Insurance means
primary, excess, reinsurance, surplus lines, or any other means for
transferring risk under state or federal law.
Liability is
defined as the legal liability for damages (including legal fees and
other claims expenses) resulting in bodily injury, property damage,
personal injury, or other types of loss or damage arising out of any
business or governmental activity. The term does
not include personal
risk liability of railroads for injuries to their employees under
the Federal Employer' Liability Act (FELA).
Personal risk
liability is
defined as liability for personal injury or property damage
resulting from personal, familiar or household responsibilities,
rather than from business-type activities.
A hazardous
financial condition exists
when a risk retention group appears to be unable (1) to meet its
policyholders obligations regarding known claims and reasonably
anticipated claims, or (2) to pay other obligations of business
operations.
RISK RETENTION GROUPS
A Risk Retention Group is a
corporation or other limited liability association, functioning as a
captive insurance company and organized for the primary purpose of
assuming and spreading the liability risk exposure(s) of its group
members (member-owners). It must be chartered and licensed as a
liability insurance company in one of the fifty states or the
District of Columbia. It can also charter as an industrial or
association captive under special state captive laws such as
Vermont, Delaware, Colorado, Illinois, etc.
RRGs chartered or licensed
under the laws of Bermuda or the Cayman Islands that have met the
capitalization requirements of one state prior to January 1, 1985,
can continue to operate as RRGs. These are the only off-shore
formations permitted.
Structuring of the RRG will
conform to the laws of the chartering state and can include
formation as a stock or mutual company, or as a reciprocal exchange.
Members of an RRG must be
engaged in businesses or activities which are similar or related in
regards to the liability exposures created by virtue of common
business or trade practices, products, services, premises or
operations. In addition, an individual or firm that meets this
criteria cannot be excluded from the group if the intent of the
exclusion is to provide the group with a competitive advantage.
Owners of RRGs must be both
members of and insured by the group. Indirect or secondary ownership
through a wholly-owned, single organization is permitted as long as
the organization's owners are members of and insured by the RRG.
Insurance companies cannot have an ownership interest in an RRG
unless all members of the group are insurance companies.
The ownership interests of an
RRG are exempt from filing registration statements under Federal
Securities Law and State Blue Sky Laws. However, in line with the
anti-fraud provisions of applicable State and Federal laws, any
solicitation for funds must disclose all material facts regarding
the RRG and its insurance operations.
Except for the chartering
state, an RRG is exempt from any state law, rule or regulation that
regulates or makes an RRG unlawful except, any state can require an
RRG to:
-
Comply with unfair claim
settlement practices;
-
Pay applicable premium or
surplus lines taxes;
-
Participate in residual
market mechanisms (Joint Underwriting Authorship's/Assigned Risk
Pools);
-
Designate the insurance
commissioner as agent for service of process;
-
Submit to financial
examination by other state insurance commissioners if the
chartering state has not initiated such an examination;
-
Comply with state
deceptive, false, or fraudulent trade practice laws;
-
Comply with lawful orders
for delinquency or dissolution proceedings;
-
Comply with an injunction
for hazardous financial condition;
-
Include a notice in
insurance policies, in 10-point type, stating the RRG is not
subject to all state laws and regulations, and that the
insolvency guaranty fund is not available for the RRG.
The non-chartering state has
no approval authority over rates, coverages, forms,
insurance-related services, management, operation, investment
activities, or loss control and claims administration. In addition,
the Act prohibits states from otherwise discriminating against RRGs.
Each RRG must submit a
feasibility study or plan of operation for approval to the
chartering state before offering insurance. Under the Federal Act,
the plan or study must include coverages, deductibles, coverage
limits, rates, and rating classification systems. The NAIC Model Act
defines the feasibility study as an "analysis which presents the
expected activities and results of a risk retention group." The NAIC
requires more information including historical and expected loss
experience of the members, pro forma financial statements and
projections, an actuarial opinion defining the minimum premium
necessary to begin operations and to avoid financial difficulties,
information on underwriting and claims procedures, reinsurance
agreements, investment policies, and management and marketing
methods. In addition, the NAIC also requires that the RRG provide
information identifying the initial members, the organizers, the
administrator and anyone else who will otherwise influence or
control the RRG.
In each state in which the RRG
is or plans to do business, the RRG is required to submit a copy of
the feasibility study (including revisions) and a copy of the annual
financial statement. The statement must be certified be an
independent accountant and include an opinion of loss and loss
adjustment expense reserves by an actuary or a qualified loss
reserve specialist.
An RRG cannot write coverage
which is prohibited by state statute or by the highest court in the
state (ex: punitive damage, intentional or criminal conduct). This
is not the same as coverage which is prohibited by the state
insurance department. However, the states do have broad
discretionary powers in deciding whether coverage from an RRG is
acceptable where proof of financial responsibility is needed to
obtain a license to engage in certain activities (i.e.: hazardous
waste hauling, motor vehicle operations).
If an RRG is found to be "in
hazardous financial condition," any state or U.S. District Court may
issue an order enjoining a RRG from soliciting, selling insurance,
or continuing operations.
PURCHASING GROUPS
A Purchasing Group (PG) is an
organization which purchases liability insurance on a group basis
from an insurance company or a Risk Retention Group (RRG) for its
members. Unlike an RRG, a PG is not an insurance company and its
members do not underwrite their own coverage. However, like RRGs,
PGs are subject to the same, similar, or related tests pertaining to
membership, exposures, and types of coverage(s) offered.
A PG is exempt from any state
law, rule, regulation or order that would:
-
Prohibit the establishment
of a PG
-
Make it unlawful for an
insurer to provide or offer insurance to, or to discriminate in
favor of the PG (based on loss experience)
Prohibit a PG or its members
from purchasing insurance on a group basis, regardless of a minimum
time in operation, the number of members or member participation
level, or otherwise discriminate against a PG or its members.
Apart from these specified
exemptions, a PG must comply with all other state laws and
regulations regarding its operation and procurement of insurance.
A PG intending to do business
in any state must give notice of intent to the appropriate state's
insurance commissioner. The notice must identify the state of
domicile and principal place of business for the PG, categorize the
lines and classifications of liability insurance to be purchased and
provide the name and domicile of the insurance company from which
insurance is to be purchased. In addition, the PG must designate the
commissioner of each state as its agent of process. It should be
noted that the NAIC Model Act authorizes a monetary filing fee in
conjunction with this last provision which applies to both PGs and
RRGs.
The Federal Act allows for
advantages in rates, forms and coverages as long as they are based
on the PG's loss and expense experience. In addition, it makes no
reference to individual state authority regarding approval of rates,
forms, or coverages. On the other hand, the NAIC Model Act gives
individual states the right of prior approval on rates, forms, and
coverages which are specifically designed for PG members.
The Federal Act does not
contain any provisions regarding deductibles or aggregate limits for
PGs. The NAIC Model Act provides for separate and individual
deductibles. Group deductibles are excluded. The NAIC Act maintains
that the purchase of aggregate limits is subject to the same
standards as all other group insurance purchases within a state. For
example, the Illinois Captive Law does not allow for a group
aggregate coverage level, only individual aggregate coverage limits.
A PG may not purchase
insurance from an insurer that is not admitted in the state where
the PG is located, or from a RRG that is not chartered in a state
unless the purchase is through a licensed broker acting pursuant to
applicable surplus lines laws
APPLICATION OF STATE AGENT
AND BROKER LICENSING
REQUIREMENTS
For both RRGs and PGs,
chartering and non-chartering states may require agents who are
acting on behalf of these entities to be licensed. However, states
cannot impose residency requirements for licensing, nor can they
require that the policy be countersigned by a resident agent or
broker.
OVERSIGHT OF IMPLEMENTATION
Under the Risk Retention Act, the Secretary of Commerce is
responsible for reporting to Congress a summary of comments and
conclusions regarding the implementation of the Act.
Ms. Steele is associated with the American Association of
Orthodontists Services, Inc., 401 N. Lindbergh Blvd., St. Louis, MO
63141-7816.