Definition:Intercompany agreement review
📋 Intercompany agreement review is the regulatory and due-diligence process through which state insurance regulators and transaction parties scrutinize the contracts that exist among entities within an insurance holding company system. These agreements — which can include tax-sharing arrangements, management services agreements, reinsurance treaties, cost-sharing arrangements, and investment management contracts — govern how money, services, and risk flow between an insurer and its affiliates. In the insurance context, regulators pay close attention to these agreements because they can be conduits for draining capital from a regulated entity to benefit unregulated parent or sister companies.
⚙️ Under the Insurance Holding Company System Regulatory Act adopted in most states, material intercompany agreements involving a domestic insurer must be filed with and, in many cases, affirmatively approved by the domiciliary regulator before they take effect. During a merger or acquisition, the acquiring party's due-diligence team combs through every such agreement to assess whether terms are arm's-length, whether pricing is fair, and whether any arrangement creates hidden liabilities or ongoing cash leakage. Regulators conduct their own parallel review when evaluating a Form A change-of-control application, often requiring the acquirer to amend or terminate agreements that appear one-sided or that could impair the insurer's surplus position post-close.
🔎 The stakes of getting this review right are substantial. A poorly structured services agreement that charges above-market fees to the regulated entity can steadily erode RBC ratios, while an internal reinsurance arrangement on non-arm's-length terms can mask the true risk profile of the insurer. Regulators have grown increasingly sophisticated in their examination of these contracts — in part because several high-profile insolvencies were preceded by aggressive intercompany transfers that went undetected until it was too late. For acquirers, a thorough intercompany agreement review is not merely a compliance checkbox; it is a critical safeguard against inheriting structural value leakage that may not appear on any single financial statement.
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