Earlier this year, noting “the recent increase in the number of reciprocal exchanges being formed and challenges in assessing the fairness and reasonableness of attorney-in-fact fees being charged to the newly formed reciprocals,” the National Association of Insurance Commissioners’ (NAIC) Risk-Focused Surveillance (E) Working Group recommended that its parent body, the Financial Condition (E) Committee, create a new Reciprocal Exchanges (E) Working Group.
In Depth
As originally proposed, the purpose of the new working group is to “modify the NAIC Insurance Holding Company System Regulatory Act (#440) (the Holding Company Model Act) [and/or Insurance Holding Company System Model Regulation with Form and Instructions (#450)] to clarify that regardless of definitions of control and affiliation, fees charged [to] insurers from the attorney-in-fact are subject to fair and reasonable standards and subject to approval by the Commissioner and under no circumstances should they exceed the cost of such services plus a modest profit.”
In their recommendation to the (E) Committee, regulators made the following points:
“1. The fee structure for management services is often based on a percentage of gross premiums written.
“2. Basing the management service fees on a percentage of premium volume creates a conflict of interest, i.e., a potential incentive for the attorney-in-fact to increase its fee revenue by underpricing or accepting risk that may be above its typical underwriting guidelines.
“3. Management service fees are also often included in the power of attorney agreement, as opposed to a separate service agreement, which can make the fees less transparent.
“4. It’s worth noting that the definition of control within Insurance Holding Company System Regulatory Act (#440) specifically provides that ‘…the power to cause the direction of the management and policies’ triggers control.”
More specifically, the Holding Company Model Act development project will entail amending Section 5 of the act to ensure that reciprocal insurance exchanges are subject to the requirements of Section 5, which currently reads as follows:
“Section 5. Standards and Management of an Insurer 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 subject to registration is a party shall be subject to the following standards:
“(a) The terms shall be fair and reasonable;
“(b) Agreements for cost sharing services and management shall include such provisions as required by rule and regulation issued by the commissioner;
“(c) Charges or fees for services performed shall be reasonable;
“(d) Expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied;
“(e) 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…”
On August 13, 2025, during the recently concluded NAIC Summer National Meeting in Minneapolis, the (E) Committee voted unanimously to approve the proposal. Colorado moved the adoption; Iowa seconded the motion to adopt.
The NAIC circulated the proposed 2026 charge for the new working group on August 19, 2025, as follows:
“The Reciprocal Exchanges (E) Working Group will:
“Modify the NAIC Insurance Holding Company System Regulatory Act (Model #440) and/or the Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450) to clarify that regardless of definitions of control and affiliation, fees charged by insurers from the attorney in fact are subject to fair and reasonable standards and subject to approval by the Commissioner and under no circumstances should they exceed the cost of such services plus a modest profit.”
Comments on the proposed charge are due by the close of business on October 2, 2025. Assuming the (E) Committee approves the new charge language later this year, the NAIC’s Executive Committee and full membership will need to confirm the approval during the NAIC’s final National Meeting of the year in December 2025.
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