Risk Retention Groups — Permitted Liability Insurance — Plan of Operation or Feasibility Study — Application for Charter — Contents — Governance Standards
Risk Retention Groups — Permitted Liability Insurance — Plan of Operation or Feasibility Study — Application for Charter — Contents — Governance Standards
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A risk retention group shall, pursuant to this chapter, be chartered and licensed to write only liability insurance pursuant to this chapter and, except as provided elsewhere in this chapter, must comply with all of the laws, rules, regulations and requirements applicable to the insurers chartered and licensed in this state and with § 56-45-104, to the extent the requirements are not a limitation on laws, rules, regulations or requirements of this state.
Before it may offer insurance in any state, each risk retention group shall also submit for approval to the commissioner a plan of operation or feasibility study. The risk retention group shall submit an appropriate revision in the event of any subsequent material change in any item of the plan of operation or feasibility study, within ten (10) days of the change. The group shall not offer any additional kinds of liability insurance, in this state or in any other state, until a revision of the plan or study is approved by the commissioner.
At the time of filing its application for a charter, the risk retention group shall provide to the commissioner 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 commissioner shall forward the information to the National Association of Insurance Commissioners.
Providing notification to the National Association of Insurance Commissioners is in addition to, and does not suffice as, satisfying the requirements of § 56-45-104 or any other sections of this chapter.
Governance Standards For Risk Retention Groups. Within one (1) year of April 7, 2016, existing risk retention groups shall ensure compliance with the following governance standards. Risk retention groups that are licensed on or after April 7, 2016, shall be in compliance with the following standards at the time of licensure:
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/subscribers advisory committee under the standards set out in this subsection (d); and, 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;
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 purposes of this subdivision (d)(1)(B), any person who 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 15 U.S.C. § 3901(a)(4)(E)(ii) of the Liability Risk Retention Act, is considered to be “independent;”
Service Provider Contracts.
The term of any material service provider contract with the risk retention group shall not exceed five (5) 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 contract at any time for cause after providing adequate notice pursuant to the terms of 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 (5%) of the risk retention group's annual gross written premium or two percent (2%) of its surplus, whichever is greater;
No service provider contract constituting a material relationship shall be entered into unless the risk retention group has notified the commissioner in writing of its intention to enter into such transaction at least thirty (30) days prior to entering into the proposed transaction and the commissioner has not disapproved it within such period;
Written Policy. 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:
Assure that all owner and insureds of the risk retention group receive evidence of ownership interest;
Develop a set of governance standards applicable to the risk retention group;
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 premium, adjusting or settling claims, or the preparation of financial statements;
Review and approve the amount to be paid to material service providers; and
Review and approve, at least annually:
The risk retention group's goals and objectives relevant to the compensation of officers and service providers;
The officers' and service providers' performance in accordance with those goals and objectives; and
The continued engagement of the officers and material service providers;
Audit Committee.
The risk retention group shall have an audit committee composed of at least three (3) independent board members. A non-independent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of such committee;
The audit committee shall have a written charter that defines the committee's purpose, which, at a minimum, must be to:
Assist board oversight of the:
Integrity of the risk retention group's financial statements;
Compliance with legal and regulatory requirements; and
Qualifications, independence, and performance of the independent auditor and actuary;
Discuss the annual audited financial statements and quarterly financial statements with management;
Discuss the annual audited financial statements with the independent auditor and, if advisable, discuss quarterly financial statements with the independent auditor;
Discuss policies with respect to risk assessment and risk management;
Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors;
Review with the independent auditor any audit problems or difficulties and management's response;
Set clear hiring policies of the risk retention group regarding the hiring of employees or former employees of the independent auditor;
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 a particular risk retention group for more than five (5) consecutive fiscal years; and
Report regularly to the board of directors;
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 (d)(4)(B);
Governance Standards. The board of directors shall adopt governance standards and shall make such standards available electronically, including, but not limited to, posting such information on the risk retention group's web site, or by other means, and provide such information to members/insureds upon request. Governance standards shall include:
The process by which the directors are elected by the owner and insureds;
Director qualification standards;
Director responsibilities;
Director access to management and, as necessary and appropriate, independent advisors;
Director compensation;
Director orientation and continuing education;
Management succession policies and procedures; and
The policies and procedures that are followed for annual performance evaluation of the board;
Business Conduct and Ethics. 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. The code shall address the following topics:
Conflicts of interest;
Matters subject to the corporate opportunities doctrine under the group's state of domicile;
Confidentiality;
Fair dealing;
Protection and proper use of risk retention group assets;
Compliance with all applicable laws, rules, and regulations; and
Mandatory reporting of any illegal or unethical behavior which affects the operation of the risk retention group;
The captive manager, president, or chief executive officer of the risk retention group shall promptly notify the domestic regulator in writing if either becomes aware of any material noncompliance with any of these governance standards; and
For purposes of this subsection (d):
“Board of directors” or “board” means the governing body of the risk retention group elected by the owners and insureds to establish policy, elect or appoint officers and committees, and make other governing decisions;
“Director” means a natural person designated in the formation documents of the risk retention group, or designated, elected or appointed by any other manner, name or title to act as a director;
“Material relationship” includes, but is not limited to:
The receipt, in any twelve-month period, of compensation or payment of any other item of value by a person, a member of the person's immediate family or any business with which the person is affiliated from the risk retention group, or a consultant or service provider to the risk retention group that is greater than or equal to five percent (5%) of the risk retention group's gross written premium for such twelve-month period or two percent (2%) of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in such twelve-month period. Such person or the person's immediate family member shall not be independent until one (1) year after the person's compensation from the risk retention group falls below the threshold;
In regards to a relationship with an auditor, 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 (1) year after the end of the affiliation, employment, or auditing relationship; or
In regards to a relationship with a related entity, 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 (1) year after the end of such service or the employment relationship; and
“Service providers” includes captive managers, auditors, accountants, attorneys, actuaries, investment advisors, managing general underwriters or other parties responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims, or the preparation of financial statements. Any reference to attorneys in this subdivision (d)(8)(D) does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to such attorneys are material as referenced in subdivision (d)(8)(C).