Materiality, Fairness, and Reasonableness of Certain Affiliated Transactions

PURPOSE: The purpose of this rule is to carry out the provisions of section 382.190, RSMo. Specifically, this rule provides the standards by which the director will determine whether a transaction is material for purposes of section 382.190(1) and (2), RSMo, whether the terms of material transactions between a registered insurer and its affiliates are “fair and reasonable” for purposes of section 382.190(1), RSMo, and whether charges or fees for services are “reasonable” for purposes of section 382.190(2), RSMo. (1) A transaction is a “material transaction” for purposes of section 382.190(1) and (2), RSMo, if: (A) It involves a registered insurer and one (1) or more of its affiliates; and (B) Such transaction, including amendments or modifications to an existing material transaction: 1. Involves more than one-half of one percent (0.5%) of such insurer’s admitted assets as of the thirty-first day of December next preceding the transaction; or 2. Is part of a plan or series of like transactions with persons within the same holding company system as such insurer and the purpose or effect of such transactions is to avoid the threshold established in paragraph 1. of subsection (B) of this section and thus avoid the review that would otherwise occur. (2) A transaction which is not a material transaction need not comply with the standards set forth in section 382.190(1) and (2), RSMo. (3) Standards for Charges, Fees, and Other Consideration: (A) For Services. 1. The charges, fees, or other consideration paid by the registered insurer to an affiliate for a service shall not exceed the direct cost to the registered insurer. “Direct cost” means the expenses and costs to the registered insurer of directly performing substantially the same service for itself. The direct cost is determined by consistently applied, objectively verifiable, generally recognized, internal accounting practices. 2. If and only if the registered insurer cannot determine its direct cost, the charge or fee paid by the registered insurer to an affiliate for a service shall not exceed the cost of obtaining substantially the same service on the open market. A service is obtained on the open market where the service is obtainable from a person— A. Who is not affiliated with the insurer; and B. Either— (I) Whose cost to the insurer represents the lowest and best bid for such service, such bid having been submitted in response to a request for proposal in a competitive bidding process approved by the director; or (II) Whose cost to the insurer represents a price that is, with respect to substantially the same service, typical of the price paid by other persons who are affiliated with neither the vendor nor the insurer. (B) For Assets or Goods. The charges, fees, or other consideration paid by the registered insurer to an affiliate for an asset or good shall not exceed the cost of obtaining substantially the same asset or good on the open market. An asset or good is obtained on the open market where the asset or good is obtainable from a person— 1. Who is not affiliated with the insurer; and 2. Either— A. Whose cost to the insurer represents the lowest and best bid for such asset or good, such bid having been submitted in response to a request for proposal in a competitive bidding process approved by the director; or B. Whose cost to the insurer represents a price that is, with respect to substantially the same asset or good, typical of the price paid by other persons who are affiliated with neither the vendor nor the insurer. (C) Notwithstanding the provisions of subsections (A) and (B) of this section, a transaction between a registered insurer and its affiliate will be deemed fair and reasonable if the transaction is the direct result of a winning bid submitted by the affiliate in a competitive bidding process that has been approved by the director. (4) The director will presume that a material transaction is fair and reasonable if such material transaction complies with the standards set forth in section (3) of this rule. The director will presume that a material transaction is neither fair nor reasonable if such material transaction does not comply with the standards set forth in section (3) of this rule. Any person may seek during the appropriate administrative proceeding (e.g., a Form D or an examination) to rebut a presumption created by this section, but evidence relating to whether a transaction is fair or reasonable will be viewed with a bias in favor of the applicable presumption. AUTHORITY: sections 374.045 and 382.240, RSMo 2016.* Original rule filed Dec. 4, 2001, effective June 30, 2002. Amended: Filed Dec. 13, 2018, effective July 30, 2019. *Original authority: 374.045, RSMo 1967, amended 1993, 1995, 2008 and 382.240, RSMo 1971.