GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 1997

S	3 

SENATE BILL 612
Pensions & Retirement and Insurance Committee Substitute Adopted 4/10/97
Third Edition Engrossed 4/16/97

Short Title:  Insurer Financial Operations.	(Public)

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Sponsors:

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Referred to:  

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April 1, 1997

A BILL TO BE ENTITLED
AN ACT TO MAKE SUBSTANTIVE CHANGES IN THE LAWS GOVERNING THE FINANCIAL OPERATIONS OF INSURANCE COMPANIES AND THE ROLE OF THE DEPARTMENT OF INSURANCE IN MONITORING THE SOLVENCY OF INSURANCE COMPANIES.
The General Assembly of North Carolina enacts:
Section 1.  G.S. 58-3-100 reads as rewritten:
"§ 58-3-100.  Revocation, suspension, restriction, or refusal to renew license.
(a)	The Commissioner may, after notice and opportunity for a hearing, revoke, suspend, restrict, or refuse to renew the license of any insurer if:
(1)	The insurer fails or refuses to comply with any law, order or rule applicable to the insurer.
(2)	The insurer's financial condition is unsound, or its assets above its liabilities, exclusive of capital, are less than the amount of its capital or required minimum surplus.
(3)	The insurer has published or made to the Department or to the public any false statement or report.
(4)	The insurer or any of the insurer's officers, directors, employees, agents, or other representatives refuse to submit to any examination authorized by law or refuse to perform any legal obligation in relation to an examination.
(5)	The insurer is found to make a practice of unduly engaging in litigation or of delaying the investigation of claims or the adjustment or payment of valid claims.
(b)	Any suspension, revocation or refusal to renew an insurer's license under this section may also be made applicable to the license or registration of any individual regulated under this Chapter who is a party to any of the causes for licensing sanctions listed in subsection (a) of this section.
(c)	The Commissioner may impose a civil penalty under G.S. 58-2-70 if an insurer fails to acknowledge a claim within 30 days after receiving written notice of the claim, but only if the notice contains sufficient information for the insurer to identify the specific coverage involved. Acknowledgement of the claim shall be made to the claimant or his legal representative advising that the claim is being investigated; or shall be a payment of the claim; or shall be a bona fide written offer of settlement; or shall be a written denial of the claim.
(d)	If a foreign insurance company's license is suspended or revoked, the Commissioner shall give written notification of the revocation or suspension to all of the company's agents in this State.  Until the Commissioner restores the company's license and authority to do business in this State, the company shall not write any new business in this State.
(e)	The Commissioner may, after considering the standards under G.S. 58-30-60(b), restrict an insurer's license by prohibiting or limiting the kind or amount of insurance written by that insurer.  For a foreign insurer, this restriction relates to the insurer's business conducted in this State.  The Commissioner shall remove any restriction under this subsection once the Commissioner determines that the operations of the insurer are no longer hazardous to the public or to the insurer's policyholders or creditors."
Section 2.  Article 7 of Chapter 58 of the General Statutes is amended by adding a new section to read:
"§ 58-7-37.  Background of incorporators and proposed management personnel.
(a)	Before a license is issued to a new domestic insurance company, each key person must furnish the Commissioner a complete set of the applicant's fingerprints and a recent passport-size, full-face photograph of the applicant.  The applicant's fingerprints shall be certified by an authorized law enforcement officer.  The fingerprints of every applicant shall be forwarded to the State Bureau of Investigation for a search of the applicant's criminal history record file, if any.  If warranted, the State Bureau of Investigation shall forward a set of the fingerprints to the Federal Bureau of Investigation for a national criminal history record check.  An applicant shall pay the cost of the State and any national criminal history record check of the applicant.
(b)	As used in this section, 'key person' means a proposed officer, director, or any other individual who will be in a position to influence the operating decisions of a domestic insurance company.
(c)	The Commissioner may refuse to approve the formation or initial license of a new domestic insurance company under this Article if, after notice to the applicant and an opportunity for a hearing, the Commissioner finds as to the incorporators or other key person any one or more of the following conditions:
(1)	Any untrue material statement regarding the background or experience of any incorporator or other key person.
(2)	Violation of or noncompliance with any insurance laws or any rule or order of the Commissioner or of the insurance regulator of another state by any incorporator or other key person.
(3)	Obtaining or attempting to obtain any license through misrepresentation or fraud.
(4)	An incorporator or other key person has been convicted of a felony.
(5)	An incorporator or other key person has been found to have committed any unfair trade practice or fraudulent act or omission.
(6)	An incorporator or other key person has used fraudulent, coercive, or dishonest practices; or has acted in a manner that is incompetent, untrustworthy, or financially irresponsible.
(7)	An incorporator or other key person has held such a position in another insurance company that has had its license suspended or revoked by any state.
(d)	If the Commissioner disapproves a company formation or initial license, the Commissioner shall notify the applicant and advise the applicant in writing of the reasons for the disapproval.  Within 30 days after date of receipt of the written disapproval, the applicant may make a written request for a hearing, which shall be scheduled within 30 days after the date of receipt of the request.
(e)	For investigations under this section, the Commissioner has all of the authority in G.S. 58-3-125.
(f)	The Commissioner may adopt rules to set standards for obtaining background information on each incorporator or other key person of a proposed new domestic insurance company."
Section 3.  G.S. 58-7-55(3)d. reads as rewritten:
"d.	That if at any time the Commissioner finds that the conditions justifying the maintenance of such offices, records, and assets outside of this State no longer exist, or that the insurer has willfully and knowingly violated any of the conditions stated in sub-subdivisions b. and c., the Commissioner may order the return of such offices, records, and assets to this State within such reasonable time, not less than six months, as may be specified in the order; and the Commissioner may, for good cause shown, extend the time for compliance in the order."
Section 4.  G.S. 58-7-130 reads as rewritten:
"§ 58-7-130.  Dividends and distributions to stockholders.
(a)	Each domestic insurance company in North Carolina shall be restricted by the Commissioner from the payment of any dividends or other distributions to its stockholders whenever the Commissioner determines from examination of such company's financial condition that the payment of future dividends or other distributions would cause a hazardous financial condition, impair the financial soundness of the company or be detrimental to its policyholders, and those restrictions shall continue in force until the Commissioner specifically permits the payment of dividends or other distributions to stockholders by the company through a written authorization.  
(b)	No domestic stock insurance company shall declare dividends to its stockholders except from the unassigned surplus of the company as reflected in the company's most recent financial statement filed with the Commissioner under G.S. 58-2-165.
(c)	A transfer out of paid-in and contributed surplus to common or preferred capital stock will be permitted on a case-by-case basis, with the Commissioner's prior approval, depending on the necessity for a company to make the transfer.
(d)	Nothing in this section and no action taken by the Commissioner in any way restricts the liabilities of stockholders under G.S. 58-7-125.
(e)	Dividends and other distributions paid to stockholders are subject to the requirements and limitations of G.S. 58-19-25(d) and G.S. 58-19-30(c)."
Section 5.  G.S. 58-7-170(c) reads as rewritten:
"(c)	
The cost of investments made by an insurer in mortgage loans authorized by G.S. 58-7-179, with any one person, or in mortgage pass-through securities and derivatives of mortgage pass-through securities authorized by G.S. 58-7-173(1), (2), (8), or (17), backed by a single collateral package, shall not exceed three percent (3%) of the insurer's admitted assets.  An insurer shall not invest in additional mortgage loans or mortgage pass-through securities and derivatives of mortgage pass-through securities without the Commissioner's consent if the admitted value of all such investments held by the insurer exceeds an aggregate of sixty percent (60%) of the admitted assets of the insurer.  Within the aggregate sixty percent (60%) limitation, the admitted value of all mortgage pass-through securities and derivatives of mortgage pass-through securities permitted by G.S. 58-7-173(17) shall not exceed twenty-five percent (25%) of the admitted assets of the insurer.  The admitted value of other mortgage loans permitted by G.S. 58-7-179 shall not exceed forty percent (40%) of the admitted assets of the insurer.  Mortgage pass-through securities authorized by G.S. 58-7-173(1), (2), or (8) shall only be subject to the single collateral package limitation and the sixty percent (60%) aggregate limitation.  An insurer that has mortgage investments that exceed the limitations specified in this subsection shall submit to the Commissioner no later than January 31, 1998, a plan to bring the amount of mortgage investments into compliance with the limitations by January 1, 2003."
Section 6.  G.S. 58-7-185(a) reads as rewritten:
"(a)	In addition to investments excluded under other provisions of this Chapter, except with prior approval by the Commissioner, an insurer shall not directly or indirectly invest in or lend its funds upon the security of:
(1)	Issued shares of its own capital stock, except in connection with a plan for purchase of the shares by the insurer's officers, employees, or agents.  No such stock shall, however, constitute an asset of the insurer in any determination of its financial condition.
(2)	Except with the Commissioner's consent, securities issued by any corporation or enterprise, the controlling interest of which is or will after acquisition by the insurer be held directly or indirectly by the insurer or any combination of the insurer and the insurer's directors, officers, parent corporation, subsidiaries, or controlling stockholders.  Investments in subsidiaries under G.S. 58-7-177 are not subject to this provision.
	)."
Section 7.  G.S. 58-7-187(c) reads as rewritten:
"(c)	An insurer may, subject to the limitations and conditions set out in subdivisions (1) through (4) of this subsection, acquire, improve, develop, manage, lease, mortgage, and dispose of real estate, other than real estate to be used primarily for mining or development of oil or mineral resources, situated in any state of the United States or province of Canada either directly or indirectly through limited partnership interest, general partnership interests, provided that in the case of general partnership interests, all other partners in the partnership are subsidiaries of the insurer, limited liability companies, joint ventures, stock of an investment subsidiary, trust certificates, or other similar instruments.  The real estate shall be income-producing or to be improved or developed for investment purposes under an existing program, in which case the property shall be deemed to be income-producing.  The real estate may be subject to mortgages, liens, or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens, or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with this subsection and G.S. 58-7-187(d).  As used in this subsection, 'investment subsidiary' means a subsidiary of an insurer engaged or organized to engage exclusively in real estate investments authorized in this subsection.
(1)	The amount shall not exceed in the aggregate the lesser of five percent (5%) of the insurer's admitted assets or fifteen percent (15%) of the insurer's capital and surplus.
(2)	The amount in any one property shall not exceed one percent (1%) of the insurer's admitted assets.
(3)	The amount in unimproved land shall not exceed one-half of one percent (0.5%) of the insurer's admitted assets.
(4)	There shall be no time limit for the disposal of investment real estate."
Section 8.  G.S. 58-7-200(c) reads as rewritten:
"(c)	No insurer shall directly or indirectly invest in or lend its funds to any of its directors, officers, stockholders, or any other person in which an officer, director, or stockholder is interested substantially, nor shall any director, officer, or stockholder directly or indirectly accept such funds."
Section 9.  G.S. 58-8-10 reads as rewritten:
"§ 58-8-10.  Policyholders are members of mutual companies. 
Every person insured by a mutual insurance company is a member while that person's policy is in force, is entitled to one vote for each policy that person holds, and must be notified of the time and place of holding its meetings by a written notice or by an imprint upon the back of each policy, receipt, or certificate of renewal, as follows:
The insured is hereby notified that by virtue of this policy the insured is a member of the ............... insurance company, and that the annual meetings of the company are held at its home office on the ........... day of ..............., in each year, at ........ o'clock.
The blanks shall be duly filled in print and are a sufficient notice. A corporation that becomes a member of a mutual insurance company may authorize any person to represent the corporation; and this representative has all the rights of an individual member. A person holding property in trust may insure it in a mutual insurance company, and as trustee assume the liability and be entitled to the rights of a member; but that person is not personally liable upon the contract of insurance. Members may vote by proxies, dated and executed within three months after receipt, and returned and recorded on the books of the company three days or more before the meeting at which they are to be used."
Section 10.  Article 10 of Chapter 58 of the General Statutes is amended by adding a new section to read:
"§ 58-10-10.  Conversion to stock insurer.
(a)	A domestic mutual insurer may convert to a domestic stock insurer under a plan that is approved in advance by the Commissioner.
(b)	The Commissioner shall not approve the plan unless:
(1)	It is fair and equitable to the insurer's policyholders.
(2)	It is adopted by the insurer's board of directors in accordance with the insurer's bylaws and approved by a vote of not less than two-thirds of the insurer's members voting on it in person, by proxy, or by mail at a meeting called for the purpose of voting on the plan, pursuant to reasonable notice and procedure as approved by the Commissioner.  If the company is a life insurer, the right to vote may be limited, as its bylaws provide, to members whose policies are other than term or group policies and have been in effect for more than one year.
(3)	Each policyholder's equity in the insurer is determinable under a fair and reasonable formula approved by the Commissioner.  The equity shall be based upon the insurer's entire statutory surplus after deducting certificates of contribution, guaranty capital certificates, and similar evidences of indebtedness included in an insurer's statutory surplus.
(4)	The policyholders entitled to vote on the plan and participate in the purchase of stock or distribution of assets include all policyholders on the date the plan was adopted by the insurer's board of directors.
(5)	The plan provides that each policyholder specified in subdivision (4) of this subsection receives a preemptive right to acquire a proportionate part of all of the proposed capital stock of the insurer or of all of the stock of a corporation affiliated with the insurer within a designated reasonable period as the part is determinable under the plan of conversion; and to apply toward the purchase of the stock the amount of the policyholder's equity in the insurer under subdivision (3) of this subsection.  The plan must provide for an equitable distribution of fractional interests.
(6)	The plan provides for payment to each policyholder of the policyholder's entire equity in the insurer; with that payment to be applied toward the purchase of stock to which the policyholder is entitled preemptively or to be made in cash, or both.  The cash payment may not exceed fifty percent (50%) of each policyholder's equity.  The stock purchased, together with the cash payment, if any, shall constitute full payment and discharge of the policyholder's equity as an owner of the mutual insurer.
(7)	Shares are to be offered to policyholders at a price not greater than that of shares to be subsequently offered to others.
(8)	The Commissioner finds that the insurer's management has not, through reduction of volume of new business written, through policy cancellations, or through any other means, sought to (i) reduce, limit, or affect the number or identity of the insurer's members entitled to participate in the plan or (ii) secure for the individuals constituting management any unfair advantage through the plan.
(9)	The plan, when completed, provides that the insurer's capital and surplus are not less than the minimum required of a domestic stock insurer transacting the same kinds of insurance, are reasonable in relation to the insurer's outstanding liabilities, and are adequate to meet its financial needs.
(c)	With respect to an insurer with a guaranty capital, the conversion plan shall be approved by a vote of not less than two-thirds of the insurer's guaranty capital shareholders and policyholders as provided for in subdivision (b)(2) of this section.  The plan may provide for the issuance of stock in exchange for outstanding guaranty capital shares at their redemption value subject to the conditions in subsection (b) of this section.
(d)	The Commissioner may schedule a public hearing on the proposed conversion plan.
(e)	The Commissioner may retain, at the mutual insurer's expense, any attorneys, actuaries, economists, accountants, or other experts not otherwise a part of the Commissioner's staff as may be reasonably necessary to assist the Commissioner in reviewing the proposed conversion plan.
(f)	The corporate existence of the mutual company continues in the stock company created under this section.  All assets, rights, franchises, and interests of the former mutual insurer, in and to real or personal property, are deemed to be transferred to and vested in the stock insurer, without any other deed or transfer; and the stock insurer simultaneously assumes all of the obligations and liabilities of the former mutual insurer.
(g)	The Commissioner may adopt rules to carry out the provisions of this section."
Section 11.  G.S. 58-16-5 reads as rewritten:
"§ 58-16-5.  Conditions of licensure.
A foreign or alien insurance company may be licensed to do business when it:
(1)	Deposits with the Commissioner a certified copy of its charter or certificate of organization and a statement of its financial condition and business, in the form and detail that the Commissioner requires, signed and sworn to by its president and secretary or other proper officer, and pays for the filing of this statement the sum required by law.
(2)	Satisfies the Commissioner that it is fully and legally organized under the laws of its state or government to do the business it proposes to transact as direct insurance or assumed reinsurance and that it has been successful in the conduct of that business; that it has, if a stock company, a free surplus and a fully paid-up and unimpaired capital, exclusive of stockholders' obligations of any description of an amount not less than that required for the organization of a domestic company writing the same kinds of business; and if a mutual company that its free surplus is not less than that required for the organization of a domestic company writing the same kind of business, and that the capital, surplus, and other funds are invested in substantial accordance with the requirements of this Chapter.
(3)	Repealed by Session Laws 1995, c. 517, s. 6.
(4)	Repealed by Session Laws 1987, c. 629, s. 20.
(5)	Files with the Commissioner a certificate that it has complied with the laws of the state or government under which it was organized and is authorized to make contracts of insurance.
(6)	Satisfies the Commissioner that it is in substantial compliance with G.S. 58-7-21, 58-7-26, 58-7-30, and 58-7-31 and Article 13 of this Chapter.
(7)	Satisfies the Commissioner that it is in compliance with the company name requirements of G.S. 58-7-35.
(8)	Satisfies the Commissioner that it is in substantial compliance with the requirements of G.S. 58-7-37 pertaining to the background of its officers and directors.
(9)	Files with the Commissioner an instrument appointing the Commissioner as the company's agent on whom any legal process under G.S. 58-16-30 may be served.  This appointment is irrevocable as long as any liability of the company remains outstanding in this State.  A copy of this instrument, certified by the Commissioner, is sufficient evidence of this appointment; and service upon the Commissioner is sufficient service upon the company."
Section 12.  G.S. 58-16-6 reads as rewritten:
"§ 58-16-6.  Conditions of continued licensure.
In order for a foreign insurance company to continue to be licensed, it shall report any changes in the documents filed under 	G.S. 58-16-5, maintain the amounts of capital and surplus specified in G.S. 58-16-5(2), and remain in substantial compliance with the statutes listed in G.S. 58-16-5(6) through G.S. 58-16-5(8)."
Section 13.  G.S. 58-19-25(a)	reads as rewritten:
"(a)	Every insurer that is licensed to do business in this State and that is a member of an insurance holding company system shall register with the Commissioner, except a foreign insurer subject to the registration requirements and standards adopted by statute or regulation in the jurisdiction of its domicile that are substantially similar to those contained in:
(1)	This section.
(2)	G.S. 58-19-30(a), 58-19-30(c), and 58-19-30(d).
(3)	G.S. 58-19-30(b) or a provision such as the following:  Each registered insurer shall keep current the information required to be disclosed in its registration statement by reporting all material changes or additions within 15 days after the end of the month in which it learns of each change or addition.  The insurer shall also file a copy of its registration statement and any amendments to the statement in each state in which that insurer is authorized to do business, if requested by the insurance regulator of that state.
Any insurer that is subject to registration under this section shall register within 30 days after it becomes subject to registration, and an amendment to the registration statement shall be filed by March 1 of each year for the previous calendar year; unless the Commissioner for good cause shown extends the time for registration or filing, and then within the extended time. All registration statements shall contain a summary, on a form prescribed by the Commissioner, outlining all items in the current registration statement representing changes from the prior registration statement. The Commissioner may require any insurer that is a member of a holding company system that is not subject to registration under this section to furnish a copy of the registration statement or other information filed by the insurance company with the insurance regulator of its domiciliary jurisdiction."
Section 14.  G.S. 58-19-30(b) reads as rewritten:
"(b)	The following transactions involving a domestic insurer and any person in its holding company system may not be entered into unless the insurer has notified the Commissioner in writing of its intention to enter into the transaction at least 30 days before the transaction, or such shorter period as the Commissioner permits, and the Commissioner has not disapproved it within that period:
(1)	Sales, purchases, exchanges, loans or extensions of credit, guarantees, or investments, provided the transactions equal 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; (ii) with respect to life insurers, three percent (3%) of the insurer's admitted assets; each as of the preceding December 31. 
(2)	Loans or extensions of credit to any person who is not affiliated, where the insurer makes the loans or extensions of credit with the agreement or understanding that the proceeds of the transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, to purchase assets of, or to make investments in, any affiliate of the insurer making the loans or extensions of credit provided the transactions equal 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; (ii) with respect to life insurers, three percent (3%) of the insurer's admitted assets; each as of the preceding December 31.
(3)	Reinsurance agreements or modifications to the agreements in which the reinsurance premium or a change in the insurer's liabilities equals or exceeds five percent (5%) of the insurer's surplus as regards policyholders, as of the preceding December 31, including those agreements that may require as consideration the transfer of assets from an insurer to a nonaffiliate, if an agreement or understanding exists between the insurer and nonaffiliate that any portion of the assets will be transferred to one or more affiliates of the insurer.
(4)	All management agreements, service contracts, guarantees, or cost-sharing arrangements.
(4a)	Direct or indirect acquisitions or investments in a person that controls the insurer or an affiliate of the insurer in an amount which, together with its present holdings in the 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 under G.S. 58-19-10, or in nonsubsidiary insurance affiliates that are subject to the provisions of this Article, are exempt from this requirement.
(5)	Any material transactions, specified by rule, that the Commissioner determines may adversely affect the interests of the insurer's policyholders."
Section 15.  G.S. 58-26-25 reads as rewritten:
"§ 58-26-25.  Amount of unearned premium reserve. 
(a)	The unearned premium reserve of every domestic title insurance company shall consist of the aggregate of:
(1)	The amount of the unearned premium reserve held as of January 1, 1998.
(2)	The amount of all additions required to be made to such reserve by this section, less the reduction of such aggregate amount required hereby.
(b)	On each contract of title insurance issued by a domestic title insurance company on and after January 1, 1998, there shall be reserved initially as an unearned premium reserve a sum equal to ten percent (10%) of the original risk premium charged therefor.
(c)	The aggregate of the amounts set aside in unearned premium reserves in any calendar year, under subsection (b) of this section, shall be reduced annually at the end of each calendar year following the year in which the policy is issued, over a period of 20 years, according to the following:  twenty percent (20%) the first year; ten percent (10%) for years two and three; five percent (5%) for years four through 10; three percent (3%) for years 11 through 15; and two percent (2%) for years 16 through 20.
(d)	The entire amount of the unearned premium reserve held as of January 1, 1998, shall be added to the reserve as of that date and shall be released from the reserve and restored to net profits in accordance with percentages reflected in G.S. 58-26-25(c).
(e)	A supplemental reserve shall be established in accordance with the instructions of the annual statement required under G.S. 58-27-15 consisting of the reserves necessary, when taken in combination with the reserves required by G.S. 58-26-25(a) through (d), to cover the company's liabilities with respect to all losses, claims, and loss adjustment expenses.
(f)	Each title insurer subject to this Article shall file with its annual statement required under G.S. 58-27-15 an actuarial certification of a member in good standing of the American Academy of Actuaries.  The actuarial certification shall conform to the NAIC annual statement instructions for title insurers.
(g)	If substantially the entire outstanding liability under all policies, contracts of title insurance, or reinsurance agreements of any title insurance company is reinsured, the value of the consideration received by a ceding title insurance company authorized to transact title insurance in this State shall constitute, in its entirety, unearned portions of original premiums, shall be added to its unearned premium reserve, and shall be deemed, for recovery purposes, to have been provided for liabilities assumed during the year of the reinsurance.  The amount of the addition to the unearned premium reserve of the assuming title insurance company shall be not less than two-thirds of the amount of the unearned premium reserve required to be maintained by the ceding title insurance company at the time of the reinsurance."
Section 16.  G.S. 58-34-2(a) is amended by adding a new subdivision to read:
"(1a)	'Custodial agreement' means any agreement or contract under which any person is delegated authority to safekeep assets of the insurer."
Section 17.  G.S. 58-34-10 reads as rewritten:
"§ 58-34-10.  Management contracts or custodial agreements.
(a)	Subject to G.S. 58-19-30(b)(4), any domestic insurer that enters into a management contract or custodial agreement must file that contract or agreement with the Commissioner on or before its effective date.  As used in this section, 'management contract' means any agreement or contract under which any person is delegated management duties or control of an insurer, or transfers a substantial part of any major function of an insurer, such as adjustment of losses, production of business, investment of assets, or general servicing of the insurer's business. 
(b)	Any domestic insurer that has a management contract or custodial agreement shall file a statement with the initial filing of that contract that discloses (i) criteria on which charges to the insurer are based for that contract; (ii) whether management personnel or other employees of the insurer are to be performing management functions and receiving any remuneration therefor through that contract in addition to the compensation by way of salary received directly from the insurer for their services; (iii) whether the contract transfers substantial control of the insurer or any of the powers vested in the board of directors, by statute, articles of incorporation, or bylaws, or substantially all of the basic functions of the insurer's management; (iv) biographical information for each officer and director of the management firm; and (v) other information concerning the contract or the management or custodian firm as may be included from time to time in any registration forms adopted or approved by the Commissioner.  The statement shall be filed on a form prescribed by the Commissioner.
(c)	Any domestic insurer that amends or cancels a management contract or custodial agreement filed under subsection (a) of this section shall notify the Commissioner within 15 business days after the amendment or cancellation.  If the contract is amended, the notice shall provide a copy of the amended contract and shall disclose if the amendment affects any of the items in subsection (b) of this section.  The Commissioner may prescribe a form to be used to provide notice under this subsection.
(d)	Any domestic insurer that has a management contract or custodial agreement shall file a statement on or before March 1 of each year, for the preceding calendar year, disclosing (i) total charges incurred by the insurer under the contract; (ii) any salaries, commissions, or other valuable consideration paid by the insurer directly to any officer, director, or shareholder of the management or custodian firm; and (iii) other information concerning the contract or the management or custodian firm as may be included from time to time in any registration forms adopted or approved by the Commissioner.  The Commissioner may prescribe a form to be used to provide the information required by this subsection.
(e)	Any domestic insurer that has a management contract may request an exemption from the filing requirements of this section if the contract is for a group of affiliated insurers on a pooled funds basis or service company management basis, where costs to the individual member insurers are charged on an actually incurred or closely estimated basis.  The request for an exemption must be in writing, must explain the basis for the exemption, and must be received by the Commissioner on or before the effective date of the contract.  As used in this subsection, 'affiliated' has the same meaning as in G.S. 58-19-5(1).  Management contracts exempted under this subsection must still be reduced to written form."
Section 18.  G.S. 58-34-15 reads as rewritten:
"§ 58-34-15.  Grounds for disapproval.
(a)	The Commissioner must disapprove any management contract or custodial agreement filed under G.S. 58-34-10 if, at any time, the Commissioner finds:
(1)	That the service or management charges are based upon criteria unrelated either to the managed insurer's profits or to the reasonable customary and usual charges for the services or are based on factors unrelated to the value of the services to the insurer; or
(2)	That management personnel or other employees of the insurer are to be performing management functions and receiving any remuneration for those functions through the management or service contract in addition to the compensation by way of salary received directly from the insurer for their services; or
(3)	That the contract would transfer substantial control of the insurer or any of the powers vested in the board of directors, by statute, articles of incorporation, or bylaws, or substantially all of the basic functions of the insurance company management; or
(4)	That the contract contains provisions that would be clearly detrimental to the best interest of policyholders, stockholders, or members of the insurer; or
(5)	That the officers and directors of the management or custodial firm are of known bad character or have been affiliated, directly or indirectly, through ownership, control, management, reinsurance transactions, or other insurance or business relations with any person known to have been involved in the improper manipulation of assets, accounts, or reinsurance.
(6)	That the custodial agreement is not substantially the same as the form adopted by the Commissioner.
(b)	If the Commissioner disapproves any management contract or custodial agreement, notice of the disapproval shall be given to the insurer assigning the reasons for the disapproval in writing.  The Commissioner shall grant any party to the contract a hearing if the party requests a hearing."
Section 19.  G.S. 58-65-95 reads as rewritten:
"§ 58-65-95. Investments and reserves.
(a)	Except as provided in subsection (e) of this section, no  corporation subject to this Article shall invest in any securities other than securities permitted by Article 7 of this Chapter for the investment of assets.
(b)	Every corporation subject to this Article shall accumulate and maintain, in addition to proper reserves for current administrative liabilities and whatever reserves are deemed to be adequate and proper by the Commissioner for unpaid hospital, medical, or dental bills, and unearned membership dues, a special contingent surplus or reserve at the following rates annually of its gross annual collections from membership dues, exclusive of receipts from cost plus plans, until the reserve equals an amount that is three times its average monthly expenditures for claims and administrative and selling expenses:
(1)	First $200,000	4%
(2)	Next $200,000	2%
(3)	All above $400,000	1%
(c)	Any corporation subject to this Article may accumulate and maintain a contingent reserve in excess of the reserve required in subsection (b) of this section, not to exceed an amount equal to six times the average monthly expenditures for claims and administrative and selling expenses.
(d)	If the Commissioner finds that special conditions exist warranting an increase or decrease in the reserves or schedule of reserves in subsection (b) of this section, the Commissioner may modify them accordingly. Provided, however, when special conditions exist warranting an increase in the schedule of reserves, the schedule shall not be increased by the Commissioner until a reasonable length of time has elapsed after the Commissioner gives notice of the increase.
(e)	The cost of investments made by service corporations in mortgage loans, authorized by G.S. 58-7-179, with any one person, shall not exceed the lesser of five percent (5%) of the service corporation's admitted assets of ten percent (10%) of the service corporation's capital and surplus.  A service corporation shall not invest in additional mortgage loans without the Commissioner's consent if the admitted value of all such mortgage loans held by the service corporation exceeds an aggregate of sixty percent (60%) of the admitted assets of the service corporation, if (i) the admitted value of all mortgage pass-through securities permitted by G.S. 58-7-173(17) does not exceed twenty-five percent (25%) of the admitted assets of the service corporation and (ii) the admitted value of other mortgage loans permitted by G.S. 58-7-179 does not exceed forty percent (40%) of the admitted assets of the service corporation.  A service corporation that, as of October 1, 1997, has mortgage investments that exceed the aggregate limitation specified in this subsection shall submit to the Commissioner no later than January 31, 1998, a plan to bring the amount of mortgage investments into compliance with the limitations by January 1, 2001."
Section 20.  Article 65 of Chapter 58 of the General Statutes is amended by adding a new section to read:
"§ 58-65-102.  Financial statements; examinations.
(a)	Every corporation organized under this Article is subject to G.S. 58-2-165.
(b)	Service corporations organized under this Article shall be examined under G.S. 58-2-131, 58-2-132, and 58-2-133."
Section 21.  Article 67 of Chapter 58 of the General Statutes is amended by adding a new section to read:
"§ 58-67-56.  Financial statements.
Every HMO under this Chapter is subject to G.S. 58-2-165."
Section 22.  G.S. 58-3-90, 58-65-100, 58-65-105, and 58-67-55 are repealed.
Section 23.  This act becomes effective October 1, 1997.