The Vermont Statutes Online

Title 8 : Banking and Insurance

Chapter 142 : Risk Retention Groups and Purchasing Groups

• § 6052. Risk retention groups chartered in this State

  (a) Pursuant to the provisions of chapter 141 of this title, a risk retention group shall be chartered and licensed to write only liability insurance pursuant to this chapter, must comply with all of the laws, rules, regulations, and requirements applicable to such insurers chartered and licensed in this State under chapter 141 of this title, and with subdivisions 6053(4), (5), (7), and (8) of this title. A risk retention group chartered in this State may provide coverage for payment of punitive damages, the multiplied portion of multiple damages, or other penalties in the nature of compensatory damages, and any such coverage shall be enforceable against such risk retention group in accordance with its terms.

  (b) Before it may offer insurance in any state, each risk retention group shall also submit for approval to the Commissioner of this State a plan of operation and feasibility study that includes a description of the coverages, deductibles, coverage limits, rates, and rating classification systems for each line of insurance the group intends to offer, together with such additional information as the Commissioner may reasonably require. In considering and approving the risk retention group’s plan of operation and any subsequent amendments thereto, the Commissioner may limit the net amount of risk retained by a risk retention group. The risk retention group shall submit for approval by the Commissioner an appropriate revision in the event of any subsequent material change in any item of the plan of operation or feasibility study, including any material change in the information called for in subsection (c) of this section, but excluding the identity of policyholders and any changes in rates or rating classification systems. 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 Commissioner. The risk retention group shall inform the Commissioner of any material changes in rates or rating classification systems within 30 days of the adoption of such change.

  (c)(1) At the time of filing its application for charter, the risk retention group shall provide to the Commissioner in summary form the following information:

  (A) the identity of the initial policyholders or members of the group or if the identity is not known or cannot be determined, a description of who is eligible to be a policyholder or a member;

  (B) the identity of the persons that organized the group;

  (C) the identity of any persons that will act as a managing general agent or reinsurance intermediary for, provide other significant administrative services to, or otherwise influence or control the activities of the group;

  (D) summary descriptions of the services, described in subdivision (C) of this subdivision (1), and of any contracts under which the services are to be performed, including the method of compensation therefor;

  (E) the amount and nature of initial capitalization;

  (F) plans for the payment of dividends or other distributions of members’ capital and surplus; and

  (G) the states in which the group intends to file.

  (2) The applicant may bind separately any portions of the application or any amendment thereto that contain proprietary information or documents and request confidential treatment of such portions. As used in this section, “proprietary information or documents” means certain information or documents furnished by or pertaining to any of the persons specified in subdivision (1) of this subsection (c) that would customarily be treated as confidential or sensitive and the disclosure of which could result in harm or prejudice to the person to whom the information or documents pertain or unfair advantage to another person. Such information includes trade secrets, historical or projected loss data, or case reserves of members or policyholders, actuarial analyses that include such data or reserves, historical or projected financial data not otherwise publicly available, and similar information or documents. The Commissioner shall determine which portions specified by the applicant fall within the definition of proprietary information or documents and treat such portions as confidential. Provided, however, that nothing herein shall excuse the applicant from making any required disclosure under the RRA 1986, this chapter or chapter 141 of this title, or prohibit the Commissioner from disclosing any proprietary information or documents in the furtherance of any legal or regulatory proceeding. Before using proprietary information or documents in a legal or regulatory proceeding that does not involve the applicant or any person named in the application or any amendment thereto, the Commissioner shall first seek to obtain the same information from nonconfidential sources. If unavailable from nonconfidential sources, the Commissioner shall seek to protect the confidential information or documents from unnecessary disclosure. Upon licensing, the Commissioner shall forward to the National Association of Insurance Commissioners all information required under the RRA 1986 to be submitted to each state where the risk retention group proposes to operate and all other information not deemed confidential under this section. Providing notification to the National Association of Insurance Commissioners is in addition to and shall not be sufficient to satisfy the requirements of section 6053 or any other sections of this chapter. In addition, the Commissioner may provide access to confidential application information with respect to risk retention groups to representatives of the National Association of Insurance Commissioners to inspect (but not copy) such information in connection with accreditation examinations, so long as the National Association of Insurance Commissioners agrees in writing to maintain the confidentiality of such information.

  (d) The provisions of subsection 6008(c) and sections 3573 and 3574 of this title shall apply to risk retention groups chartered in this State, except that such provisions shall not apply to final examination reports relating to risk retention groups and except that the Commissioner may, in the Commissioner’s discretion, grant access to any other examination information covered by subsection 6008(c) of this title to representatives of the National Association of Insurance Commissioners to inspect (but not copy) such information in connection with accreditation examinations, so long as the National Association of Insurance Commissioners agrees in writing to maintain the confidentiality of such information.

  (e) The provisions of chapter 101, subchapter 13 of this title shall apply to risk retention groups chartered in this State. However, no existing rule, regulation, or order promulgated under section 3688 of this title shall apply to a risk retention group chartered in this State unless the rule, regulation, or order or a provision thereof is specific to risk retention groups. The Commissioner shall establish procedures to implement the provisions of chapter 101, subchapter 13 of this title as applied to risk retention groups chartered in this State by rule, regulation, or order.

  (f) The provisions of chapter 159 of this title (risk based capital for insurers) shall apply to risk retention groups chartered in this State, except that the Commissioner may elect not to take regulatory action as otherwise required by sections 8303-8306 of chapter 159 of this title, provided at least one of the following conditions exist:

  (1) The Commissioner determines that the risk retention group’s members or sponsoring organization, or both, are sufficiently capitalized to support the operations of the risk retention group. As required by the Commissioner, the members or sponsoring organization, or both, shall provide evidence of:

  (A) an investment grade credit rating from a nationally recognized statistical rating organization or rating of A- or better by the A. M. Best Company;

  (B) an excess of assets over liabilities of at least $100 million; or

  (C) an excess of assets over liabilities of at least 10 times the risk retention group’s largest net retained per occurrence limit.

  (2) Each policyholder qualifies as an industrial insured under the law of his or her home state or under Vermont law, whichever the Commissioner determines to be more stringent.

  (3) The risk retention group’s certificate of authority was issued prior to January 1, 2011 and, based on a minimum of five years of solvent operation, is specifically exempted from the requirements for mandatory action in writing by the Commissioner.

  (g) This subsection establishes governance standards for a risk retention group.

  (1) As used in this subsection:

  (A) “Board of directors” or “board” means the governing body of a risk retention group elected by risk retention group members to establish policy, elect or appoint officers and committees, and make other governing decisions.

  (B) “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 member of the governing body of the risk retention group.

  (C)(i) “Independent director” means a director who does not have a material relationship with the risk retention group. A director has a material relationship with a risk retention group if he or she, or a member of his or her immediate family:

  (I) In any 12-month period, receives from the risk retention group, or from a consultant or service provider to the risk retention group, compensation or other item or items of value in an amount equal to or greater than five percent of the risk retention group’s gross written premium or two percent of the risk retention group’s surplus, as measured at the end of any fiscal quarter falling in such 12-month period, whichever is greater. This provision also applies to compensation or items of value received by any business with which the director is affiliated. Such material relationship shall continue for one year after receipt of the item or items of value or the compensation falls below the threshold established in this subdivision.

  (II) Has a relationship with an auditor as follows: Is affiliated with or employed in a professional capacity by a current or former internal or external auditor of the risk retention group. Such material relationship shall continue for one year after the affiliation or employment ends.

  (aa) Is employed as an executive officer of another business entity that is affiliated with the risk retention group by virtue of common ownership and control, if such entity meets all of the following criteria:

  (AA) the entity is not an insured of the risk retention group;

  (BB) the entity has a contractual relationship with the risk retention group; and

  (CC) the governing board of the entity includes executive officers of the risk retention group, unless a majority of the membership of such entity’s governing board is composed of individuals who are members of the governing board of the risk retention group.

  (bb) Such material relationship shall continue until the employment or service ends.

  (ii) Notwithstanding subdivision (i) of this subdivision (g)(1)(C), a director who is a direct or indirect owner of the risk retention group is deemed to be independent; and an officer, director, or employee of an insured of the risk retention group is deemed to be independent, unless some other relationship of such officer, director, or employee qualifies as a material relationship.

  (D) “Material service provider” includes a captive manager, auditor, accountant, actuary, investment advisor, attorney, managing general underwriter, or other person responsible for underwriting, determination of rates, premium collection, claims adjustment or settlement, or preparation of financial statements, whose aggregate annual contract fees are equal to or greater than five percent of the risk retention group’s annual gross written premium or two percent of its surplus, whichever is greater. It does not mean defense counsel retained by a risk retention group, unless his or her annual fees have been equal to or greater than five percent of a risk retention group’s annual gross premium or two percent of its surplus, whichever is greater, during three or more of the previous five years.

  (2) The board shall have a majority of independent directors. The board of directors shall determine whether a director is independent; review such determinations annually; and maintain a record of the determinations, which shall be provided to the Commissioner annually. If the Commissioner disagrees with the board’s determination regarding independence, the board, within six months, shall take such actions as are necessary in order to obtain written confirmation from the Commissioner that the board meets the independence requirements set forth in subdivision (1)(C) of this subsection.

  (3) The term of any material service provider contract entered into with a risk retention group shall not exceed five years. The contract, or its renewal, requires approval of a majority of the risk retention group’s independent directors. The board of directors has the right to terminate a contract at any time for cause after providing adequate notice, as defined in the terms of the contract.

  (4) A risk retention group shall not enter into a material service provider contract without the prior written approval of the Commissioner.

  (5) A risk retention group’s business plan shall include written policies approved by its board of directors requiring the board to:

  (A) provide evidence of ownership interest to each risk retention group member;

  (B) develop governance standards applicable to the risk retention group;

  (C) oversee the evaluation of the risk retention group’s management, including the performance of its captive manager, managing general underwriter, or other person or persons responsible for underwriting, rate determination, premium collection, claims adjustment and settlement, or preparation of financial statements;

  (D) review and approve the amount to be paid under a material service provider contract; and

  (E) at least annually, review and approve:

  (i) the risk retention group’s goals and objectives relevant to the compensation of officers and material service providers;

  (ii) the performance of officers and material service providers as measured against the risk retention group’s goals and objectives;

  (iii) the continued engagement of officers and material service providers.

  (6) A risk retention group shall have an audit committee composed of at least three independent board members. A nonindependent board member may participate in the committee’s activities, if invited to do so by the audit committee, but he or she shall not serve as a committee member. The Commissioner may waive the requirement of an audit committee if the risk retention group demonstrates to the Commissioner’s satisfaction that having such committee is impracticable and the board of directors is able to perform sufficiently the committee’s responsibilities. The audit committee shall have a written charter defining its responsibilities, which shall include:

  (A) Assisting board oversight of the integrity of financial statements, compliance with legal and regulatory requirements, and qualifications, independence, and performance of the independent auditor or actuary.

  (B) Reviewing quarterly financial statements and annual audited financial statements with management.

  (C) Reviewing annual audited financial statements with its independent auditor and, if it deems advisable, the risk retention group’s quarterly financial statements as well.

  (D) Reviewing risk assessment and risk management policies.

  (E) Meeting with management, either directly or through a designated representative of the committee.

  (F) Meeting with independent auditors, either directly or through a designated representative of the committee.

  (G) Reviewing with the independent auditor any audit problems and management’s response.

  (H) Establishing clear hiring policies applicable to the hiring of employees or former employees of the independent auditor by the risk retention group.

  (I) Requiring the independent auditor to rotate the lead audit partner having primary responsibility for the risk retention group’s audit so that no individual performs audit services for the risk retention group for more than five consecutive fiscal years. In a form and manner prescribed by the Commissioner, a risk retention group may request a waiver from the rotation requirement of this subdivision. In determining whether to grant a waiver request, the Commissioner may consider:

  (i) the number and expertise of the independent auditor’s partners;

  (ii) the number of insurance clients the independent auditor has;

  (iii) the premium volume of the risk retention group;

  (iv) the number of jurisdictions in which the risk retention group transacts business; and

  (v) any other factor deemed relevant by the Commissioner.

  (J) Reporting regularly to the board of directors.

  (7) The board of directors shall adopt governance standards, which shall be available to risk retention group members through electronic or other means, and provided to risk retention group members, upon request. The governance standards shall include:

  (A) a process by which risk retention group members elect directors;

  (B) director qualifications, responsibilities, and compensation;

  (C) director orientation and continuing education requirements;

  (D) a process allowing the board access to management and, as necessary and appropriate, independent advisors;

  (E) policies and procedures for management succession; and

  (F) policies and procedures providing for an annual performance evaluation of the board.

  (8) The board of directors shall adopt a code of business conduct and ethics applicable to directors, officers, and employees of the risk retention group and criteria for waivers of code provisions, which shall be available to risk retention group members through electronic or other means, and provided to risk retention group members, upon request. Provisions of the code shall address:

  (A) conflicts of interest;

  (B) matters covered under the Vermont corporate opportunities doctrine;

  (C) confidentiality;

  (D) fair dealing;

  (E) protection and proper use of risk retention group assets;

  (F) standards for complying with applicable laws, rules, and regulations; and

  (G) mandatory reporting of illegal or unethical behavior affecting operation of the risk retention group.

  (9) The president or chief executive officer of a risk retention group shall promptly notify the Commissioner in writing of any known material noncompliance with the governance standards established in this subsection.

  (h) The provisions of subchapter 7A of chapter 101 of this title (own risk and solvency assessment) shall apply to risk retention groups chartered in this State. (Added 1991, No. 249 (Adj. Sess.), § 23, eff. Dec. 31, 1992; amended 1993, No. 235 (Adj. Sess.), § 9i, eff. June 21, 1994; 1997, No. 49, § 17, eff. June 26, 1997; 1999, No. 38, § 20, eff. May 20, 1999; 2009, No. 42, §§ 29, 30, eff. May 27, 2009; 2011, No. 21, § 25; 2011, No. 78 (Adj. Sess.), § 41, eff. April 2, 2012; 2013, No. 103 (Adj. Sess.), § 9, eff. April 14, 2014; 2015, No. 20, § 9, eff. May 7, 2015; 2015, No. 74 (Adj. Sess.), § 6, eff. April 13, 2016; 2017, No. 12, § 10, eff. May 1, 2017; 2017, No. 90 (Adj. Sess.), § 6, eff. March 8, 2018; 2019, No. 3, § 9, eff. April 18, 2019; 2019, No. 110 (Adj. Sess.), § 11, eff. June 15, 2020.)