KRS 304.3-410: Applicability -- Contract between insurer and controlling producer --

Audit committees -- Reporting requirements.

(1) The applicability of this section is as follows:

(a) The provisions of this section shall only apply if in any calendar year, the

aggregate amount of gross written premium on business placed with a

controlled insurer by a controlling producer is equal to or greater than five

percent (5%) of the admitted assets of the controlled insurer, as reported in the

controlled insurer's quarterl y statement filed as of September 30 of the

immediate preceding year; and

(b) Notwithstanding paragraph (a) of this subsection, the provisions of this

section shall not apply if:

1. The controlling producer:

a. Places insurance only with the controlled ins urer, or only with the

controlled insurer and a member or members of the controlled

insurer's holding company system, or the controlled insurer's

parent, affiliate, or subsidiary and receives no compensation based

upon the amount of premiums written in con nection with the

insurance; and

b. Accepts insurance placements only from nonaffiliated

subproducers, and not directly from insureds; and

2. The controlled insurer, except for insurance business written through a

residual market mechanism, accepts insuranc e business only from a

controlling producer, a producer controlled by the controlled insurer, or

a producer that is a subsidiary of the controlled insurer.

(2) A controlled insurer shall not accept business from a controlling producer and a

controlling producer shall not place business with a controlled insurer unless there

is a written contract between the controlling producer and the insurer specifying the

responsibilities of each party, and the contract has been approved by the board of

directors of the insurer and contains the following minimum provisions:

(a) The controlled insurer may terminate the contract for cause, upon written

notice to the controlling producer. The controlled insurer shall suspend the

authority of the controlling producer to write business during the pendency of

any dispute regarding the cause for termination;

(b) The controlling producer shall render accounts to the controlled insurer

detailing all material transactions, including information necessary to support

all commissions, charges, and other fees received by, or owing to, the

controlling producer;

(c) The controlling producer shall remit all funds due under the terms of the

contract to the controlled insurer on at least a monthly basis. The due date

shall be fixed so that pr emiums or installments collected shall be remitted no

later than ninety (90) days after the effective date of any policy placed with the

controlled insurer under this contract;

(d) All funds collected for the controlled insurer's account shall be held by t he

controlling producer in a fiduciary capacity, in one (1) or more appropriately

identified bank accounts in banks that are members of the federal reserve

system, in accordance with the provisions of the insurance code, as applicable.

Funds of a controlli ng producer not required to be licensed in this state shall

be maintained in compliance with the requirements of the controlling

producer's domiciliary jurisdiction;

(e) The controlling producer shall maintain separately identifiable records of

business written for the controlled insurer;

(f) The contract shall not be assigned in whole or in part by the controlling

producer;

(g) The controlled insurer shall provide the controlling producer with its

underwriting standards, rules and procedures, and with manu als stating the

rates to be charged and the conditions for the acceptance or rejection of risks.

The controlling producer shall adhere to the standards, rules, procedures,

rates, and conditions. The standards, rules, procedures, rates, and conditions

shall be the same as those applicable to comparable business placed with the

controlled insurer by a producer other than the controlling producer;

(h) The rates and terms of the controlling producer's commissions, charges, or

other fees and the purposes for tho se charges or fees. The rates of

commissions, charges, and other fees shall be no greater than those applicable

to comparable business placed with the controlled insurer by producers other

than the controlling producers. For purposes of this paragraph and paragraph

(g) of this subsection, examples of "comparable business" include the same

lines of insurance, same kinds of insurance, same kinds of risks, similar policy

limits, and similar quality of business. This paragraph does not authorize

controlling pro ducers to charge fees which the controlling producer is not

otherwise permitted to charge under the provisions of the insurance code;

(i) If the contract provides that the controlling producer, on insurance business

placed with the insurer, is to be compen sated contingent upon the insurer's

profits on that business, then such compensation shall not be determined and

paid until at least five (5) years after the premiums on liability insurance are

earned and at least one (1) year after the premiums are earned on any other

insurance. In no event shall the commissions be paid until the adequacy of the

controlled insurer's reserves on remaining claims has been independently

verified pursuant to subsection (3) of this section;

(j) A limit on the controlling produc er's writings in relation to the controlled

insurer's surplus and total writings. The insurer may establish a different limit

for each line or subline of business. The controlled insurer shall notify the

controlling producer when the applicable limit is ap proached and shall not

accept business from the controlling producer if the limit is reached. The

controlling producer shall not place business with the controlled insurer if it

has been notified by the controlled insurer that the limit has been reached; and

(k) The controlling producer may negotiate, but shall not bind, reinsurance on

behalf of the controlled insurer on business the controlling producer places

with the controlled insurer, except that the controlling producer may bind

facultative reinsurance contracts pursuant to obligatory facultative agreements,

if the contract with the controlled insurer contains underwriting guidelines, for

both reinsurance assumed and ceded, which include a list of reinsurers with

automatic agreements that are in effect , the coverages and amounts or

percentages that may be reinsured, and commission schedules.

(3) Every controlled insurer shall have an audit committee of the board of directors

composed of independent directors. The audit committee shall annually meet with

the management, the insurer's independent certified public accountants, and an

independent casualty actuary or other independent loss reserve specialist acceptable

to the commissioner to review the adequacy of the insurer's loss reserves.

(4) Reporting requirements are as follows:

(a) In addition to any other required loss reserve certification, the controlled

insurer shall annually, on April 1 of each year, file with the commissioner an

opinion of an independent casualty actuary, or other independent loss reserve

specialist acceptable to the commissioner, reporting loss ratios for each line of

business written and attesting to the adequacy of loss reserves established for

losses incurred and outstanding as of the end of the year, including incurred

but not reported losses, on business placed by the producer; and

(b) The controlled insurer shall annually report to the commissioner the amount

of commissions paid to the producer, the percentage that amount represents of

the net premiums written, and comparable amounts and percentage paid to

noncontrolling producers for placements of the same kinds of insurance.