Management, Service and Cost-Sharing Agreements

These instructions and the accompanying Delegation of Insurer Functions Checklist set forth guidelines for management, service and cost-sharing arrangements that domestic or commercially domiciled insurers may enter into with an affiliate as defined under California Insurance Code Section 1215. The Department will require that the agreement be in writing and be accompanied with the NAIC Form D - Prior Notice of a Transaction Application and the current California Department of Insurance filing fee. The written agreement must cover any function that is delegated to an affiliate and include the safeguard provisions, as indicated in the Delegation of Insurer Functions Checklist, to ensure that the Applicant retains sufficient control of its insurance business. A sample agreement is provided with these instructions. 

Please submit the following documentation/information with the application:

1. Cover Letter
   
   
2. Original and one copy of the NAIC Form D - Prior Notice of a Transaction Application, proposed agreement among applicant and affiliates, and related exhibits.  The Legal Division and the Financial Analysis Division of the Department will simultaneously review the agreement.
   
   
3. Identify the type of agreement.  The following are examples of different types of agreements that may be submitted:
   • Facility-sharing agreement
   • Investment agreement
   • General agent or Managing General agent agreement
   • Advisory/Management/Cost-Sharing agreement (covering budget, personnel, accounting, tax, legal, actuarial, computer services, etc.)
   • Service agreement
     
4. The Delegation of Insurer Functions Checklist (download applicable checklists in MS-Excel format: (a) Management, Service Agreement; (b) Tax-Sharing Agreement) must be completed and submitted with the application. If this application relates to an amendment to an existing agreement, a copy of the original agreement and an underlined/redlined version of the proposed agreement must be included with the application.
   
   
5. Provide justification why the insurer cannot perform the service(s) in-house. In the case that the insurer has entity(ies) currently performing the services, provide justification why the insurer intends to replace the current provider(s). Include the name of the entity (ies) currently performing the service(s).   Identify the entity(ies) who will be performing the service(s). 
   
   
6. Explain the benefits/advantages of entering into this agreement.  This should include the following information: (a) Actual costs incurred by the applicant for the services to be provided, for each of the past three (3) calendar years; (b) Projected costs to be incurred by the applicant under the terms of the proposed agreement, for each of the next three (3 ) calendar years.
   
   
7. Does the service provider supply similar services to other entities (affiliates or non-affiliates)?  If yes, provide the compensation being paid by the entity(ies) and the basis for such compensation.
   
   
8. Provide the commission rate to be charged by the service provider (applicable to underwriting services only).
   
   
9. Provide a detailed description of the method of cost allocation for indirect and shared expenses of the parties.  In accordance with SSAP No. 70, shared expenses shall be apportioned to the entities that incurred the expense as if the expense had been paid solely by the incurring entity.  The apportionment shall be completed based upon specific identification to the entity incurring the expense.  However, where specific identification is not feasible, the apportionment shall be based on pertinent factors or ratios.
   
   
10. California Insurance Code Section 1215.5(a) specifies that the terms for transactions with affiliates shall be fair and reasonable.  In the Department's experience, service fees that contain a profit factor cannot ordinarily be justified under these standards. However, the Department will consider and review such arrangements if the applicant can demonstrate that its fees are reasonable. For example, under investment management agreements, it is standard within the investment industry to use percentage of assets to determine fees and not actual costs, and the Department has and will take such circumstances into consideration.   If the services are provided at cost, Applicant should include language that states "the compensation shall be based on actual cost without a profit factor built into cost.   The indirect and shared expenses shall be allocated in accordance with a method of cost allocation in conformity with SSAP No. 70."
    
    
11. Organizational Chart identifying the applicant and affiliates.
    
    
12. Filing fee (refer to CDI Public Website under Schedule of Fees and Charges).
    

Source: CDI Public Website for Management, Service and Cost-Sharing agreements