New IL Law Strengthens Solvency Regulation

Springfield, IL - Governor George H. Ryan recently signed legislation to strengthen Illinois' corporate governance of insurance companies and health maintenance organizations. House Bill 2556, an initiative of Director of Insurance Nat Shapo sponsored by Rep. Timothy Osmond (R-Antioch) and Sen. Todd Sieben (R-Geneseo), establishes: additional standards for the boards of directors of insurers and HMOs operating in Illinois; additional standards for transactions between affiliated companies; new standards for transactions between HMOs and their officers and directors; and additional authority in receiverships of affiliated companies when their operations are commingled with the domestic insurer.

"The Governor's action provides appropriate reforms for the insurance regulatory system. This law will protect consumers and companies themselves through enhanced oversight of the corporate practices of insurance companies and HMOs," Director Shapo said.

Effective immediately, the legislation prohibits HMOs from making loans to company officers or directors, or to any other persons with financial interest in the HMO without the prior approval of the Department of Insurance. "This provision will greatly diminish the ability of company owners to make business decisions that may benefit them personally, but jeopardize the financial stability of their company," Shapo said.

Beginning July 1, 2002, the law also establishes the following requirements for composition of boards of directors:

• For domestic insurance companies not part of a holding company system, at least one-fifth of the directors must be persons who are not officers or employees of the company.
• For HMOs not part of a holding company system, at least one-third of the directors must be persons who are not officers or employees of the organization.
• For both domestic insurers and HMOs that are part of a holding company system, at least one-third of the directors must be persons who are not officers or employees and who are not beneficial owners with a controlling interest in the voting stock in the entity.

House Bill 2556 also establishes a new threshold for filing affiliated company transactions such as sales, purchases, loans or extensions of credit, or guarantees. The Director of Insurance must now approve such transactions when the domestic company is not eligible to declare and pay a dividend or other distribution.

Finally, the new legislation extends the Department's authority in receivership actions to entities or persons which provide management, administrative, accounting, data processing, marketing, underwriting, claims handling or any other similar services to the insurer, in a manner that is detrimental to policyholders, creditors, members or shareholders. For purposes of this provision, the entity or person need not be licensed to engage in the business of insurance in Illinois, as long as they are an affiliate of the insurer.