2023 Laws of Puerto Rico › TITLE TWENTY-SIX - Insurance (§§ 101 — 10377) › Subtitle 1 - Insurance Generally (§§ 101 — 4513) › Chapter 44 - Insurance Holding Company System Regulatory Act (§§ 4401 — 4414) › § 4406 - Standards and management of an insurer or health service organization within an insurance holding company system

(a) Transactions within an insurance holding company system.—
(1) Transactions within an insurance holding company system, to which an insurer or health service organization subject to registration is a party, shall be subject to the following standards:
(A) The terms shall be fair and reasonable;
(B) Charges or fees for services performed shall be reasonable;
(C) Expenses incurred and payment received shall be allocated to the insurer or health service organization in conformity with customary insurance accounting practices applied;
(D) The books, accounts, and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the 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
(E) The insurer or health service organization’s surplus as regards policyholders following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer or health service organization’s outstanding liabilities and adequate to meet its financial needs.
(2) The following transactions involving a domestic insurer or health service organization, and any person in its insurance holding company system may not be entered into unless the insurer or the health service organization has notified the Commissioner in writing of its intention to enter into the transaction at least thirty (30) days prior thereto, or such shorter period as the Commissioner may permit, and the Commissioner has not disapproved it within that period:
(A) Sales, purchases, exchanges, loans, extensions of credit, or investments, provided the transactions are equal to or exceed:
(i) With respect to nonlife insurers, the lesser of three percent (3%) of the insurer’s admitted assets or twenty-five percent (25%) of surplus as regards policyholders as of the 31st day of December next preceding;
(ii) With respect to life insurers, three percent (3%) of the insurer’s admitted assets as of the 31st day of December next preceding;
(B) Loans or extensions of credit to any person who is not an affiliate, where the insurer or health service organization makes loans or extensions of credit with the understanding that the proceeds of the transactions, in whole or in part, are to be used to make loans or extensions of credit to, or to purchase assets of any affiliate of the insurer or health service organization, making the loans or extensions of credit provided the transactions are equal to or exceed:
(i) With respect to nonlife insurers, the lesser of three percent (3%) of the insurer’s admitted assets or twenty-five percent (25%) of surplus as regards policyholders as of the 31st day of December next preceding;
(ii) With respect to life insurers, three percent (3%) of the insurer’s admitted assets as of the 31st day of December next preceding;
(C) 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 (5%) of the insurer’s surplus as regards policyholders, as of the 31st day of December next preceding, including those agreements which may require as consideration the transfer of assets from an insurer or health service organization to a non-affiliate, if an agreement or understanding exists between the insurer and non-affiliate to such effect.
(D) All management agreements, service contracts, guarantees, and all cost-sharing arrangements.
(E) Guarantees when made by a domestic insurer or health service organization; Provided, however, That a guarantee which is quantifiable as to amount is not subject to the notice requirements of this paragraph unless it exceeds the lesser of one-half of one percent (.5%) of the insurer’s admitted assets and ten percent (10%) of surplus as regards policyholders as of the 31st day of December next preceding. Further, all guarantees not quantifiable as to amount are subject to the notice requirements of this paragraph.
(F) Direct or indirect acquisitions or investments in a person that controls the insurer or health service organization, or in an affiliate of the insurer or health service organization in an amount which, together with its present holdings in such investments, exceeds two and one-half percent (2.5%) of the insurer’s surplus to policyholders. Direct or indirect acquisitions or investments in subsidiaries acquired pursuant to § 4402 of title or under any other section of this chapter, or in non-subsidiary insurers or health service organizations affiliates that are subject to the provisions of this chapter, are exempt from this requirement; and
(G) Any material transactions, specified by regulation, which the Commissioner determines may adversely affect the interests of the insurer o health service organization’s policyholders.
Nothing in this clause shall be deemed to authorize or permit any transactions which, in the case of an insurer or health service organization not a member of the same insurance holding company system, would be otherwise contrary to law.
(3) A domestic insurer may not enter into transactions which are part of a plan or series of like transactions with persons within the insurance holding company system if the purpose of those separate transactions is to avoid the statutory threshold amount and thus avoid the review of the transaction. If the Commissioner determines that separate transactions were entered into over any twelve (12)-month period for that purpose, the Commissioner may exercise his or her authority under § 4411 of this title.
(4) The Commissioner, in reviewing transactions pursuant to clause (2) of this subsection, shall consider whether the transactions comply with the standards set forth in clause (1) of this subsection and whether they may adversely affect the interests of policyholders.
(5) The Commissioner shall be notified within thirty (30) days of any investment of the domestic insurer or health service organization in any one corporation if the total investment in the corporation by the insurance holding company exceeds ten percent (10%) of the corporation’s voting securities.
(b) Dividends and other distributions.— No domestic insurer or health service organization shall pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until thirty (30) days after the Commissioner has received notice of the declaration thereof and has not within that period disapproved the payment, or until the Commissioner has approved the payment within the thirty (30)-day period.
For purposes of this subsection, an extraordinary dividend or distribution includes any dividend or distribution of cash or other assets, whose fair market value together with that of other dividends or distributions made within the preceding twelve (12) months exceeds the lesser of:
(1) Ten percent (10%) of the insurer’s surplus as regards policyholders as of the 31st day of December next preceding; or
(2) The net gain from operations of the insurer, if the insurer is a life insurer, or the net income, if the insurer is not a life insurer, not including realized capital gains, for the twelve (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.
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 (2) 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.
Notwithstanding what is established in any other section, an insurer or health service organization may declare an extraordinary dividend or distribution which is conditional upon the Commissioner’s approval, and the declaration shall confer no rights upon shareholders until:
(1) The Commissioner has approved the payment of the dividend or distribution; or
(2) The Commissioner has not disapproved payment within the thirty-day period referred to above.
(c) Management of domestic insurers or health service organizations 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 assure its separate operating identity consistent with the provisions of this chapter.
(2) Nothing in this section shall preclude a domestic insurer from having or sharing a common management or cooperative or joint use of personnel, assets, or services with one or more other persons under arrangements meeting the standards of subsection (a)(1) of this title.
(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 comprised solely 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 designating independent certified public accountants, reviewing the insurer’s financial statement, as well as the scope and results of independent and internal audits, 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.
(5) The provisions of clauses (3) and (4) shall not apply to a domestic insurer if the person controlling the insurer is an insurer whose board of directors and committees thereof that meet the requirements of the aforementioned paragraphs.
(6) A domestic insurer may make application to the Commissioner for a waiver from the requirements of this section, 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 three hundred million dollars ($300,000,000). In addition, an insurer may also make application to the Commissioner for a waiver based upon unique circumstances such as the type of business entity, volume of business written, availability of qualified board members, or the organizational structure of the entity, among other factors the Commissioner deems reasonable.
(d) Adequacy of surplus.— For purposes of this chapter, in determining whether an insurer’s surplus as regards policyholders is reasonable in relation to the insurer’s outstanding liabilities and adequate to meet 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 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 investment portfolio.
(8) The surplus as regards policyholders maintained by other comparable insurers.
(9) The adequacy of the insurer’s reserves and the quality and liquidity of investments in affiliates. The Commissioner may treat any such investment as a disallowed asset for purposes of determining the adequacy of surplus as regards policyholders whenever in the judgment of the Commissioner the investment so warrants.
History —Ins. Code, added as § 44.060 on Mar. 7, 2012, No. 51, § 1, eff. 30 days after Mar. 7, 2012.