The NAIC's Risk Retention Handbook and Model Law Amendment (C) Subgroup has proposed important amendments to the Model Risk Retention Act to strengthen the regulatory framework for Risk Retention Groups (RRGs). When the Subgroup concludes its deliberations, its recommendations will work their way up the NAIC chain to the full NAIC Executive/Plenary Committee for implementation. If the NAIC approves the proposed changes, each state will likely have to adopt the revisions in order to maintain its NAIC accreditation. The revisions to the Act are expected to be passed by the NAIC sometime this year, according to a representative from the Subgroup.

These changes will greatly impact many RRGs, and it is imperative that such entities become familiar with the Act and the potential impact on the RRG’s corporate governance structure. Notably, the board of directors/subscriber advisory committee of any RRG will have to be comprised of a majority of independent directors. A director qualifies as “independent” if the board affirmatively determines that the director has no “material relationship” with the RRG. Additionally, if the RRG is a reciprocal, then the RRG’s attorney-in-fact would be required to adhere to the same independence standards as imposed on the RRG’s board of directors/subscribers advisory committee under the revised Act. By attempting to impose independence requirements on both the reciprocal RRG’s board of directors/subscriber advisory committee and the reciprocal RRG’s attorney-in-fact, the proposed governance standards would result in a “double-independence requirement.”

Other important amendments to the Act include:

  • Material service provider contracts with RRGs (i) cannot exceed five years, and (ii) require the approval of a majority of the RRG’s independent directors. The RRG’s board of directors/subscriber advisory committee shall have the right to terminate any service provider, audit or actuarial contracts at any time for cause after providing adequate notice.
  • The RRG must have an audit committee composed of at least three independent board members. Because of the possible overlap with the impending application of the Model Audit Rule to captive RRGs, the RRG’s domestic regulator may waive the requirement to establish an audit committee composed of independent board members if the RRG is able to demonstrate that it is impracticable to do so and the RRG’s board of directors/subscriber advisory committee itself is otherwise able to accomplish the purposes of an audit committee.

These proposed revisions will further affect the ever-changing landscape in which RRGs operate. Recently, the NAIC’s Model Insurance Holding Company System Regulatory Act became applicable to captive RRGs. Further, the application of the Model Audit Rule to captive RRGs is to become effective January 1, 2012.