RISK RETENTION GROUP (E) TASK FORCE

© 2007 National Association of Insurance Commissioners

RISK RETENTION GROUP (E) TASK FORCE Risk Retention Group (E) Task Force Sept. 29, 2007 Minutes

Letter from Robert H. Myers, Jr. (Morris, Manning & Martin LLP) dated Sept. 26, 2007 to Julie Glaszczak (NAIC) regarding Reinsurance Guidelines Comments (Attachment One)

District of Columbia Reinsurance Regulations for Risk Retention Groups Licensed as Captive Insurers, dated Sept. 11, 2007 (Attachment Two)

Memorandum from Julie Glaszczak (NAIC) to Members of the Risk Retention Group (E) Task Force regarding Proposed 2008 Charges, dated Sept. 19, 2007 (Attachment Three)

Risk Retention Group (E) Task Force Sept. 11, 2007 Minutes (Attachment Four) District of Columbia Reinsurance Regulations for Captive Insurers Draft, dated July 18, 2007 (Attachment Four-A) Part A Accreditation Standard – Reinsurance Ceded dated July 2, 2007 (Attachment Four-B) Letter from Robert H. Myers, Jr. (Morris, Manning & Martin LLP) dated Aug. 22, 2007 to Julie Glaszczak (NAIC)

regarding Reinsurance Guidelines – Comments (Attachment Four-C) Letter from Molly Lambert (Vermont Captive Insurance Association) dated Aug. 22, 2007 to Julie Glaszczak

regarding Reinsurance Guidelines for Risk Retention Comments (Attachment Four-D) Letter from Kimberly M. Welsh (Reinsurance Association of America—RAA) to Julie Glaszczak (NAIC) dated

Aug. 27, 2007, regarding Risk Retention Group Comments on the Proposed “Significant Changes to Part A Reinsurance Standards” (Attachment Four-E)

Letter from Peter Raymond (Vermont Department of Captive Insurance) to Julie Glaszczak (NAIC) dated Aug. 27, 2007, regarding Reinsurance Guidelines Comments (Attachment Four-F)

E-Mail Comments received from Craig Watanabe (HI) dated Sept. 10, 2007, regarding Reinsurance Guidelines (Attachment Four-G)

Risk Retention Group (E) Task Force July 18, 2007 Minutes (Attachment Five) District of Columbia Reinsurance Provisions (Attachment Five-A) District of Columbia Reinsurance Regulations for Captive Insurers (Attachment Five-B) Part A Accreditation Standard – Reinsurance Ceded, dated June 26, 2007 (Attachment Five-C)

© 2007 National Association of Insurance Commissioners 1

Drafted: 10/3/07

Risk Retention Group (E) Task Force Washington, D.C.

September 29, 2007 The Risk Retention Group (E) Task Force met in Washington, D.C., Sept. 29, 2007. A quorum was present; Scott Richardson represented by Leslie Jones (SC) chaired the meeting. The following Task Force members were present: Kent Michie, Vice Chair represented by Don Spann (UT); Walter Bell represented by Richard Ford and Sheila Travis (AL); Christina Urias represented by Steve Ferguson (AZ); Steve Poizner represented by Jill Jacobi and Bob Loo (CA); Thomas E. Hampton (DC); Matt Denn represented by Al Franz and William White (DE); Kevin McCarty represented by Claude Mueller (FL); J.P. Schmidt represented by Craig Watanabe (HI); Julie McPeak represented by David Hurt (KY); Glenn Wilson represented by Jaki Gardner (MN); Steven M. Goldman represented by Bob Kasinow (NJ); Alice Molasky-Arman represented by Gary Cooper (NV); Eric Dinallo represented by Larry Levine (NY); Kim Holland represented by Karl Kramer (OK); Paulette Thabault represented by Peter Raymond (VT); and Mike Kreidler represented by Patrick McNaughton (WA). 1. Approve Minutes from Interim Conference Calls Commissioner Hampton moved and Ms. Jacobi seconded a motion to adopt the minutes from the Task Force’s interim conference calls held on July 18, 2007 (Attachment Five), and Sept. 11, 2007 (Attachment Four). The motion passed unanimously. 2. Discuss Part A: Reinsurance Ceded Accreditation Standard Ms. Jones briefly summarized the work that the Task Force has done to date on the Part A accreditation standards. She then noted that the Task Force is currently working on the last Part A standard it has yet to finalize, which is Reinsurance Ceded. She noted that as a result of the July 18, 2007 conference call, the draft guidelines that had been provided to the Task Force by the District of Columbia were released for comment. Five comment letters were received and were subsequently discussed on the Sept. 11, 2007, conference call. Based on some significant revisions made to the draft guidelines as a result of the latter conference call, the Task Force re-released the document for comment. This latest comment period does not end until Oct. 15, 2007; however, one comment letter had already been submitted prior to this Fall National Meeting. Skip Myers (National Risk Retention Association) provided a summary of his comment letter (Attachment One). There were no questions or comments for Mr. Myers from Task Force members or the audience. Dana Sheppard (DC) provided a brief summary of the updated draft reinsurance guidelines (Attachment Two). Ms. Jacobi noted that the current title of the document is the “District of Columbia Reinsurance Regulations for Risk Retention Groups Licensed as Captives.” She suggested that the reference to the District of Columbia be deleted. There was no objection from Mr. Sheppard or any of the Task Force members. Ms. Jacobi also questioned if licensure of the reinsurer was something that is required and/or reviewed by the District of Columbia. Mr. Sheppard asked if she was referring to licensure of the risk retention group’s (RRG) state of domicile or where the reinsurer has to be licensed in general. Ms. Jacobi explained that she was referring to the latter. Mr. Sheppard noted that the proposed guidelines do not discuss this in detail; however, the District of Columbia’s practice has been to look at the domicile of where the reinsurer is located (e.g., Bermuda, Cayman and Barbados because they are comfortable with the regulatory bodies in those domiciles). If a company was domiciled in a jurisdiction other than the three previously noted, the District of Columbia would take a much closer look at that company and reserves the right to reject that reinsurer even if it had an acceptable A.M. Best rating. Ms. Jacobi stated that it might be helpful to note that the reinsurer is licensed in a specific jurisdiction and not just domiciled there. Commissioner Hampton noted that domiciled is more pertinent for the District of Columbia because a reinsurer could be domiciled in a non-Bermuda jurisdiction (for example) that might be licensed in Bermuda; however, these regulations would only be applicable to those companies domiciled in Bermuda because that body would have full regulatory authority over those companies domiciled in its jurisdiction. Ms. Jacobi suggested a friendly amendment to the regulations to state “… domiciled and licensed …” There was no objection from the Task Force. Mr. Raymond noted that, as opposed to looking at the regulatory scheme of another domicile, Vermont ensures that it receives and reviews the audited financial statements of the reinsurer and, thus, relies more on the auditors of that company than its respective domiciliary regulator. Ms. Jones asked if Vermont was in a circumstance similar to section I.B. of the guidelines, would they impose an additional requirement to obtain the audited financial statements of that insurer. Mr. Raymond responded in the affirmative noting that Vermont would require the company’s audited financial statements


regardless because they have to approve them on an annual basis. He also noted that this provides a standard procedure that Vermont follows that shows an accreditation team a process that is always completed for each domestic annually. Ms. Jacobi referenced sections I.B. and IV. and asked if the phrase “audited financial statements” needed to be included in order for a regulator to be able to make the determination that a reinsurer is sufficiently capitalized. Mr. Raymond noted that Vermont does not accept financial statements prepared by company management but requires the audited financial statements. Mr. Watanabe noted that Hawaii reviews audited financial statements if they are available and also other similar documents such as an examination report from the domiciliary regulator. Commissioner Hampton agreed with the discussion and recommended adding the phrase “as detailed in the most recent audited financial statements” at the end of section I.B. and also in section IV. so that it would now read, “… the reinsurer is sufficiently capitalized as detailed in the most recent audited financial statements, and the ….” Mr. Loo asked if a commissioner has discretion to lower the minimum amount of policyholder surplus required in section I.B. Ms. Jones responded in the affirmative. Mr. Loo then asked if the phrase “one or more” in section IV. could also mean “all of the above”. He suggested that if it did then a commissioner would have the discretion to waive all of the items noted in I.C. if he felt this was acceptable. Mr. Kramer asked if the District of Columbia could summarize why the commissioner discretion language was included in these guidelines. Commissioner Hampton explained that there could be a hypothetical situation where a commissioner would allow a large, well-known reinsurer to take credit for reinsurance without requiring that reinsurer to go through and satisfy all of the requirements detailed in section I.C. because the commissioner would already know that this reinsurer would be able to address each of those six requirements. Mr. Loo suggested that the words “or more” in the first sentence of section IV. be changed to “but not all” and that the phrase “under section I.C.” be added after the words “reinsurance requirements.” There was no objection from the Task Force. Mr. Kasinow asked what policy was being referred to in section V. Mr. Sheppard noted that the reference was to the proposed guidelines as a whole. Mr. Kasinow suggested that the three references to the words “this policy” in that section be replaced by the words “these guidelines.” There was no objection from the Task Force. Ms. Jones suggested that the Task Force hold at least one interim conference call to continue its discussions regarding the addition of these updated draft guidelines as a new significant element of the Reinsurance Ceded standard applicable to captive RRGs, including considering any additional comment letters that are received prior to the Oct. 15, 2007, deadline. She also noted that it is her intent to have the Task Force vote on these draft guidelines during that conference call. There was no objection from the Task Force. 3. Discuss Proposed 2008 Charges Ms. Jones noted that a memo was included from Julie Glaszczak (NAIC) dated Sept. 19, 2007 (Attachment Three), discussing the proposed charges of the Task Force for 2008. After limited discussion, it was decided that a charge regarding the ongoing review of the Part A accreditation standards should be added for 2008 because the Task Force does not know if it will complete this review by its Winter National Meeting. Ms. Gardner moved and Mr. Spann seconded a motion to adopt the proposed charges after adding a charge, which states that the Task Force should continue to review the current Part A: Laws and Regulations accreditation standards applicable to traditional insurance companies to evaluate which standards, and what portion thereof, should apply to RRGs incorporated as captives. The motion passed unanimously. Having no further business, the Risk Retention Group (E) Task Force adjourned. W:\Sep07\TF\Risk Retention E TF\09-risk.doc

MORRIS, MANNING & MARTIN LLP A T T O R N E Y S A T L A W

September 26,2007

National Association of Insurance Commissioners

Risk Retention Group (E) Task Force

Attn: Julie Glaszczak 2301 McGee Street Suite 800 Kansas City, MO 641 08-2662

Robert H. Myers, Jr. 202-408-51 53 [email protected] www.mmmlaw.com

Re: Reinsurance Guidelines - Comments

Dear Ms. Glaszczak:

This letter is submitted on behalf of the National Risk Retention Association ("NRRA"). At the end of the Task Force conference call on September 11, comments were solicited regarding the changes adopted during the call.

NRRA supports the amended draft of the Reinsurance Guidelines. It is the product of a lengthy and deliberative process by the Task Force and represents the best efforts of the Task Force with the benefit of comments from interested persons.

At the end of the September 11 call, it was also indicated that a vote would be taken at the next meeting on Saturday, September 29 on whether reinsurance for risk retention groups (RRGs) formed as captives should be limited to the requirements of the NAIC Model Credit for Reinsurance law ("NAIC Model"). NRRA opposes this proposed limitation on the authority of domicile commissioners for the following reasons.

First, the Task Force has been working on credit for reinsurance for at least six months. The proposal voted upon favorably at the last conference call is the product of all that work. A decision by the Task Force at this late date not to deviate in any respect from the NAIC Model would be a repudiation of all the Task Force's work in the past six months and an unwillingness to even consider the substance of what has been accomplished.

Second, RRGs chartered as captives are subjected to a different regulatory regime from traditional property casualty insurers. While all of these issues have been discussed before by this Task Force, several aspects of this regulatory regime stand out and bear repeating:

Washington, DC 202.408.5153

Center City Building With offices in 1401 H Street, NW, Suite 760 Washington, DC 20005 Fax: 202.408.5146

Atlanta, Georgia Charlotte, North Carolina Princeton, New Jersey Raleigh-Durham, North Carolina


Attachment OneRisk Retention Group (E) Task Force

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NAIC September 26,2007 Page 2

(1) Captive regulation of RRGs is a more "hands on," contemporaneous form of regulation than traditional regulation. While traditional insurers are only required to bring to the attention of regulators material transactions that trigger the Holding Company Systems Act benchmarks, RRGs regulated as captives must obtain prior approval of any deviation from the Business Plan approved by the Commissioner. This means that any change in reinsurance would have to receive prior approval.

(2) The captive manager serves as the "eyes and ears" of the Commissioner and has a duty to immediately report any deviation from the Business Plan or any indication that the RRG may be taking actions that could result in a hazardous financial condition.

Third, the criteria set forth in Item I.C(l)-(6) of the Guidelines, along with the supplemental requirements set forth in Items 11.-VI, provide a solid basis for the Commissioner's discretion to grant credit for reinsurance. These criteria are the result of an analysis of the best practices of Vermont, Hawaii, the District of Columbia, and other domiciles.

Fourth, the Task Force has (a) investigated the regulatory structure and operations of captive domiciles, (b) determined regulatory best practices, and (c) determined if NAIC Model laws required by the NAIC Accreditation Standard should be applied. The effect of adopting the proposed reinsurance guidelines will be to standardize the reinsurance practices of the various domiciles in a manner consistent with the needs of regulating RRGs. This addresses the concern expressed in the GAO Report on RRGs that domicile states were inconsistent in their regulatory practices.

Fifth, there are numerous existing RRGs regulated as captives that are in excellent financial condition (for example, some have A ratings and obtain their reinsurance from highly capitalized and well-administered offshore reinsurers). To require these insurers to establish trusts onshore and then transfer assets to them would not improve their financial stability but could certainly require a very substantial expenditure of time, effort and money.

Sixth, the arguments advanced by the proponents of requiring the NAIC Model are not convincing. They are:

1. Do not impose a new regulatory regime for RRG reinsurance until the NAIC Reinsurance Committee has completed its work on reinsurance reform. As has been discussed, there is no termination date for the deliberations of this Committee. The final determination of this complicated issue could take years. There is no point in waiting for the ultimate determination of this issue by the Reinsurance Committee because any guidelines adopted by this Task Force could be changed at a later time.



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Moms, MANNING & M~RTIN A L I i w n i D I,IABILI'IT PI\RTN~':RSHII'

N AIC September 26,2007 Page 3

2. The traditional insurance industry is adequately regulated with the NAIC Model. First, the NAIC Reinsurance Committee is diligently working to develop a new system of reinsurance regulation to substitute for the current Model; therefore, it cannot be working all that well. Secondly, this argument fails to take into consideration the nature of RRGs as federally authorized liability insurers with particular needs and practices. The RRG Task Force has been working for two years based on the assumption that RRGs regulated as captives differ in certain material respects from the traditional industry. The Task Force has carefully examined each of the NAIC Accreditation Part A requirements and made decisions upon this assumption. It does not make sense to deviate from this practice now.

In sum, NRRA believes that this Task Force should adopt the Reinsurance Guidelines approved by the Task Force at its conference call on

General counsel, National Risk Retention Association


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Attachment Two Risk Retention Group (E) Task Force

9/29/07 DRAFT – 9/11/07


District of Columbia Reinsurance Regulations for Risk Retention Groups Licensed as Captive Insurers

I. Permitted Reinsurance

A. Credit for reinsurance will be permitted if the reinsurer complies with section 2 of the Law on Credit for Reinsurance Act of 1993 (D.C. Official Code § 31-501); or

B. 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; andor

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.

II. The Commissioner may require a reinsurer not domiciled in the US to

include language in the reinsurance agreement that states that in the event of the reinsurer’s failure to perform its obligations under the terms of its

Attachment Two Risk Retention Group (E) Task Force

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reinsurance agreement, it shall submit to the jurisdiction of any court of competent jurisdiction in the US.

III. For credit for reinsurance and solvency regulatory purposes, the

Commissioner may require an approved funds-held agreement, letter of credit, trust or other acceptable collateral based on unearned premium, loss and LAE reserves, and IBNR.

IV. The Commissioner may waive one or more of the reinsurance

requirements 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, and the proposed reinsurance agreement adequately protects the risk retention group licensed as a captive insurer, and its policyholders.

V. Each approved captive manager or risk retention group licensed as a

captive insurer shall assess the reinsurance programs of the risk retention groups licensed as captives under their management, and within 60 days of the effective date of this policy, submit a written report to the Commissioner indicating whether such risk retention groups licensed as captives are in compliance with this policy. All risk retention groups licensed as captive insurers that fail to submit the report in a timely manner shall be examined, at the risk retention groupcaptive’s expense, to determine compliance with this policy.

VI. Risk retention groups Llicensed 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.

W:\sep07\TF\Risk Retention E TF\09-risk Attachment 2.doc

Attachment Three Risk Retention Group (E) Task Force

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To: Members of the Risk Retention Group (E) Task Force From: Julie Glaszczak, Senior Accreditation Manager Date: September 19, 2007 Subject: Proposed 2008 Charges Charges that represent ongoing maintenance and/or necessary updates to NAIC programs, products or services (e.g., handbooks, education programs, publications, etc.) 1. Review current Part B: Regulatory Practices and Procedures accreditation standards to evaluate which standards, and what portion thereof, should be applicable to risk retention groups incorporated as captives. (Essential)

2. Evaluate whether additional Part B standards should be applicable to risk retention groups incorporated as captives. (Essential)

3. Review the Part C: Organizational and Personnel Practices accreditation standards to the extent that such standards are impacted as the result of the Task Force’s work on the other charges. (Important)

Charges that represent new objectives and goals, representing new NAIC programs. None W:\sep07\tf\Risk Retention E TF\09-risk Attachment 3.doc

Attachment Four Risk Retention Group (E) Task Force

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Drafted: 9/12/07 Risk Retention Group (E) Task Force

Conference Call September 11, 2007

The Risk Retention Group (E) Task Force met via conference call, Sept. 11, 2007. A quorum was present; Scott Richardson represented by Leslie Jones (SC) chaired the meeting. The following Task Force members participated: Kent Michie, Vice Chair, represented by Don Spann (UT); Walter Bell represented by Richard Ford (AL); Thomas Hampton represented by Dana Sheppard (DC); Matthew Denn represented by William White (DE); Kevin McCarty represented by Claude Mueller (FL); Julie McPeak represented by Russell Coy (KY); Alice Molasky-Arman represented by Stephen Wright (NV); Kim Holland represented by Karl Kramer (OK); Paulette Thabault represented by Len Crouse and Peter Raymond (VT); and Mike Kreidler represented by Ron Pastuch (WA). 1. Discussion of Part A Reinsurance Ceded Standard Ms. Jones provided a brief summary of the two exposed documents, which included proposed guidelines giving captive domiciles the ability to grant risk retention groups (RRG) an exception to the Reinsurance Ceded Part A accreditation standard which applies to traditional companies (Attachment One) and examination procedures which may be incorporated into the NAIC Financial Condition Examiners Handbook to be used when evaluating a company as a possible reinsurer of a RRG licensed as a captive insurer (Attachment Two). These documents were released for a 30-day comment period, which ended Aug. 27, 2007. There were five comment letters received. Skip Myers (National Risk Retention Association–NRRA) gave a brief summary of his comment letter (Attachment Three). In regards to the first change referenced in the comment letter, Ms. Jones suggested changing the caption to “Risk Retention Groups Licensed as Captive Insurers” to be more specific and in line with the charges. There were no objections from the Task Force members. Ms. Jones summarized the second and third changes referenced in the comment letter and asked the District of Columbia for their original intention of the reinsurance regulation for captives. Mr. Sheppard stated that the changes indicated in the comment letter agree with the original intent of the regulation. After much discussion, Mr. Wright moved and Mr. Spann seconded a motion to accept the changes indicated in the NRRA comment letter. The motion carried by a majority vote with Alabama, Florida, Oklahoma and Washington opposing the motion. Jim McIntyre (Vermont Captive Insurance Association–VCIA) stated that the changes indicated in the VCIA comment letter (Attachment Four) were addressed during the discussions of the NRRA comment letter and no additional discussions were necessary. Marsha Cohen (Reinsurance Association of America–RAA) provided a brief summary of the RAA comment letter (Attachment Five). She recommended that the Task Force not take a firm vote on the Part A Reinsurance Ceded standard and should wait and revisit this standard after the Reinsurance (E) Task Force finishes its work regarding changes to the credit for reinsurance laws and regulations. Mr. Sheppard noted that Commissioner Hampton has thought about delaying this discussion because the Reinsurance (E) Task Force is still discussing this issue but the work of this Task Force should not be delayed; therefore, discussions should continue regarding RRGs. The Task Force could revisit this standard, if necessary, after the Reinsurance (E) Task Force finalizes the credit for reinsurance laws and regulations. Mr. White noted that there is a presumption that the Task Force should modify this standard to reflect the Reinsurance (E) Task Force’s modifications or that the RRGs should be subordinate to the activities of the Reinsurance (E) Task Force. He recommended that this Task Force continue discussions and address any conflicts in the future, which could be beneficial by allowing two different perspectives to be discussed. Ms. Jones noted that the RAA letter indicates that RRGs do not warrant preferential treatment. Mr. Crouse stated that RRGs are different types of insurers and can not be treated the same as traditional insurers. He also stated that this Task Force can not be certain that the Reinsurance (E) Task Force is going to address all of the issues that concern RRGs and delay the work of this Task Force. Mr. White noted that different does not automatically mean preferential treatment. He further noted that the overall intent for RRGs, in regards to solvency and good market conduct, is the same as with traditional insurers but should be applied in a different way. After much discussion amongst the Task Force members, Mr. Ford moved and Mr. Kramer seconded a motion to delay a Task Force vote on the Part A Reinsurance Ceded accreditation standard until the Reinsurance (E) Task Force has finalized the credit reinsurance laws and regulations. The motion failed a majority vote with Utah, Delaware, the District of Columbia, Kentucky, Nevada and Vermont opposing the motion. Mr. Raymond provided a brief summary of his comment letter (Attachment Six). Ms. Jones suggested modifying the language of the draft regulation to require the captive manager or RRG, as appropriate, to assess the reinsurance program,

Attachment Four Risk Retention Group (E) Task Force

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and submit the written reports and annual filings. Mr. Raymond moved and Mr. Wright seconded a motion to accept Ms. Jones’ modification to the District of Columbia reinsurance regulation for captives. The motion passed unanimously. Jeff Loomis (NAIC) stated that Hawaii was not able to participate on this conference call, although their comments (Attachment Seven) were addressed during the discussion regarding Vermont’s comment letter. No additional discussion was necessary. Mr. Sheppard noted that the Task Force agreed to modify the title of the District of Columbia reinsurance regulation for captives to clarify that the regulation is intended for RRGs licensed as captive insurers; therefore, similar language in items IV., V. and VI. within the regulation should also be modified to be consistent. There were no objections from the Task Force. The Task Force discussed re-releasing the District of Columbia reinsurance regulation for RRGs licensed as captives as modified during this call for a 30-day comment period, although the Task Force would encourage that all comment letters be submitted prior to the Fall National Meeting. Having no further business, the Risk Retention Group (E) Task Force adjourned. w:\sep07\tf\risk retention E TF\09-risk Attachment4.doc

Attachment Four-A Risk Retention Group (E) Task Force

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District of Columbia Reinsurance Regulations for Captive Insurers



B. Credit for reinsurance will 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 has maintains a minimum policyholder surplus of not less than $25 million in an amount acceptable to the Commissioner;; or

C.Credit for reinsurance will be permitted if the reinsurer maintains a minimum

policyholder surplus in an amount satisfactory to the Commissioner, and the reinsurer satisfies all of the following requirements or any other requirements deemed necessary by the Commissioner:

(1) Captive manager shall file annually, or before June 30, or at the request of

the Commissioner or if the captive manager 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;


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



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

(7) II. If theThe Commissioner may require a reinsurer is not domiciled in the US to, the

reinsurance agreement shall include language in the reinsurance agreement that states that in the event of the reinsurer’s failure to perform its obligations under the terms of its reinsurance agreement, it shall submit to the jurisdiction of any court of competent jurisdiction in the US.

III. II. For credit for reinsurance and solvency regulatory purposes, the Commissioner

may require an approved funds-held agreement, letter of credit, trust or other acceptable collateral based on unearned premium, loss and LAE reserves, and IBNR.

Attachment Four-A Risk Retention Group (E) Task Force

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IV. III. The Commissioner may waive one or more of the reinsurance requirements in circumstances where the captive insurer or reinsurer can demonstrate to the satisfaction of the Commissioner that the reinsurer is sufficiently capitalized, and the proposed reinsurance agreement adequately protects the captive insurer, and its policyholders.

IV.V. Each approved captive manager shall assess the reinsurance programs of the captives

under their management, and within 60 days of the effective date of this policy, submit a written report to the Commissioner indicating whether such captives are in compliance with this policy. All captive insurers that fail to submit the report in a timely manner shall be examined, at the captive’s expense, to determine compliance with this policy.

VI. V. Licensed 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.

W:\Sep07\tf\Risk Retention E TF\091107 RRGTF Attachment 4-A.doc

Attachment Four-B Risk Retention Group (E) Task Force

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7.2.07 © 2007 National Association of Insurance Commissioners

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RRG (E) Task Force Part A Accreditation Standard – Reinsurance Ceded Reinsurance review and approval process for reinsurers not meeting requirements of a, b, c, d Following is a recap of the framework and criteria used to evaluate a company as a possible reinsurer of a risk retention group licensed as a captive insurer. This recap was prepared by the Insurance Divisions of Hawaii and Vermont. 1. Review and evaluation of RRG program and plan of operations

a. Program structure and nature of risks insured by RRG • Liability lines of business being written • Retention limits (per occurrence and aggregate limits) • Claims-made or occurrence basis coverage

b. RRG quantitative information

• Actuarial feasibility study of RRG (including reserve confidence levels) • Projected financial statements (based on expected and worse case scenarios) • Consulting/independent actuarial review • Financial strength of members and/or parent of RRG, as applicable

2. Review and evaluation of reinsurer

• Current audited financial statements, and other available filings with home/domiciliary regulators

• Most recent examination report prepared by home/doimiciliary regulator • Capital and surplus level • Lines of business and layers being assumed by reinsurer • Consistency of reinsurer with RRG program • Independent rating agency rating / report • Ownership structure of reinsurer (If affiliated with RRG, then additional

evaluation of nature and potential impact on reinsured losses) • Is the reinsurer ceding underlying RRG risk to other reinsurers? If so, then

need to evaluate other reinsurers • Annual surveillance summary of approved reinsurer • RRG business plan changes that may materially affect projected (ceded)

losses require reevaluation of reinsurer W:\Sep07\TF\Risk Retention E TF\091107 RRGTF Attachment 4-B.doc

Attachment Four-C

Risk Retention Group (E) Task Force9/29/07


W:\sep07\tf\risk retention E TF\091107 RRGTF Attachment 4-C.pdf

Attachment Four-CRisk Retention Group (E) Task Force

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W:\Sep07\risk retention E TF\091107 RRGTF Attachment 4-C.pdf

August 22, 2007 National Association of Insurance Commissioners Risk Retention Group (E) Task Force Attn: Julie Glaszczak 2301 McGee Street Suite 800 Kansas City, MO 64108-2662 Dear Chair Richardson, Ms. Glaszczak and Members of the Task Force, Thank you for the opportunity to comment on the reinsurance guidelines for Risk Retention Groups being considered by the (E) Task Force. I am writing to you on behalf of the Vermont Captive Insurance Association (“VCIA”) a Vermont-based trade organization for captive insurers with over 500 members. The VCIA has been in existence for more than 20 years and is the largest captive insurance association in the world serving the largest captive domicile in the United States. Vermont as a domicile hosts approximately 50% of all RRGs in the country and the VCIA has significant RRG representation among its members. The VCIA has participated in the Task Force discussions as an interested party throughout its review of the Part A Accreditation Standards and is supportive of the committee’s work to promote high standards of regulation throughout all domiciles. In response to the drafts of the Hawaii, Vermont and District of Columbia Reinsurance Regulations for risk retention groups, VCIA offers the following. First and foremost, it is important to note that the process of application and regulation in the State of Vermont has led to solvent, well-run organizations based on solid actuarial principles and accounting practices. As the committee has observed in their review, Vermont and Hawaii use a multi-step process when approving a reinsurer that among other items, evaluates the strength of the RRG members and their parents, the business plan, the rating of reinsurers and

One Lawson Lane, Suite 320 Burlington, VT 05401-8445 phone: 802-658-8242 www.vcia.com fax: 802-658-9.65 e-mail: [email protected]

Attachment Four-DRisk Retention Group (E) Task Force

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also establishes an appropriate minimum capital and surplus level. This system has worked well during the last 20 years in Vermont history with no insolvencies related to reinsurance. Appreciating the fact that the Task Force is trying to achieve development of clear standards surrounding reinsurance ceding that increase the ability of an RRG to collect reinsurance should it be necessary, we note that the recommendations contained in the District of Columbia submission included in the July 27, 2007 e-mail from the committee may be helpful if:

1. It is clear that these regulations are for risk retention groups only; 2. An item IC is added to the DC Reinsurance Regulations as described in the attached

document entitled DC Reinsurance Regs as amended by VCIA proposal. 3. That items I A, IB and IC present alternatives by which a risk retention group may take

credit for reinsurance ceded to a reinsurer. To be clear each statement should be separated from the other with the word “or”. In other words either A or B or C would fulfill the requirements.

Again, the VCIA appreciates the opportunity to participate in this process and looks forward to working with the Task Force as it continues its discussions.

Sincerely,

Molly Lambert President

One Lawson Lane, Suite 320 Burlington, VT 05401-8445 phone: 802-658-8242 www.vcia.com fax: 802-658-9.65 e-mail: [email protected]


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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, the reinsurer maintains a minimum policyholder surplus in an amount acceptable to the Commissioner; or

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 shall file annually, or before June 30, or at

the request of the Commissioner or if the captive manager 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;


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



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

II. The Commissioner may require a reinsurer not domiciled in the US to

include language in the reinsurance agreement that states that in the event of the reinsurer’s failure to perform its obligations under the terms of its reinsurance agreement, it shall submit to the jurisdiction of any court of competent jurisdiction in the US.


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III. For credit for reinsurance and solvency regulatory purposes, the Commissioner may require an approved funds-held agreement, letter of credit, trust or other acceptable collateral based on unearned premium, loss and LAE reserves, and IBNR.

IV. The Commissioner may waive one or more of the reinsurance

requirements in circumstances where the captive insurer or reinsurer can demonstrate to the satisfaction of the Commissioner that the reinsurer is sufficiently capitalized, and the proposed reinsurance agreement adequately protects the captive insurer, and its policyholders.

V. Each approved captive manager shall assess the reinsurance programs of

the captives under their management, and within 60 days of the effective date of this policy, submit a written report to the Commissioner indicating whether such captives are in compliance with this policy. All captive insurers that fail to submit the report in a timely manner shall be examined, at the captive’s expense, to determine compliance with this policy.

VI. Licensed 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.


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W:\sep07\tf\Risk Retention E TF\091107 RRGTF Attachment 4-D.pdf

1301 Pennsylvania Avenue, N.W., Suite 900, Washington, D.C. 20004-1701 Via E-mail August 27, 2007 Julie Glaszczak Senior Accreditation Manager National Association of Insurance Commissioners 2301 McGee Street Suite 800 Kansas City, MO 64108 [email protected] Re: Risk Retention Group (E) Task Force Thirty-Day Comment Period on the

Proposed “Significant Changes to Part A Reinsurance Standards” Dear Ms. Glaszczak: On behalf of the members of the Reinsurance Association of America (RAA), we respectfully submit these comments with respect to the Risk Retention Group (E) Task Force’s (RRG Task Force) exposure for comment of the “Reinsurance Guidelines Draft from DC” and the “RRG Task Force Reinsurance Procedures from HI/VT,” collectively, “Significant Changes to Part A Reinsurance Standards.” The RAA is a national trade association representing property and casualty organizations that specialize in reinsurance. The RAA membership is diverse, including large and small, broker and direct, U.S. companies and subsidiaries of foreign companies. RAA underwriting members and their affiliates write more than 2/3 of the gross reinsurance coverage provided by U.S. professional reinsurance companies. As part of the RRG Task Force’s consideration of what accreditation standards should apply to risk retention groups (RRGs) chartered under captive laws, the RRG Task Force is evaluating whether to give insurance commissioners broad discretion to permit captive RRGs to take credit for reinsurance for cessions to unlicensed reinsurers that have not posted collateral to secure obligations. The RAA opposes this proposal for the reasons set forth below. RRGs should be subject to the same credit for reinsurance rules as insurers. RRGs should be subject to the same credit for reinsurance requirements as insurers. Laws governing credit for reinsurance are important regulatory tools that are employed to ensure that reinsurance recoverables will be available to pay claims when they become due. One of the goals of reinsurance regulation, through credit for reinsurance statutes, is to assure that reinsurers can and will meet their commitments and that ceding companies

Telephone: (202) 638-3690 Facsimile: (202) 638-0936 http://www.reinsurance.org

Attachment Four-ERisk Retention Group (E) Task Force

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will in turn have the ability to fulfill their obligations to policyholders. According to the NAIC model, a reinsurer must either be licensed or accredited in the insurer’s state or a substantially similar U.S. jurisdiction, or must post collateral to secure obligations in order for a ceding insurer to obtain credit for that reinsurance. Certain states have adopted legislation that allows the creation of captive insurers and reinsurers. In an effort to attract these captives, some state laws subject captives to regulation and solvency controls that are less stringent than those applied to traditional insurers and reinsurers, yet allow captives to vie for the same business. The proposed “Significant Changes to Part A Reinsurance Standards” would allow such preferential treatment for captive RRGs by allowing looser credit for reinsurance standards for RRGs than for traditional insurers. There is no basis for this preferential treatment. Further, the mere fact that some states have loosened their credit for reinsurance standards is not a reason for weakening NAIC “model” laws, guidelines or best practices. The proposal increases uncertainty about the ability of RRGs to meet their obligations. As the RAA understands it, one of the principal goals of the RRG Task Force is to achieve a consistent level of RRG regulation in the states to provide comfort to other regulators that the RRG will be able to meet its liabilities to consumers in the non-domestic state. This consistency is needed because federal law permits RRGs to operate on a multi-state basis without seeking separate state licenses. The proposal before the RRG Task Force arguably presents an opportunity for a “race to the bottom” by agreeing to a credit for reinsurance standard that essentially grants unfettered discretion to the RRG’s domestic regulator to determine whether to grant credit for obligations due from unlicensed reinsurers. The RAA also opposes changes granting such unfettered discretion to regulators under the current system because it undermines the uniformity of regulation that the RRG Task Force states it is seeking. That lack of uniformity undermines the ability of a non-domestic regulator to have confidence that the interests of its state consumers are being protected. The NAIC credit for reinsurance regulations are currently being reviewed by the Reinsurance Task Force. The RRG Task Force should not make any modifications before that review is complete. The NAIC Reinsurance Task Force is currently considering restructuring the regulatory system for reinsurance, including the credit for reinsurance laws and regulations. This restructuring may alter the credit for reinsurance rules. It would be premature for the RRG Task Force to substantially deviate from the current rules while that process continues, because any changes made by the RRG Task Force will have to be revisited after the NAIC finishes its work and adopts changes to the credit for reinsurance laws and regulations. Until the NAIC’s work is completed and adopted, the need for uniformity


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and enforcement of credit for reinsurance rules, including collateral for unlicensed reinsurers, is essential. For these reasons, the RAA opposes the proposed “Significant Changes to Part A Reinsurance Standards.” Thank you for the opportunity to present the views of the RAA. Please feel free to contact us if you have any questions or need further information. Sincerely,

Dennis C. Burke Kimberly M. Welsh Vice President, State Relations Assistant Vice President and Associate General Counsel


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W:\sep07\TF\Risk Retention E TF\091107 RRGTF Attachment 4-E.pdf

Attachment Four-F Risk Retention Group (E) Task Force

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August 27, 2007 National Association of Insurance Commissioners Risk Retention Group (E) Task Force Attn: Julie Glaszczak 2301 McGee Street Suite 800 Kansas City, MO 64108-2662 Dear Members of the Task Force, The Vermont Department of Captive Insurance has reviewed the revised District of Columbia Reinsurance Regulations, as amended by the Vermont Captive Insurance Association (VCIA) and the National Risk Retention Association (NRRA), and note the following:

We agree that items IA, IB and IC present alternatives by which a risk retention group may take credit for reinsurance ceded to a reinsurer. To be clear each statement should be separated from the other with the word “or”. In other words either A or B or C would fulfill the requirements. We also agree that the title of the regulation should refer to Risk Retention Groups, in place of Captive Insurers.

In addition, please note that the draft DC Regulation requires the captive manager to assess the reinsurance program, and submit written reports and annual filings. Since Vermont licenses the captive insurer, and only approves the captive manager, the majority of our regulatory authority relates to the captive insurer. We therefore feel Vermont could adopt a substantially similar regulation, but we would require the captive insurer to assess the reinsurance program, submit the written reports and the annual filings. In reality, for the average captive we realize that the captive manager would be the one fulfilling the requirements for the captive insurer. Sincerely, Peter Raymond Director of Financial Examinations Vermont Department of Captive Insurance W:\sep07\tf\Risk Retention E TF\091107 RRGTF Attachment4-F.doc

Attachment Four-G Risk Retention Group (E) Task Force

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Comments Received via E-mail from Craig Watanabe – September 10, 2007 With respects to item I.B. (1), we believe it would be more appropriate to require the RRG (licensee) to make the annual filing, rather than placing the responsibility on the captive manager to make the filing.... The owners/management of the RRG should be aware and responsible for securing appropriate reinsurance, and they should also be "responsible" for making any required filings. The RRG could "delegate" this to their captive manager or other party, but the RRG should be the one ultimately responsible and accountable. This would also appear to be consistent with good corporate governance practices. Thanks for your assistance. Craig Watanabe Captive Insurance Administrator Hawaii Division of Insurance W:\sep07\TF\Risk Retention E TF\091107 RRGTF Attachment 4-G.doc

Attachment Five Risk Retention Group (E) Task Force

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Drafted: 7/23/07 Risk Retention Group (E) Task Force

Conference Call July 18, 2007

The Risk Retention Group (E) Task Force met via conference call July 18, 2007. A quorum was present, and Scott Richardson represented by Leslie Jones (SC) chaired the meeting. The following Task Force members participated: Kent Michie, Vice Chair, represented by Don Spann (UT); Christina Urias represented by Steve Ferguson (AZ); Steve Poizner represented by Bob Loo (CA); Thomas Hampton (DC); Matthew Denn represented by William White (DE); Kevin McCarty represented by Claude Mueller (FL); J.P. Schmidt represented by Sanford Saito (HI); Julie McPeak represented by Russell Coy (KY); Alice Molasky-Arman represented by Stephen Wright (NV); Steven Goldman represented by Steve Zalewitz (NJ); Eric Dinallo represented by Larry Levine (NY); Kim Holland represented by John McCarter (OK); Paulette Thabault represented by Peter Raymond (VT); and Mike Kreidler represented by Patrick McNaughton (WA). 1. Discussion of Part A Reinsurance Ceded Standard Ms. Jones provided a brief summary of the progress regarding the significant elements for the Reinsurance Ceded Part A accreditation standard. She stated that the first five significant elements have been addressed and that the Task Force should complete the discussion of significant element (g). She noted that this significant element provides that credit be allowed for reinsurance ceded to an insurer not meeting the requirements of significant elements a., b., c., or d. but only in the amount of acceptable forms of security. She further noted that there are several captive jurisdictions that do permit credit for reinsurance in circumstances that would not normally be applicable for traditional insurance companies; therefore, the Task Force needs to decide whether that is appropriate. To assist the Task Force with this discussion, two states agreed to share their law, draft regulations, or processes regarding captive reinsurers. Dana Sheppard (DC) discussed the state’s current captive statute regarding reinsurance, including commissioner discretion language (Attachment Five-A) and the state’s draft of reinsurance regulations for captive insurers (Attachment Five-B). Mr. Sheppard noted that the purpose of the draft regulation is to bring order to what would or would not be permitted in regards to reinsurance of captive insurers. He further noted that this is a draft regulation and has not officially been implemented. Mr. Loo questioned whether the net surplus ratio of 3:1, referenced in I.C. (2) of the District of Columbia draft regulation, can be adjusted based on the difference of the amount of allowable admitted assets in foreign countries and the reporting difference between Statutory Accounting Principles (SAP) and Generally Accepted Accounting Principles (GAAP). Mr. Sheppard responded that the District of Columbia inquires whether the reinsurer reports are based on U.S. or International GAAP, researches disclosures of non-admitted assets in the SAP to GAAP reconciliation, and then the commissioner has the discretion to adjust the ratio when necessary. Charles Perry (SC) noted that the phrase “credit for reinsurance will be permitted” indicates that credit is automatic if all requirements are met, and he commented whether “will” should be changed to “may” to allow for commissioner discretion. Mr. Sheppard noted that this should be open for comment by interested parties. Mr. Sheppard explained that the term “will” was used to give clear guidance regarding the requirements to receive credit for reinsurance. Ms. Jones added that changing the “will” to “may” would make it clearer that on a case-by-case basis the commissioner has discretion. Ms. Jones commented whether I.C. (3) of the District of Columbia draft regulation was meant to presume that the reinsurer is a related party. Mr. Raymond suggested that the term “affiliated” be added to the beginning of the sentence to clarify. Mr. Loo commented whether the commissioner had authority to remove the credit for reinsurance provision if a subsequent event was discovered that threatened the financial solvency of the reinsurer. Mr. Sheppard noted that if it is deemed that the solvency of the reinsurer is threatened, based on the review of the financial statements, then the captive would no longer be allowed to take credit for that reinsurer. Ms. Jones suggested that section I.C. (1) of the District of Columbia draft regulation be modified to clarify that captive managers shall file annually or at the request of the commissioner or more often when appropriate for the purpose of assessing the appropriateness of the reserve credit or the initial or continued financial condition of the reinsurer. Mr. Sheppard noted that there has been a lot of pushback regarding sections I.C. (6) and (7). Mr. White stated that sections I.C. (5), (6) and (7) are in conflict with one another, and questioned why (6) or (7) are needed, if (5) has already been completed. Mr. Sheppard indicated this is to ensure the authority to examine the reinsurer and gather the necessary

Attachment Five Risk Retention Group (E) Task Force

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information when needed. After much discussion, it was determined that sections I.C. (5) and (6) should be separated with the word “and,” and then to clarify in (7) that the commissioner has discretion. The Task Force discussed the “or” between sections I.B and I.C and it was determined that the “or” should be replaced with “and” and that the commissioner should be given discretion regarding the amount of surplus required or any other requirements deemed necessary. Skip Myers (Morris, Manning & Martin LLP) stated that he had not heard from the interested parties, but as an interested party, noted that this is authority that regulators already have and should not be considered a deterrent. Ms. Jones confirmed that the Task Force is comfortable that reasonable standards could be drafted that would allow for risk retention groups (RRGs) licensed as captives to grant credit for reinsurance for the reinsurers that meet these particular standards. Ms. Jones asked if there were any objections to proceeding with this and allowing commissioner discretion based on District of Columbia’s draft regulation; there were no objections. She stated that the plan is to take District of Columbia’s draft regulation and incorporate the comments and suggestions made by Task Force members during this call and then release the document for a 30-day comment period. Mr. Saito provided a brief summary of Hawaii’s framework and criteria drafted to evaluate a company as a possible reinsurer of a RRG licensed as a captive insurer (Attachment Five-C). Mr. Raymond stated that Vermont worked with Hawaii on this framework and noted that it is not possible to put it all in a regulation, so it is good to have other processes on the side. Julie Glaszczak (NAIC) noted that this could be included in the Part A standards as a combination of a regulation and administrative practice. Ms. Jones asked if Section IV. of the District of Columbia draft regulation was a one-time or annual requirement. Mr. Sheppard noted that it was a one-time requirement and transition provision. He further noted that based on Section V. there would not be any grandfathering of current relationships, but there would need to be a period of time to bring the agreement into compliance. Mr. Spann moved, and Mr. Wright seconded a motion to release for a 30-day comment period the District of Columbia reinsurance regulation for captives as modified during this call and the Hawaii process as administrative practice under the Part A standards. Ms. Glaszczak clarified that this would be an additional significant element under the Part A: Credit for Reinsurance standard. The motion passed unanimously. Ms. Jones suggested that the Task Force hold another conference call after the 30-day comment period to discuss the comments received. Having no further business, the Risk Retention Group (E) Task Force adjourned. w:\sep07\tf\risk retention E TF\071807 RRGTF mins.doc

Attachment Five-A Risk Retention Group (E) Task Force

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Sec. 9. Reinsurance.

(a) A captive insurer or segregated account may provide reinsurance on risks ceded by any

other insurer, captive insurer or segregated account.

(b) A captive insurer or segregated account may take credit for the reinsurance of risks or

portions of risks ceded to reinsurers in compliance with the Law of Credit for Reinsurance Act of 1993,

effective October 15, 1993 (D.C. Law 10-36; D.C. Official Code § 31-501 et seq.). Prior approval of the

Commissioner shall be required for ceding or taking credit for the reinsurance of risks or portions of

risks ceded to reinsurers not complying with the Law of Credit for Reinsurance Act of 1993, effective

October 15, 1993 (D.C. Law 10-36; D.C. Official Code § 31-501 et seq.), except for business written by

an alien captive insurer outside of the United States.

(c) In addition to reinsurers authorized under the provisions of the Law of Credit for

Reinsurance Act of 1993, effective October 15, 1993 (D.C. Law 10-36; D.C. Official Code § 31-501 et

seq.), a captive insurer or segregated account may take credit for the reinsurance of risks or portions of

risks ceded to a pool, exchange or association acting as a reinsurer which has been authorized by the

Commissioner. The Commissioner may require any other documents, financial information or other

evidence that such a pool, exchange, or association will be able to provide adequate security for its

financial obligations. The Commissioner may deny authorization or impose any limitations on the

activities of a reinsurance pool, exchange or association that, in the Commissioner's judgment, are

necessary and proper to provide adequate security for the ceding captive insurer or segregated account

and for the protection and consequent benefit of the public at large.

Attachment Five-A Risk Retention Group (E) Task Force

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(d) For all purposes of this act, insurance written by a captive insurer or segregated account

of any workers' compensation qualified self-insured plan of its parent or affiliates shall be deemed to be

reinsurance.

W:\Sep07\TF\Risk Retention E TF\071807 RRGTF Attachment 5-A.doc

Attachment Five-B Risk Retention Group (E) Task Force

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1




B. Credit for reinsurance will be permitted if the reinsurer maintains a A- or higher

A.M. Best rating, or other rating from a rating agency acceptable to the Commissioner, and the reinsurer has a minimum policyholder surplus of not less than $25 million; or

C. Credit for reinsurance will be permitted if the reinsurer maintains a minimum

policyholder surplus in an amount satisfactory to the Commissioner, and the reinsurer satisfies all of the following requirements:

(1) Captive manager shall file annually, or before June 30, the reinsurer’s

audited financial statements, which shall be analyzed by the Commissioner;


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


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

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

(7) If the reinsurer is not domiciled in the US, the reinsurance agreement shall include language in the reinsurance agreement that states in the event of the reinsurer’s failure to perform its obligations under the terms of its reinsurance agreement, it shall submit to the jurisdiction of any court of competent jurisdiction in the US.

II. For credit for reinsurance and solvency regulatory purposes, the Commissioner may

require an approved funds-held agreement, letter of credit, trust or other acceptable collateral based on unearned premium, loss and LAE reserves, and IBNR.

III. The Commissioner may waive one or more of the reinsurance requirements in

circumstances where the captive insurer or reinsurer can demonstrate to the satisfaction of the Commissioner that the reinsurer is sufficiently capitalized, and the proposed reinsurance agreement adequately protects the captive insurer, and its policyholders.

Attachment Five-B Risk Retention Group (E) Task Force

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2

IV. Each approved captive manager shall assess the reinsurance programs of the captives under their management, and within 60 days of the effective date of this policy, submit a written report to the Commissioner indicating whether such captives are in compliance with this policy. All captive insurers that fail to submit the report in a timely manner shall be examined, at the captive’s expense, to determine compliance with this policy.

V. Licensed 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.

W:\Sep07\TF\Risk Retention E TF\071807 RRGTF Attachment 5-B.doc

Attachment Five-C Risk Retention Group (E) Task Force

9/29/07 DRAFT – 7/2/07

7.2.07 © 2007 National Association of Insurance Commissioners

1

RRG (E) Task Force Part A Accreditation Standard – Reinsurance Ceded Reinsurance review and approval process for reinsurers not meeting requirements of a, b, c, d Following is a recap of the framework and criteria used to evaluate a company as a possible reinsurer of a risk retention group licensed as a captive insurer. This recap was prepared by the Insurance Divisions of Hawaii and Vermont. 1. Review and evaluation of RRG program and plan of operations

a. Program structure and nature of risks insured by RRG • Liability lines of business being written • Retention limits (per occurrence and aggregate limits) • Claims-made or occurrence basis coverage

b. RRG quantitative information

• Actuarial feasibility study of RRG (including reserve confidence levels) • Projected financial statements (based on expected and worse case scenarios) • Consulting/independent actuarial review • Financial strength of members and/or parent of RRG, as applicable

2. Review and evaluation of reinsurer

• Current audited financial statements, and other available filings with home/domiciliary regulators

• Most recent examination report prepared by home/doimiciliary regulator • Capital and surplus level • Lines of business and layers being assumed by reinsurer • Consistency of reinsurer with RRG program • Independent rating agency rating / report • Ownership structure of reinsurer (If affiliated with RRG, then additional

evaluation of nature and potential impact on reinsured losses) • Is the reinsurer ceding underlying RRG risk to other reinsurers? If so, then

need to evaluate other reinsurers • Annual surveillance summary of approved reinsurer • RRG business plan changes that may materially affect projected (ceded)

losses require reevaluation of reinsurer W:\Sep07\TF\Risk Retention E TF\071807 RRGTF Attachment 5-C.doc

RISK RETENTION GROUP (E) TASK FORCE

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