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NAIC proposes rule change to close loophole around related-party investments

The National Association of Insurance Commissioners has proposed a rule change that aims to close a loophole that allowed some insurers to mask related-party investments.

The proposed change comes in light of The Wall Street Journal investigation that revealed that Eli Global LLC founder and owner Greg Lindberg had invested some $2 billion of assets from life insurance companies purchased since 2014 into his own businesses. The funds were moved through intermediaries to allow them to be declared as non-related party transactions, something that a Lindberg spokesman told the Journal had been authorized by North Carolina regulators.

The new NAIC proposal would require a judgment on whether a transaction involves related parties to consider "the substance of the agreement and the parties whose actions or performance materially impact the insurance reporting entity under the transaction." The text cited as an example an investment acquired from a non-related intermediary for which the investment return is primarily contingent on the performance of a related party.

It also says "the mere inclusion of a non-related intermediary" should not be used as the basis for concluding that a transaction need not be identified and reported under related-party disclosure rules.

A NAIC spokesperson said in an email that the proposed rule change is something that NAIC "has been working on for a while." The spokesperson added that the NAIC regularly reviews matters and "seeks to provide greater clarity and transparency around its rules and guidance."

Separately, North Carolina Commissioner Mike Causey has been working on proposed legislation, which if approved "would provide protection to policyholders by limiting the amount that may be invested in affiliates to 10% of admitted assets or 50% of policyholder surplus," he said.

Causey said the NAIC's proposed changes "appear to be a good start to closing loopholes."

The NAIC rule change was proposed March 22 and is on the agenda for an April 6 meeting of NAIC's statutory accounting principles working group.