NAIC Risk Retention Group (E) Task Force Meeting Recap

 

A meeting of the National Association of Insurance Commissioners (“NAIC”) Risk Retention Group (E) Task Force took place on November 13, 2007 via conference call.  The Task Force is part of the NAIC’s Financial Condition Committee.  Its charge is to consider what accreditation standards should apply to Risk Retention Groups (“RRGs”) chartered under captive laws.

The purpose of this conference call was to discuss comments and revisions made to the draft form of the RRGs Licensed as Captive Insurers.

The new revisions and comments will be incorporated into a revised draft that will be circulated prior to the upcoming NAIC National meeting in Houston. 

During the conference call, in addition to specific revisions and poignant comments made regarding the language and substantive aspects of the draft, there were a number of general comments made and broad opinions expressed about the nature of the market and the effective regulation of RRGs.  These comments did not necessitate revisions of the exposed draft; however, they were made so as to advise the drafters of the context and framework in which these proposed regulations need to effectively function. 

Most notable among the general comments made during the conference call, was the widely expressed opinion by the Commissioners that these regulations should function first and foremost as general standards/guidelines and not be interpreted in absolute terms.  Much attention was paid to wording the revised provisions in such a way as to allow for maximum discretionary flexibility of the Commissioners in regard to the acceptability or non-acceptability of prospective RRGs.

More specifically, the group made clear that Paragraph I, sub-paragraph A would include reference to each states’ relevant reinsurance statute instead of the one included in the circulated draft, so that the guidelines for the credit for reinsurance would be clearly identified.

The group focused upon Paragraph I, sub-paragraph C pertaining to the requirements for Credit for Reinsurance.  As circulated prior to this conference call, Paragraph I sub-paragraph C read:

I.  Permitted Reinsurance

C. Credit for reinsurance may be permitted if the reinsurer satisfies all of the following requirements or any other requirements deemed necessary by the Commissioner.
 
(1) Captive manager or risk retention group licensed as a captive insurer shall file annually, or before June 30, or at the request of the Commissioner or if the captive manager or risk retention group thinks it appropriate to file more often, the reinsurer’s audited financial statements, which shall be analyzed by the Commissioner to assess the appropriateness of the reserve credit or the initial and continued financial condition of the reinsurer;

(2) Reinsurer shall demonstrate to the satisfaction of the Commissioner that it maintains a ratio of net written premium, wherever written, to surplus and capital of not more than 3 to 1;

(3) Affiliated reinsurer shall not write third-party business without obtaining prior written approval from the Commissioner;

(4) Reinsurer shall not use cell arrangements without obtaining prior written approval from the Commissioner;

(5) Reinsurer shall be domiciled in a jurisdiction acceptable to the Commissioner; and

(6) Reinsurer shall submit to the examination authority of the Commissioner.

The group decided to change the word “or” in the second line of sub-paragraph C to “and.”  The purpose of this change was to clarify that a Commissioner must consider the provisions set forth in sub-paragraph (1) through (6) in addition to “any other requirements deemed necessary” by a Commissioner.  Although a “Commissioner may waive one but not all of the reinsurance requirements under section I.C.,” the change was made to assure that the criteria in sub-paragraph (1) through (6) could not be wholly disregarded in the discretion of a Commissioner.  Instead, the provisions will function as minimal requirements upon which a Commissioner may impose additional requirements at his/her discretion. 

The group also focused upon Paragraph I, sub-paragraph C (5), which originally read: “Reinsurer shall be domiciled in a jurisdiction acceptable to the Commissioner.”  California voiced an opinion held by all that this sub-paragraph should read: “Reinsurer shall be licensed and domiciled in a jurisdiction acceptable to the Commissioner.”  The group agreed that “licensed” means something different than “domiciled” and, although the implication in the original wording was that any such reinsurer would naturally have to be licensed in its jurisdiction of domicile, this was one rule that the group did not want to leave open to any interpretation.   

Regarding the provision contained in sub-paragraph I.C(5), requiring reinsurers to be licensed and domiciled in a jurisdiction acceptable to the Commissioner, the group felt that this provision was too important to allow it to be waived as provided for in Paragraph IV.  Paragraph IV reads:

IV. The Commissioner may waive one but not all of the reinsurance requirements under section I.C. in circumstances where the risk retention group licensed as a captive insurer or reinsurer can demonstrate to the satisfaction of the Commissioner that the reinsurer is sufficiently capitalized as detailed in the most recent audited financial statements, and the proposed reinsurance agreement adequately protects the risk retention group licensed as a captive insurer, and its policyholders.

Instead of changing the wording of Paragraph IV so as to create a carve-out exception for provision sub-paragraph I.C(5), the group decided to add this requirement to Paragraph I, sub-paragraph B so that it is clear it may not be waived.  Paragraph I, sub-paragraph B originally read:

I. Permitted Reinsurance

B. Credit for reinsurance may be permitted if the reinsurer maintains  an A- or higher A.M. Best rating, or other rating from a rating agency acceptable to the Commissioner, and the reinsurer  maintains a minimum policyholder surplus in an amount  acceptable to the Commissioner as detailed in the most recent  audited financial statements; or

The group added the language; “and is licensed in its jurisdiction of domicile” to the language of sub-paragraph I.B. 

New York expressed the opinion that the provision requiring the annual filing of financial statements was equally important and should not be waivable by a Commissioner/Risk Retention Regulator.  Sub-paragraph C provision 1 reads: 

C. Credit for reinsurance may be permitted if the reinsurer satisfies all of the following requirements or any other requirements deemed necessary by the Commissioner.
 
(1) Captive manager or risk retention group licensed as a captive insurer shall file annually, or before June 30, or at the request of the Commissioner or if the captive manager or risk retention group thinks it appropriate to file more often, the reinsurer’s audited financial statements, which shall be analyzed by the Commissioner to assess the appropriateness of the reserve credit or the initial and continued financial condition of the reinsurer;

However, the group decided not to change this provision since it wanted to maintain maximum  discretionary flexibility for Risk Retention Regulators. 

It was asked if the provision in sub-paragraph I.C(6) should be waivable.  Sub-paragraph C, provision 6 reads:

C. Credit for reinsurance may be permitted if the reinsurer satisfies all of the following requirements or any other requirements deemed necessary by the Commissioner.

(6) Reinsurer shall submit to the examination authority of the Commissioner.

This provision not modified.  However, the group discussed why RRGs should be subject to stricter regulation than insurance companies.  The reason suggested was that RRGs have less capital.

Finally, the group agreed that Paragraph VI needed to include some additional language to clarify that it is a transitional rule.  No specific language was adopted to effectuate this change.  However, this issue was taken into advisement and proposed language will be included in the next draft.  Paragraph VI reads:

VI. Risk retention groups licensed as captive insurers shall be permitted to take credit for reinsurance for risks ceded to reinsurers not in compliance with these regulations for a period not to exceed six (6) months from the effective date of these regulations.

 

We will continue to monitor this issue and provide further information as it becomes available. 

Should you have any comments or questions, please do not hesitate to contact this office.