§ 123B-3

(Section scheduled to be repealed on January 1, 2057) Sec. 123B-3. Risk retention groups organized in this State. A. A risk retention group shall either: (1) pursuant to the provisions of Articles II or III, be organized to write only liability insurance and, except as provided elsewhere in this Article, must comply with all of the laws, rules, regulations and requirements applicable to such insurers organized in this State and with Section 123B-4 of this Article to the extent such requirements are not a limitation on laws, rules, regulations or requirements of this State; or (2) pursuant to the provisions of Article VIIC, be organized to write only liability insurance as a captive insurance company and, except as provided elsewhere in this Article, must comply with all of the laws, rules, regulations and requirements applicable to such insurers organized in this State and with Section 123B-4 of this Article to the extent such requirements are not a limitation on laws, rules, regulations or requirements of this State. Except that, as of the effective date of this amendatory Act of 1995, a new risk retention group must qualify under paragraph (1) of this subsection. B. Before it may offer insurance in any state, each risk retention group shall also submit for approval to the Director a plan of operation or a feasibility study and revisions of such plan or study if the group intends to offer any additional lines of liability insurance. In the event of any subsequent material change in any item of its plan or study, such risk retention group shall submit an appropriate revision to the Director within 10 days of any such change for approval by the Director. The group shall not offer any additional kinds of liability insurance, in this State or in any other state, until a revision of such plan or study is approved by the Director. C. At the time of filing its application for organization, 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 the information to the NAIC. Providing notification to the NAIC is in addition to and shall not be sufficient to satisfy the requirements of Section 123B-4 of this Code or any other provisions of this Article. D. The name under which a risk retention group may be organized and licensed shall include the phrase "Risk Retention Group". E. Notwithstanding any other provision to the contrary, all risk retention groups chartered in this State shall file an annual statement with the Department and NAIC. The annual statement shall be in a form prescribed by the Director. The statement may be required to be in diskette form. The statement shall be completed in accordance with the annual statement instructions and the NAIC Accounting Practices and Procedures Manual. F. As used in this subsection F: "Board of directors" means the governing body of the risk retention group elected by shareholders or members to establish policy, elect or appoint officers and committees, and make other governing decisions. "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. "Material relationship" means a relationship of a person with the risk retention group that includes, but is not limited to: (a) The receipt in any one 12-month period of compensation or payment of any other item of value by the 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 services provider to the risk retention group is greater than or equal to 5% of the risk retention group's gross written premium for the 12-month period or 2% of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in a 12-month period. The person or immediate family member of that person is not independent until one year after his or her compensation from the risk retention group falls below the threshold. (b) A relationship with the 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. (c) A relationship with a related entity as follows: a director or an 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 the service or the employment relationship. Within one year after the effective date of this amendatory Act of the 99th General Assembly, existing risk retention groups shall be in compliance with the following governance standards and new risk retention groups shall be in compliance with the standards at the time of licensure: (1) 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 shall adhere to the same standards regarding independence of operations and governance as imposed on the risk retention group's board of directors or subscribers advisory committee under these standards and, to the extent permissible under State law, service providers of a reciprocal risk retention group shall 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 the Department at least annually and the Director may approve or refute the board's determination. 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 an owner and insured, unless some other position of the officer, director, or employee constitutes a material relationship), as contemplated by 15 U.S.C. 3901(a)(4)(E)(ii), shall be deemed independent. A material relationship shall not be deemed to exist by reason that a majority of the membership of the related entity's board of directors is the same as the membership of the board of directors of the risk retention group unless the director decides otherwise. (2) The term of any material service provider contract with the risk retention group shall not exceed 5 years. Any 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 the contract is greater than or equal to 5% of the risk retention group's annual gross written premium or 2% of its surplus, whichever is greater. No service provider in a material relationship with the risk retention group shall enter into a contract with the risk retention group unless the risk retention group has notified the Director of Insurance in writing of its intention to enter into a transaction at least 30 days prior thereto and the Director of Insurance has not disapproved it within that period. For the purposes of this paragraph (2), "service providers" includes captive managers, auditors, accountants, actuaries, investment advisors, lawyers, managing general underwriters, and other parties responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims or preparation of financial statements. "Lawyers" does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to the lawyers meet the definition of a material relationship. (3) 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) ensure that all owner-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 premium, 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. (4) The risk retention group shall have an audit committee composed of at least 3 independent board members as defined in this subsection F. 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 the committee. The audit committee shall have a written charter that defines the committee's purpose, which at a minimum must be to: (a) assist board oversight of: (I) the integrity of the financial statements, (II) the compliance with legal and regulatory requirements, and (III) the qualifications, independence, and performance of the independent auditor and actuary; (b) discuss the annual audited financial statements and quarterly financial statements with management; (c) discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor; (d) discuss policies with respect to risk assessment and risk management; (e) meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors; (f) review with the independent auditor any audit problems or difficulties and management's response; (g) set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor; (h) 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 5 consecutive fiscal years; and (i) report regularly to the board of directors. The Department 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 Department 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 this paragraph (4). (5) The board of directors shall adopt and disclose governance standards, either through electronic or other means, and provide information to members and insureds upon request, including, but not limited to: (a) a process by which the directors are elected by the owner 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. (6) 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 of business conduct and ethics shall include, but is not limited to, 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) the required reporting of any illegal or unethical behavior that affects the operation of the risk retention group. (7) The captive manager, president, or chief executive officer of the risk retention group shall promptly notify the Department in writing if he or she becomes aware of any material non-compliance with any of these governance standards.

Legislative History

(Source: P.A. 99-512, eff. 1-1-17 .)