D.C. Mun. Regs. tit. 26, r. 26-A3775

Current through Register Vol. 71, No. 49, December 6, 2024

Rule 26-A3775 - GOVERNANCE STANDARDS FOR RISK RETENTION GROUPS

These Governance Standards for Risk Retention Groups are effective January 1, 2018 for risk retention groups licensed prior to January 1, 2017 and are effective at the time of licensure for risk retention groups licensed on or after January 1, 2017.

3775.1

The board of directors shall adopt and make available governance standards, which shall include:

(a) A process by which the directors are elected by the owner/insureds;

(b) Director qualification standards;

(c) Director responsibilities;

(d) Director access to management and, as necessary and appropriate, independent advisors;

(e) Director compensation;

(f) Director orientation and continuing education;

(g) The policies and procedures that are followed for management succession;

(h) The policies and procedures that are followed for annual performance evaluation of the board; and

(i) The policies and practices that must be followed by any audit committee required by this section, including compliance with Subsections 3775.7 and 3775.8 of this section or, if no audit committee is required, the policies and practices to be followed by the board of directors to satisfy the requirements of Subsection 3775.9 of this section.

3775.2

The board of directors shall adopt and make available a code of business conduct and ethics for directors, officers and employees, and promptly disclose to the board of directors any waivers of the code granted to a director or officer, which should include the following topics:

(a) Conflicts of interest;

(b) Matters covered under the corporate opportunities doctrine in the District of Columbia;

(c) Confidentiality;

(d) Fair dealing;

(e) Protection and proper use of risk retention group assets;

(f) Compliance with applicable laws, rules and regulations; and

(g) The mandatory reporting of any illegal or unethical behavior that affects the operation of the risk retention group.

3775.3

The risk retention group shall require in one or more of its organizational documents that the board of directors shall have a majority of independent directors. The board shall determine at least annually whether a director is independent and the risk retention group shall maintain a record of such determinations and report such determinations to the Commissioner promptly upon request. No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no "material relationship" with the risk retention group. If the risk retention group is a reciprocal, then the attorney-in-fact shall adhere to the same standards regarding independence of operation and governance as imposed on the risk retention group's board of directors; and, to the extent permissible under District law, service providers of a reciprocal risk retention group should contract with the risk retention group and not the attorney-in-fact.

3775.4

The board of directors shall adopt a written policy in the plan of operation as approved by the board that requires the board to:

(a) Assure that all owners/insureds/subscribers of the risk retention group receive evidence of ownership interest;

(b) Develop a set of governance standards applicable to the risk retention group;

(c) Oversee the evaluation of the risk retention group's management including but not limited to the performance of the captive manager, managing general underwriter or other party or parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims or the preparation of financial statements;

(d) Review and approve the amount to be paid for all material service providers, and ensure that material service provider contracts comply with this rule; and

(e) Review and approve, at least annually:

(i) Risk retention group's goals and objectives relevant to the compensation of officers and service providers;

(ii) The officers' and service providers' performance in light of those goals the and objectives; and

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

3775.5

The term of any material service provider contract with the risk retention group shall not exceed five (5) years. Any such contract, or its renewal, shall require the approval of the majority of the independent directors. The board of directors shall have the right to terminate any service provider, audit or actuarial contracts at any time for cause after providing notice as defined in the contract.

3775.6

A material service provider contract, which is deemed by this rule to be a material transaction, shall not be entered into until after notice has been provided to the Commissioner in writing by the risk retention group of its intention to enter into such transaction at least thirty (30) days prior to the effective date and the contract has not been disapproved within thirty (30) days after such notice.

3775.7

The risk retention group shall have an audit committee composed of at least three independent board members. If invited by the members of the audit committee, a non-independent board member may participate in the activities of the audit committee but may not serve as a member of the audit committee.

Alternatively, in lieu of the audit committee provisions in this section, the risk retention group shall have an audit committee similar to that required in Section 4 D of the NAIC Annual Financial Reporting Model Regulation (#205).

3775.8

(a) An audit committee established under this rule shall have a written charter that defines the committee's purpose, which, at a minimum, must include to:

(1) Assist board oversight of the integrity of the financial statements, the compliance with legal and regulatory requirements, and the qualifications, independence and performance of the independent auditor and actuary;

(2) Discuss the annual audited financial statements and quarterly financial statements with management;

(3) Discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor;

(4) Discuss policies with respect to risk assessment and risk management;

(5) Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors;

(6) Review with the independent auditor any audit problems or difficulties and management's response;

(7) Set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor;

(8) Require the external auditor to rotate the lead (or coordinating) audit partner having primary responsibility for the risk retention group's audit as well as the audit partner responsible for reviewing that audit so that neither individual performs audit services for more than five (5) consecutive fiscal years or alternatively, require the external auditor to adhere to the partner rotation requirements similar to Section 7 D of the NAIC Annual Financial Reporting Model Regulation (#205); and

(9) Report regularly to the board of directors.

(b) Alternatively, in lieu of the audit committee requirements in this section, the risk retention group shall adhere to the audit committee requirements similar to those required in Section 14 of the NAIC Annual Financial Reporting Model Regulation (#205).

3775.9

The Commissioner may waive the requirement to establish an audit committee composed of independent board members if the risk retention group is able to demonstrate that it is impracticable to do so and the board of directors is otherwise able to accomplish the purposes of the audit committee.

3775.10

The captive manager, president or chief executive officer of the risk retention group shall promptly notify the Commissioner in writing if any becomes aware of any material non-compliance with a governance standard mandated in this section.

3775.99

As used in this section:

Board of directors means the governing body of the risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees, and make other governing decisions.

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 director.

Independent director means a director who does not have a material relationship with the risk retention group. Any person that is a direct or indirect owner of or subscriber in a risk retention group (or is an officer, director and/or employee of such an owner and insured, unless such other position of such officer, director and/or employee constitutes a material relationship), that is a risk retention group described in 15 USC § 3901(a)(4)(E)(ii), is considered to be "independent".

Material relationship means a relationship between a director and the risk retention group if the director, a member of his or her immediate family, or any business with which such director is affiliated:

(1) In any twelve (12)-month period, receives compensation or payment of any other item of value from the risk retention group or a consultant or service provider to the risk retention group in an amount greater than or equal to five percent (5%) of the risk retention group's gross written premium for such 12-month period or two percent (2%) of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in such a 12- month period. Such person or immediate family member of such person is not independent until one (1) year after his/her compensation from the risk retention group falls below the threshold established in this section, as applicable;

(2) Is affiliated with or employed in a professional capacity by a present or former internal or external auditor of the risk retention group. Such material relationship shall continue for one year after the end of the affiliation, employment or auditing relationship ends; or

(3) Is employed as an executive officer of another company where any of the risk retention group's present executives serve on that other company's board of directors. Such material relationship shall continue for one year after such employment or service ends.

Make available means making such information available through electronic (e.g., posting such information on the risk retention group's website) or other means, and providing such information to members/insureds upon request.

Material service provider contract means a service provider contract, for which the amount to be paid for such contract is greater than or equal to five percent (5%) of the risk retention group's annual gross written premium or two percent (2%) of its surplus, whichever is greater. A service provider may include captive managers, auditors, accountants, actuaries, investment advisors, lawyers, managing general underwriters or other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims and/or the preparation of financial statements. Lawyers acting as defense counsel retained by the risk retention group to defend claims shall be excluded from the definition of service provider unless the amount of the fees paid are material, as defined in this rule.

Organizational documents mean documents setting forth the establishment, structure, and standards for governing and operating a risk retention group, including governance standards, a code of business conduct and ethics, and plan of operations for a risk retention group.

D.C. Mun. Regs. tit. 26, r. 26-A3775

Final Rulemaking published at 64 DCR 9885 (10/6/2017)