AT A GLANCE
The NAIC Risk-Focused Surveillance (E) Working Group (RFSWG) met via teleconference on February 26, 2025 and initiated a new project relating to the management fees paid by reciprocal interinsurance exchanges ("reciprocals") to their attorneys-in-fact.
BACKGROUND
The new project was launched in response to a referral from the NAIC's Chief Financial Regulator Forum, which met at the NAIC Fall National Meeting in November 2024. The Chief Financial Regulator Forum is a regulator-only group that meets in closed sessions and consists (as its name implies) of the chief financial regulators from each state's insurance department. The referral took the form of a memo from the chair of the Chief Financial Regulator Forum to the Chair of the RFSWG. The memo was included as Attachment B to the materials for the February 26 open meeting of the RFSWG and is available here.
CONCERNS RAISED BY THE FINANCIAL REGULATORS
The memo notes the recent increase in the number of reciprocals being formed and "challenges in assessing the fairness and reasonableness of attorney-in-fact fees being charged to the newly formed reciprocals." It goes on to identify three concerns:
- The fee structure for management services is often based on a percentage of gross premiums written, which may be difficult to evaluate for fairness/reasonableness by comparing against market rates or obtaining detail on the costs of services provided.
- 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.
- 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.
During the discussion at the February 26 RFSWG meeting, NAIC staff liaison Bruce Jenson commented that the conflict-of-interest issue is not limited to reciprocals, but can also apply in other contexts where a person engaged in underwriting is compensated based on premium volume.
NEXT STEPS
After discussion, the RFSWG voted to establish a subgroup of the RFSWG as a drafting group to study these issues and consider developing additional guidance for insurance departments to use in reviewing service agreements between reciprocals and their attorneys-in-fact.
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