44-4404. Risk retention group; charter and license requirements; governance standards; material service provider contract; term; audit committee; written charter; waiver of requirement; code of business conduct and ethics.
(1) A risk retention group seeking to be chartered and licensed in this state shall be chartered and licensed as a liability insurance company under Chapter 44 and, except as provided elsewhere in the Risk Retention Act, shall comply with all of the laws, rules, and regulations applicable to such insurers chartered and licensed in this state and with sections 44-4405 to 44-4413 to the extent such requirements are not a limitation on laws, rules, or regulations of this state.
(2) Before a risk retention group may offer insurance in any state, it shall submit for approval to the director a plan of operation and revisions of such plan if the group intends to offer any additional lines of liability insurance.
(3) At the time of filing its application for a charter and license, the risk retention group shall provide to the director in summary form the following information: The identity of the initial members of the group; the identity of those individuals who organized the group or who will provide administrative services or otherwise influence or control the activities of the group; the amount and nature of initial capitalization; the coverages to be afforded; and the states in which the group intends to operate. Upon receipt of this information, the director shall forward such information to the National Association of Insurance Commissioners. Providing notification to the National Association of Insurance Commissioners shall be in addition to and shall not be sufficient to satisfy the requirements of section 44-4405 or any other sections of the act.
(4) Subsections (5) through (11) of this section provide governance standards for risk retention groups licensed and chartered in this state. Any risk retention group in existence on January 1, 2017, shall be in compliance with such standards by January 1, 2018. Any risk retention group that is initially licensed on or after January 1, 2017, shall be in compliance with such standards at the time of licensure.
(5)(a) For purposes of this subsection:
(i) Board of directors or board means the governing body of the risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees, and make other governing decisions; and
(ii) Director means a natural person designated in the articles of the risk retention group or designated, elected, or appointed by any other manner, name, or title to act as a director.
(b) The board of directors of the risk retention group shall have a majority of independent directors. If the risk retention group is a reciprocal, then the attorney in fact would be required to adhere to the same standards regarding independence of operation and governance as imposed on the risk retention group’s board of directors or subscribers advisory committee under this subsection. To the extent permissible under state law, service providers of a reciprocal risk retention group should contract with the risk retention group and not the attorney in fact.
(c) No director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship with the risk retention group. Each risk retention group shall disclose these determinations to its domestic regulator at least annually. For this purpose, any person that is a direct or indirect owner of or subscriber in the risk retention group, or is an officer, director, or employee of such an owner and insured unless some other position of such officer, director, or employee constitutes a material relationship, as contemplated by section 3901(a)(4)(E)(ii) of the federal Liability Risk Retention Act of 1986, is considered to be independent.
(d) Material relationship of a person with the risk retention group includes, but is not limited to:
(i) The receipt in any one twelve-month period of compensation or payment of any other item of value by such person, a member of such person’s immediate family, or any business with which such person is affiliated from the risk retention group or a consultant or service provider to the risk retention group is greater than or equal to five percent of the risk retention group’s gross written premium for such twelve-month period or two percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in such a twelve-month period. Such person or immediate family member of such person is not independent until one year after his or her compensation from the risk retention group falls below the threshold;
(ii) A relationship with an auditor as follows: A director or an immediate family member of a director who is affiliated with or employed in a professional capacity by a present or former internal or external auditor of the risk retention group is not independent until one year after the end of the affiliation, employment, or auditing relationship; and
(iii) A relationship with a related entity as follows: A director or immediate family member of a director who is employed as an executive officer of another company where any of the risk retention group’s present executives serve on that other company’s board of directors is not independent until one year after the end of such service or the employment relationship.
(6)(a) The term of any material service provider contract with the risk retention group shall not exceed five years. Any such contract, or its renewal, shall require the approval of the majority of the risk retention group’s independent directors. The risk retention group’s board of directors shall have the right to terminate any service provider, audit, or actuarial contracts at any time for cause after providing adequate notice as defined in the contract. The service provider contract is deemed material if the amount to be paid for such contract is greater than or equal to five percent of the risk retention group’s annual gross written premium or two percent of its surplus, whichever is greater.
(b) For purposes of this subsection, service providers shall include captive managers, auditors, accountants, actuaries, investment advisors, lawyers, managing general underwriters, or other parties responsible for underwriting, determination of rates, collection of premiums, adjusting and settling claims, or the preparation of financial statements. Any reference to lawyers in this subdivision does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to such lawyers are material as referenced in subdivision (5)(d) of this section.
(c) No service provider contract meeting the definition of material relationship contained in subdivision (5)(d) of this section shall be entered into unless the risk retention group has notified the director in writing of its intention to enter into such transaction at least thirty days prior thereto and the director has not disapproved it within such period.
(7) The risk retention group’s board of directors shall adopt a written policy in the plan of operation as approved by the board that requires the board to:
(a) Assure that all owners or insureds of the risk retention group receive evidence of ownership interest;
(b) Develop a set of governance standards applicable to the risk retention group;
(c) Oversee the evaluation of the risk retention group’s management, including, but not limited to, the performance of the captive manager, managing general underwriter, or other party or parties responsible for underwriting, determination of rates, collection of premiums, adjusting or settling claims, or the preparation of financial statements;
(d) Review and approve the amount to be paid for all material service providers; and
(e) Review and approve, at least annually:
(i) The risk retention group’s goals and objectives relevant to the compensation of officers and service providers;
(ii) The officers’ and service providers’ performance in light of those goals and objectives; and
(iii) The continued engagement of the officers and material service providers.
(8)(a) The risk retention group shall have an audit committee composed of at least three independent board members as described in subsection (5) of this section. A nonindependent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of such committee.
(b) The audit committee shall have a written charter that defines the committee’s purpose, which, at a minimum, must be to:
(i) Assist board oversight of (A) the integrity of the financial statements, (B) the compliance with legal and regulatory requirements, and (C) the qualifications, independence, and performance of the independent auditor and actuary;
(ii) Discuss the annual audited financial statements and quarterly financial statements with management;
(iii) Discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor;
(iv) Discuss policies with respect to risk assessment and risk management;
(v) Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors;
(vi) Review with the independent auditor any audit problems or difficulties and management’s response;
(vii) Set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor;
(viii) Require the external auditor to rotate the lead or coordinating audit partner having primary responsibility for the risk retention group’s audit as well as the audit partner responsible for reviewing that audit so that neither individual performs audit services for more than five consecutive fiscal years; and
(ix) Report regularly to the board of directors.
(c) The domestic regulator may waive the requirement to establish an audit committee composed of independent board members if the risk retention group is able to demonstrate to the domestic regulator that it is impracticable to do so and the risk retention group’s board of directors itself is otherwise able to accomplish the purposes of an audit committee as described in subdivision (8)(b) of this section.
(9) The board of directors shall adopt and disclose governance standards, where disclose means making such information available through electronic or other means, including the posting of such information on the risk retention group’s website, and providing such information to members or insureds upon request, which shall include:
(a) A process by which the directors are elected by the owners or insureds;
(b) Director qualification standards;
(c) Director responsibilities;
(d) Director access to management and, as necessary and appropriate, independent advisors;
(e) Director compensation;
(f) Director orientation and continuing education;
(g) The policies and procedures that are followed for management succession; and
(h) The policies and procedures that are followed for annual performance evaluation of the board.
(10) The board of directors shall adopt and disclose a code of business conduct and ethics for directors, officers, and employees and promptly disclose to the board of directors any waivers of the code for directors or executive officers, which should include the following topics:
(a) Conflicts of interest;
(b) Matters covered under the corporate opportunities doctrine under the state of domicile;
(c) Confidentiality;
(d) Fair dealing;
(e) Protection and proper use of risk retention group assets;
(f) Compliance with all applicable laws, rules, and regulations; and
(g) Requiring the reporting of any illegal or unethical behavior which affects the operation of the risk retention group.
(11) The captive manager, president, or chief executive officer of the risk retention group shall promptly notify the domestic regulator in writing if he or she becomes aware of any material noncompliance with any of the governance standards provided in subsections (5) through (11) of this section.
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