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Risk Retention Group Governance Standards: Vermont Leads Implementation

Vermont State House
May 17, 2016

During a webinar hosted by Strategic Risk Solutions last week, Dan Petterson, director of captive examinations, Vermont Department of Financial Regulation, gave a presentation that focused on actions the state has taken to implement new risk retention group (RRG) governance standards.

The May 11, 2016, "New Standards for the Management of RRGs" webinar topics included new National Association of Insurance Commissioners (NAIC) Part A governance standards. Adoption of the governance standards by January 1, 2011, is an NAIC requirement for state insurance department accreditation.

To its credit, Vermont has taken the lead in moving forward with implementing the governance standards. The state Legislature took the first step by passing legislation (Title 8, Chapter 142, Section 6052) that was signed on May 7, 2015. The legislation requires existing RRGs to be in compliance with the governance standards within 1 year from the effective date of the legislation..

The purpose of corporate governance standards, according to Mr. Petterson, and quoting from the webinar slide presentation, is to provide a "framework of systems, policies and procedures through which a Company effectively and efficiently:

  • Provides for sound and prudent management and oversight

  • Holds Board members, Senior management, and Key Persons in Control Functions accountable

  • Creates security and long-term value for policyholders and other stakeholders"

The specific RRG governance requirement areas identified in the presentation were as follows.

  • Independence of directors

  • Written governance standards

  • Code of conduct and ethics

  • Audit committee

  • Written policies

  • Service provider contracts not to exceed 5 years

  • Reporting obligations

In March 2016, the Vermont Department of Financial Regulation issued a follow-up memo (2016-02) reminding RRGs that they had to be in compliance with the corporate governance standards by May 7, 2016, and attest to their compliance. That attestation has to include a listing of the board of directors noting the status of each member's independence. Vermont is showing flexibility by permitting RRGs actively working toward compliance to request an extension. According to Mr. Petterson, the department recognizes compliance may be more difficult for smaller RRGs and the standards will be applied proportionately.

One of the questions addressed in the webinar was "who is an independent director?" As explained in the webinar, and included in the slide presentation, independent directors are policyholder/members as are directors that have no material relationship with the RRG. "Material" is defined to mean payments that do not exceed 5 percent of annual premium or 2 percent of surplus, whichever is greater, during a 12-month period, with no independence threshold for audit or relationships with related entities.

RRGs seeking to comply with the numerous governance standards are encouraged to consider independent professional consulting assistance. RRGs not domiciled in Vermont can get ahead of prospective regulations in their respective domiciles by becoming knowledgeable about the policies and standards being adopted by the Vermont-based RRGs.

The Captive.com editors laud the Vermont regulator's governance standard efforts.

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