7/30/2019 13 NATL ASSN INS. COMMRS, FINANCIAL CONDITION EXAMINERS HANDBOOK 1-50 to -51

1/2

1-50

12100

FINANCIAL CONDITION EXAMINERS HANDBOOKd. Affiliates But No TransactionsSometimes two or more entities are under common ownership or management control, but do nottransact business between or among themselves. The mere existence of common control mayresult in operating results or financial position significantly different from what would haveoccurred if the entities were autonomous. For example, two or more entities in the same line ofbusiness may be commonly controlled by a party with the ability to increase or decrease thevolume of business done by each (i.e., the ability to exercise significant influence over theoperations of each entity).e. Typical Examination ProceduresThe following examination procedures typically are considered to identify afTtliates andafflliated transactions.

The review and evaluation of internal accounting control and an understandingof the entity's business and operating environment should be sufficient torecognize whether significant transactions are occurring and are not being givenaccounting recognition. Examples: a company provides accounting andmanagement services to an affiliate at no charge; a major shareholder absorbscorporate expenses. Determine and evaluate the entity's procedures for identifying and properlyaccounting for affiliated transactions. Determine and evaluate the entity's procedures, if any, that prohibit individualdirectors or other members of management from exercising significant influenceover transactions in which that person is an affiliate.One means used by many entities to preclude such significant influence is to prohibit a directoror other member of management from voting or otherwise participating in any business decisionsin which that individual is an affiliate.In some cases, an affiliate may have participated in a business decision and it may not bepractical for the board to reconsider a previously approved transaction solely so that person canabstain from voting. In these instances, it usually is acceptable to obtain written representationfrom appropriate management and the affiliate that significant influence was not exercised,provided that by reference to the entity's minutes or otherwise, the examiners are able to satisfythemselves that the affiliate's vote does not influence the outcome of the board's decision (e.g.,the resolution was unanimously approved).If examiners have been unable to satisfy themselves as to the absence of significant influence, orconclude that a relationship or transaction merits attention of the board of directors, they mayrecommend subsequent reconsideration of an issue by the board of directors, with any affiliatesabstaining from voting.The following procedures provide an approach for detecting abuses that sometimes result fromholding company or affiliated relationships.Potential abuses :

(1) Misuse of insurance company assets through:i.

ii.

Shifting assets (particularly securities) from one affiliate to another forwindow-dressing purposes during examinations or at the fmancialstatement date;Making unsecured loans or advances to afflliates;

7/30/2019 13 NATL ASSN INS. COMMRS, FINANCIAL CONDITION EXAMINERS HANDBOOK 1-50 to -51

2/2

iii.iv.v.

PART 1 GENERAL 1-51Maintaining compensating bank balances for the benefit of an affiliate;Making inappropriate loans to affIliates or purchases of affIliatesecurities; or,Pledging assets to secure loans for affiliates.

(2) Siphoning of insurance company funds through:i. Dividends;ii. Management or service fees;iii. Payment of exorbitant reinsurance premiums to affiliates;iv. Inappropriate payment of the expense of affiliates; or,v. Misdirection of premiums or commissions to affIliate insurancecompanies or agencies.

(3) Other forms of misrepresentation:i. Creating nonexistent receivables due from affIliates for window-dressingpurposes during examination, or at the financial statement date;ii. Assuming the liabilities by/for an affiliate.

Techniques for deterring abuses:(1)(2)

(3)

Examine affIliates simultaneously;Appoint an affiliate coordinator for large or diffIcult examinations. Thecoordinator should be an experienced examiner and capable of supervisingothers. The coordinator may be either the examiner-in-charge or, in the case of avery large group, an examiner appointed by the examiner-in-charge;The coordinator's duties include:i. Reviewing and verifying the propriety of all legal documents (suppliedby management) supporting inter affIliate agreements or transactions(e.g., management or service contracts, guarantees or pledges of assets,intercompany loan agreements, agency contracts, inter affIliatereinsurance contracts, and current reports to the Securities ExchangeCommission) ;ii. Where necessary, coordinating the investigation of intercompanytransactions with the teams that are examining other affiliates;iii. Compiling a list of all entities that are affiliated with the company -together with an organization (intercompany) chart - including:

Any company holding a controlling interest in the companybeing examined; Companies that are controlled by a common holding company; Companies in which a director or offIcer has a substantialinterest; and, Companies controlled by the company being examined.iv. Supervising the examiners in the investigation of inter affiliaterelationships.

(4) Define the duties of the examiners which include:i. Develop a list of all significant inter affiliate transactions or balancesencountered during the selection and evaluation of data used in theexamination of the individual balance sheet accounts and evaluatecompliance with appropriate insurance laws.

12100