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(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 ; and
(10) the quality and liquidity of investments in subsidiaries made pursuant to section 3. The Commissioner may treat any such investment as a disallowed asset for purposes of determining the adequacy of surplus as re
gards policyholders whenever in his judgment such investment so warrants. (c) DIVIDENDS AND OTHER DISTRIBUTIONS.-(1) No insurer subject to registration under section 5 shall pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until (A) thirty days after the Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment, or (B) the Commissioner shall have approved such payment within such thirty-day period.
(2) 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 twelve months exceeds the gretter of (A) 10 per centum of such insurer's surplus as regards policyholders as of the thirty-first day of December next preceding or (B) the net gain from operations of such insurer, if such insurer is a life insurer, or the net investment income, if such insurer is not a life insurer, for the twelve-month period ending the thirty-first day of December next preceding, but shall not include pro rata distributions of any class of the insurer's own securities.
(3) Notwithstanding any other provision of law, an insurer may declare an extraordinary dividend or distribution which is conditional upon the Commissioner's approval thereof, and such a declaration shall confer no rights upon shareholders until (A) the Commissioner has approved the payment of such dividend or distribution or (B) the Commissioner has not disapproved such payment within the thirty-day period referred to above.
EXAMINATION Sec. 7. (a) POWER OF COMMISSIONER.-Subject to the limitation contained in this section and in addition to the powers which the Commissioner has under the insurance laws of the District relating to the examination of insurers, the Commissioner shall also have the power to order any insurer registered under section 5 to produce such records, books, papers, or other information in the possession of the insurer or its affiliates as shall be necessary to ascertain the financial condition or legality of conduct of such insurer. In the event such insurer fails to comply with such order, the Commissioner shall have the power to examine such affiliates to obtain such information.
(b) PURPOSE AND LIMITATION OF EXAMINATION.—The Commissioner shall exercise his power under subsection (a) only if the examination of the insurer under and as is provided for by the insurance laws of the District is inadequate or the interests of the policyholders of such insurer may be adversely affected.
(c) ISE OF CONSULTANTS.-- The Commissioner may retain at the registered insurer's expense such attorneys, actuaries, accountants, and other experts not otherwise a part of the Commissioner's staff as shall be reasonably necessary to assist in the conduct of the examination under subsection (a). Any persons so retained shall be under the direction and control of the Commissioner and shall act in a purely advisory capacity.
(d) EXPENSES.—Each registered insurer producing for examination records, books, and papers pursuant to subsection (a) shall be liable for and shall pay the expense of such examination in accordance with the provisions of section 19, chapter II, of the Life Insurance Act (D.C. Code, sec. 35-418) and section 10, chapter II, of the Fire and Casualty Act (D.C. Code, sec. 35–1313), pertaining to examination expense.
Sec. 8. CONFIDENTIAL TREATMENT.-All information, documents, and copies thereof obtained by or disclosed to the Commissioner or any other person in the course of an examination or investigation made pursuant to section 7 and all information reported pursuant to section 5, shall be given confidential treatment and shall not be subject to subpena and shall not be made public by the Commissioner or any other person, except to insurance departments of other States, without the prior written consent of the insurer to which it pertains unless the Commissioner, after giving the insurer and its affiliates who would be affected thereby, notice and opportunity to be heard, determines that the interests of policyholders, shareholders, or the public will be served by the publication thereof, in which event he may publish all or any part thereof in such manner as he may deem appropriate.
SEC. 9. RULES AND REGULATIONS.-- The Commissioner may, upon notice and opportunity of all interested persons to be heard, issue such rules, regulations, and orders as shall be necessary to carry out the provisions of this Act. INJUNCTIONS; PROHIBITIONS AGAINST VOTING SECURITIES ; SEQUESTRATION OF VOTING
SECURITIES SEC. 10. (a) INJUNCTIONS.-Whenever it appears to the Commissioner that any insurer or any director, officer, employee or agent thereof has committed or is about to commit a violation of this Act or of any rule, regulation, or order issued by the Commissioner hereunder, the Commissioner may apply to the Superior Court of the District of Columbia for an order enjoining such insurer of such director, officer, employee, or agent thereof from violating or continuing to violate this Act or any such rule, regulation, or order, and for such other equitable relief as the failure of the case and the interests of the insurer's policyholders, creditors, shareholders, or the public may require.
(b) VOTING OF SECURITIES ; WHEN PROHIBITED.—No security which is the subject of any agreement or arrangement regarding acquisition, or which is acquired or to be acquired, in contravention of the provisions of this Act or of any rule, regulation, or order issued by the Commissioner hereunder may be voted at any shareholders' meeting, or may be counted for quorum purposes, and any action of shareholders requiring the affirmative vote of a percentage of shares may be taken as though such securities were not issued and outstanding; but no action taken at any such meeting shall be invalidated by the voting of such securities, unless the action would materially affect control of the insurer or unless the Superior Court of the District of Columbia has so ordered. If an insurer or the Commissioner has reason to believe that any security of the insurer has been or is about to be acquired in contravention of the provisions of this Act or of any rule, regulation, or order issued by the Commissioner hereunder the insurer or the Commissioner may apply to the Superior Court of the District of Columbia to enjoin any offer, request, invitation, agreement, or acquisition made in contravention of section 4 of any rule, regulation, or order issued by the Commissioner thereunder to enjoin the voting of any security so acquired, to void any vote of such security already cast at any meeting of shareholders, and for such other equitable relief as the nature of the case and the interests of the insurer's policyholders, creditors, shareholders, or the public may require.
(c) SEQUESTRATION OF VOTING SECURITIES.-In any case where a person has or is proposing to acquire any voting securities in violation of this Act or any rule, regulation, or order issued by the Commissioner hereunder, the Superior Court of the District of Columbia may, on such notice as the court deems appropriate, upon the application of the insurer or the Commissioner seize or sequester any voting securities of the insurer owned directly or indirectly by such person, and issue such orders with respect thereto as may be appropriate to effectuate the provisions of this Act. Notwithstanding any other provisions of law, for the purposes of this Act the situs of the ownership of the securities of domestic insurers shall be deemed to be in the District.
Sec. 11. CRIMINAL PROCEEDINGS.--Whenever it appears to the Commissioner that any insurer or any director, officer, employee, or agent thereof has committed a willful violation of this Act, the Commissioner may cause criminal proceedings to be instituted in the District against such insurer or the responsible director, officer, employee, or agent thereof. Any insurer which willfully violates this Act may be fined not more than $1,000. Any individual who willfully violates
this Act may be fined not more than $1,000 or, if such willful violation involves the deliberate perpetration of a fraud upon the Commissioner, imprisoned not more than two years or both.
SEC. 12. RECEIVERSHIP.-Whenever it appears to the Commissioner that any person has committed a violation of this Act which so impairs the financial condition of a domestic insurer as to threaten insolvency or make the further transaction of business by it hazardous to its policyholders, creditors, shareholders, or the public, the Commissioner may proceed as provided under the insurance laws of the District to take possession of the property of such domestic insurer and to conduct the business thereof.
Sec. 13. REVOCATION, SUSPENSION, OR NON-RENEWAL OF INSURER'S LICENSE.— Whenever it appears to the Commissioner that any person has committed a violation of this Act which makes the continued operation of an insurer contrary to the interests of policyholders or the public, the Commissioner may, after giving notice and an opportunity to be heard, suspend, revoke, or refuse to renew such insurer's license or authority to do business in the District for such period as he finds is required for the protection of policyholders or the public. Any such determination shall be accompanied by specific findings of fact and conclusions of law.
Sec. 14. JUDICIAL REVIEW ; MANDAMUS.-(a) Any person aggrieved by any act, determination, rule, regulation, or order or any other action of the Commissioner pursuant to this Act may appeal therefrom to the District of Columbia Court of Appeals, in accordance with the District of Columbia Administrative Procedure Act.
(b) Any person aggrieved by any failure of the Commissioner to act or make a determination required by this Act may petition the Superior Court of the District of Columbia for a writ in the nature of a mandamus or a peremptory mandamus directing the Commissioner to act or make such determination forthwith.
Sec. 15. CONFLICT WITH OTHER LAWS.-All laws and parts of laws of the District inconsistent with this Act are hereby superseded with respect to matters covered by this Act.
SEC. 16. SEPARABILITY OF PROVISIONS.-If any provision of this Act or the application thereof to any person or circumstance is held invalid, the invalidity shall not affect other provisions or applications of this Act which can be given effect without the invalid provision or application, and for this purpose the provisions of this Act are separable.
SEC. 17. EFFECTIVE DATE.—This Act shall take effect thirty days after the date of its enactment.
The first witness this morning is Mr. Edward Lombard, superintendent of insurance. He is accompanied by Mr. Wallach, deputy superintendent of insurance.
Gentlemen, we are delighted to have you before the committee again. It is good to see you again.
STATEMENT OF EDWARD P. LOMBARD, SUPERINTENDENT OF
INSURANCE, DISTRICT OF COLUMBIA GOVERNMENT; ACCOMPANIED BY MAXIMILLIAN WALLACH, DEPUTY SUPERINTENDENT OF INSURANCE
Mr. LOMBARD. Mr. Chairman, I believe there is a statement or will be a statement from the Mayor, and the department will submit a statement for the record, if you would like us to.
This Holding Company Act (H.R. 7218) is an effort to bring to the District of Columbia a model act that has already been enacted in 30some States, with more coming. We have, obviously, a desire that this law be enacted in the District so that our domestic industry will not have to respond to 37 different States whenever anything of this nature occurs, so that our law will be on the books and our domestic industry will not be burdened by this almost impossible task of responding to a similar act in so many other States.
If this law is enacted here, then there will be this uniform approach to obtaining the information concerning any prospective merger, with the proper reports to the District government and to eliminate the necessity for these companies to respond to similar bills all over the United States.
If there is any question as to the detail of the bill, Mr. Wallach will be very glad to respond to any questions.
Mr. STUCKEY. Thank you, Mr. Lombard.
Mr. Wallach, do you have any statement you might make this morning?
BACKGROUND Mr. WALLACH. I will be glad to answer any questions and furnish a statement in writing; or if you want me to, I can give you a brief summary, due to the time element. Either way, Mr. Chairman.
Briefly, insurance has been regulated in some States for over 100 years. Model legislation is quite frequently developed by the National Association of Insurance Commissioners, and the D.C. Department of Insurance used that model in this case as a base.
The primary goal is to provide solvency of the insurers. In addition, of course, regulation is to insure the fair treatment of policyholders in the availability of insurance.
Conservative investment by insurers, in part required by statute, and required to purchase insurance on a voluntary basis, has led to quality investment and economic survival in the past.
In most recent years, diversification has led to reorganization whereby additional related services have been provided by corporations affiliated with the insurer. In some instances, the insurer established one or more subsidiaries. At other times, outside corporations have acquired control of one or more insurers.
After considerable studies, the NAIC in 1969 developed model legislation, known as the Insurance Holding Company System Regulatory Act, to provide proper procedures, granting the Insurance Commissioner additional statutory authority as well as charging him with the responsibility to protect policyholders, so that financial injury or erosion of their acquired rights is avoided.
In the 92d Congress, s. 3298 was introduced, and in this Congress we are now dealing with H.R. 7218, which was introduced in April of this year. The purpose is to confer statutory authority in the Commissioner, in this area of regulating insurance holding companies, in a similar way that is now being done in at least 37 States.
This bill follows closely the NAIC bill. It recognizes the need for diversification of investments, contains liberalization applicable to subsidiaries, and has sufficient quantitative tests to protect this type of liberalization. It contains a disclosure provision, provides for filing requirement standards to protect policyholders as well as security holders.
It provides for standardization, broad notification, has reasonable exemptions to provide flexibility, and it also is aimed, as the Superintendent said before, to provide relief so that the domestic companies do no longer have to file identical information in all of the States in which they operate.
It provides for enforcement, court injunction, and penalties in the case of violations.
In summary, it will enable the District government to update its laws to be in line with what has happened over the last several years in other States in this area.
Mr. STUCKEY. Thank you, Mr. Wallach.
Let me ask you a question, I guess really both of you. We have received no opposition to this bill, and to my knowledge it is a noncontroversial bill; it is simply updating, bringing the District of Columbia laws in line with what they should be. Is this correct?
Mr. LOMBARD. That is correct; yes, sir. We know of no opposition to this bill from any source.
Mr. STUCKEY. I feel a little funny having a bill before us with the District of Columbia government not opposing some part of it.
SCOPE OF H.R. 7218 Why does this bill apply only to insurance companies instead of the holding company situation?
Mr. WALLACH. In the case of a holding company, you have to deal with one or more insurers and several noninsurers. At the current time, nobody could walk in and take over a company, and the Superintendent of Insurance would not have any facility to-never mind approaching it, but even looking into it. This will provide for a regular procedure, hearing documentation, and a close examination as to what extent, if any, policyholders or security holders will be concerned by such a takeover. That is one of the important traditions.
The other important tradition is to maintain a process whereby the insurer could no longer declare extraordinary dividends without filing it with the Department and have a proper review. So that everybody is aware, due to disclosure and other management tools, what is going on at all times.
Mr. LOMBARD. Let me just add briefly to that. The insurance laws were written to protect the public, and traditionally the insurance Commissioners want to deal in that direction. They want to be involved with protection of policyholders and, unfortunately, on some occasions to the distrust of stockholders of insurance companies. So that when the Commissioners are brought into the problem of regulating matters other than in, just let's say in, the best interests in the long run of the policyholders, are brought into this business of becoming involved with operations that are akin to the stock market operations, they do so rather reluctantly.
But as Mr. Wallach has said, when you get a combination of insurance companies and noninsurance companies operating through the holding company system, then the Commissioner must go beyond the individual insurance company, which has been rather easy to regulate, and get into this complication of having noninsurance persons who normally are beyond his reach involved in something that is, in the long run, going to be very important to the policyholder.