.

(c) If an order for liquidation or rehabilitation of the controlled insurer has been entered pursuant to Chapter 27, Title 38, and the receiver appointed under that order believes that the controlling producer or another person has not materially complied with this section, or regulation or order promulgated under it, and the controlled insurer suffered any loss or damage from it, the receiver may maintain a civil action for recovery of damages or other appropriate sanctions for the benefit of the controlled insurer.

(d) Nothing contained in this section affects the right of the director or his designee to impose other penalties provided for in the insurance law.

(e) Nothing contained in this section is intended to or in any manner alters or affects the rights of policyholders, claimants, creditors, or other third parties.

HISTORY: 1993 Act No. 70, Section 3; 2009 Act No. 27, Section 4, eff June 2, 2009.