Risk Retention Groups Face Rigorous Governance Standards under NAIC Model Act

The National Association of Insurance Commissioners (NAIC) Model Risk Retention Act contains numerous Governance Standards that will create a significant workload for some risk retention groups (RRGs) in the months ahead.

The Model Risk Retention Act Governance Standards (NAIC, January 2012), available on the NAIC website, include the following.

Plan of Operation

The RRG plan of operation adopted by the board must be in a written policy that requires the board to:

• Provide evidence of ownership to each member
• Develop governance standards
• Oversee the evaluation of management including the captive manager and party or parties responsible for underwriting, adjusting, or settling claims or preparing financial statements
• Review and approve the amount paid under service provider contracts
• Review and approve at least annually
  • Goals and objectives relevant to compensation of officers and service providers
  • Performance of the officers and service providers as measured against the RRG's goals and objectives
  • Continued engagement of the officers and material service providers

Audit Committee

The audit committee must be comprised of at least three independent directors and have a written job description (charter) that defines its responsibilities that include the following.

• Assisting board oversight of the integrity of financial statements, compliance with regulatory requirements, and the qualifications, independence, and performance of the independent auditor and actuary
• Reviewing audited financial statements with management
• Reviewing audited financial statements with the independent auditor
• Reviewing assessment and risk management policies
• Meeting with management
• Meeting with the independent auditors

Governance

The RRG board is required to adopt governance standards that include the following.

• A process by which the directors are elected by the owner/insured
• Director qualifications, responsibilities, and compensation
• Director orientation and continuing education requirements
• Director access to management and independent advisers
• Policies and procedures for management succession

Business Conduct and Ethics

An RRG board is required to adopt a code of ethics for directors, officers, and employees. The code must be made available upon request and address the following.

• Conflicts of interest
• Matters covered under the corporate opportunity doctrine in the RRG state of domicile
• Confidentiality
• Fair dealing
• Protection and proper use of RRG assets
• Standards for complying with applicable laws, rules, and regulations
• Mandatory reporting of illegal or unethical behavior affecting the operation of the RRG

Numerous RRG managers, executives, and regulators have described the model standards as being "common sense." However, that means many RRG boards will need to formalize in writing and expand their policies. For some boards, it will also require a larger time commitment to their governance responsibilities.

States are in the process of adopting the standards, and effective dates may vary.