Cease and Desist Doing Business Under Corporate Name

							Arizona Captive Insurance Association
      2008 Annual Conference
            Phoenix, AZ
           May 6-8, 2008
 Brief History of STICO Mutual
• Formed July, 1988 as association captive
  – Manufacturers of underground storage tanks;
    members of the Steel Tank Institute
• Organized as mutual
• Products & Pollution Liability and
  Warranty
• Domicile: Vermont
           Prior to Formation:
       The Perfect Storm(1984-87)
•   Reauthorization of RCRA (1984)
•   EPA’s LUST Program
•   Pollution insurance market tight
•   Insurance Cycle
•   Liability exposure’s impact on family
    owned businesses
         History Continued . . . .
•   Original Policy Limit: $1,000,000
•   Deductible: $25,000
•   Member Insureds in 1988: 45
•   No reinsurance support at first
    – Finite program in 1993 (Pre-FASB)
    – Pure risk transfer in 1996
•   Entered into fronting agreement in 1997
•   Changed fronting carrier in 2001
•   Converted to RRG in 2002
•   Became “A-Rated” by AM Best
       STICO Mutual Today
• 100 insureds
• $4 million + in annual premium
• GL, Environmental and Contractual Liability
  policies
• Underground & aboveground tanks, pressure
  vessels and petroleum equipment services
  – STI Membership no longer required (due to
    RRG Conversion)
    What led to our conversion?
• Desire to simplify operation
   – Return to direct writing
      • Unique policy form
   – Claims control


• Reduce expense load
   – Not fully realized


• AM Best rating change
    What Challenges Were Ahead?

• Coming out of the closet
  – No longer operating in shadows
     • NAIC filings and more frequent exams
• State Registration
  – Lack of uniformity
  – Increased scrutiny
  STICO Mutual’s Registration
         Approach
• 50-state telephone canvas
  – Registration forms required
     • NAIC, unique, hybrid
  – Financials
     • Type, which years
  – Director bios
  – Business Plan
  – Most recent State examination
Based upon the survey, we created one
binder incorporating everything that could
possibly be required by any given state. We
express- mailed the binder with the required
registration fee to each state.
    Results of registration effort……
•   15 states confirmed reg. w/i 30 days
•   30 states confirmed w/i 60 days
•   42 states confirmed w/i 180 days
•   5 states never formally responded
•   100% cashed check w/i 90 days
•   100% cash quarterly premium tax checks
           Since 2002 . . . .
• Our goals and objectives have been reached
• Smooth transition, with a few bumps from
  some states
• We avoid direct confrontation
• STICO Mutual’s financials and
  examinations have not created concerns
 STICO’s Premium Growth
                    Premium Written

$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
 $500,000
        $0
             2001    2002   2003   2004   2005   2006   2007
    STICO’s Asset Growth
              Asset Appreciation

$22,000,000
$20,000,000
$18,000,000
$16,000,000
$14,000,000
$12,000,000
$10,000,000




                E
              01

              02

              03

              04

              05

              06

             07
           20

           20

           20

           20

           20

           20

          20
    STICO’s Surplus Growth
               Surplus Appreciation

$12,000,000

$11,000,000

$10,000,000

 $9,000,000

 $8,000,000

 $7,000,000

 $6,000,000
              2001   2002   2003   2004   2005   2006   2007
    Was the conversion to an RRG
             successful?
• Strong financials
• Annual return of excess premiums
• Steady AM Best rating (A-)
• Control of claims, policy form, distribution
  and operations
• 20-30% loss ratio
   Emerging Issue: H.R. 5762
• Increasing Insurance Coverage Options
  for Consumers Act of 2008
  – Flows from GAO report and NAIC rules
  – Would allow RRG’s to write commercial
    property
  – Would require uniform corporate governance,
    disclosure and financial accounting standards
        Corporate Governance
• Majority of board must be “independent”
  – Material relationship disclosure
• Service provider contracts
  – 5% GWP/2% surplus & 5 year max term
  – Prior approval of domicile
• Written Charter (BOD)
  – Evidence of ownership interest, governance standards,
    management oversight, approve service provider
    contracts, and approve at least annually………
          Written Charter continued
• Groups goals and objectives regarding SP compensation
• Review Officer & SP performance in light of above goals
  and objectives
• Active decision to continued engagement of officers &
  material SP’s
   CORPORATE GOVERNANCE
• Formation of Audit Committee
   – 3 independent directors
• Written Charter
   –   Assist board; integrity of financial statements
   –   Compliance with legal and regulatory req.’s
   –   Qualifications, independence and performance of auditor
   –   Review performance of captive manager, MGU, TPA
   –   Periodic meetings with management and auditor
   –   Auditor lead partner rotation (5 year max)
   –   DOMESTIC REGULATOR MAY WAIVE
          Corporate Governance
• RRG must adopt & disclose standards
  –   Director election process
  –   Director qualification standards
  –   Director responsibilities
  –   Director access to mgmt & auditor
  –   Director compensation
  –   Director orientation and CE
  –   Management succession
  –   Annual director performance evaluation
            Corporate Governance
• BUSINESS CONDUCT & ETHICS
  – RRG shall adopt code of conduct and ethics
     • Conflict of interest
     • Corporate opportunities
     • Confidentiality
     • Fair dealing
     • Protection & use of RRG assets
     • Compliance with laws, rules and regulations
     • Reporting illegal and unethical behavior to domestic
       regulator
 NEW DISCLOSURE LANGUAGE

“This policy is issued by your risk retention
group of which you are a part owner. Your
risk retention group is primarily
regulated under the laws of _______ and
may be subject to all of the insurance
laws and consumer protections of
your state. If your risk retention group
fails, it may not be protected by a State
insurance insolvency guaranty fund”.
(bold, 12 point type)
Risk Retention Act
  Risk Retention Groups
  •   A RRG must be chartered and licensed in a state or the District of Columbia
  •   Except for the chartering state:
           • A RRG is exempt from any state law, rule or regulation that
              would regulate or make a RRG unlawful, except that any state
              may require a RRG to:
                • Comply with unfair claims settlement practices
                • Pay applicable premium or surplus lines taxes
                • Participate in a proportional insurance mechanism
                • Register for legal service
                • Submit to financial examination if the chartering state has not
                   initiated such an exam
                • Comply with lawful orders for delinquency or dissolution
                   proceedings
                • Comply with deceptive, false or fraudulent regulatory act
                   prohibition
                • Comply with an injunction for hazardous financial condition
                • Comply with a prescribed notice in 10 point type advising the
                   insured of no guaranty fund coverage and preemption of many
                   non-domiciliary state consumer protections
Post RRG Formation

            • Registration in states where RRG
              does business

            • Notice filing.
               • States will require, however, additional
                 information preempted by LRRA;
                 sometimes under the guise of right to
                 enjoin financially hazardous operations
Post RRG Formation
      continued…

      See Section 3902(d) of LRRA; NRRA
        v. Brown
         Section 3902(d) of LRRA
•   Each risk retention group shall submit –
•   To the insurance commissioner of the State in which it is chartered - -
•   Before it may offer insurance in any State, a plan of operation or a
    feasibility study which includes in the coverage, deductibles, coverage
    limits, rates, and rating classifications systems for each line of insurance the
    group intends to offer; and
•   Revisions of such plan or study if the group intends to offer any additional
    lines of liability insurance.
•   To the insurance commissioner of each State in which it intends to do
    business, before it may offer insurance in such State - -
•   A copy of such plan or study (which shall include the name of the State in
    which it is chartered and its principal place of business); and
•   A copy of any revisions to such plan or study as provided in paragraph
    (1)(B)(which shall include any change in the designation of the State in
    which it is chartered); and
•   To the insurance commissioner of each State in which it is doing business, a
    copy of the groups annual financial statement submitted to the State in
    which the group is chartered as an insurance company.
 Auto Dealers RRG v. California
• AD-RRG was formed in Montana. It offered
  stop-loss or excess loss liability coverage to
  self-insured employee benefit plans of auto
  dealers. It filed a registration notice with the
  CA Dept. of Insurance (“CA DOI”). CA DOI
  took the position that the coverage offered was
  not “liability” insurance as defined by the
  LRRA, even though MT (the chartering state)
  had issued the license, thereby confirming that
  it believed that the insurance was “liability”
  insurance.
 Auto Dealers RRG v. California
• CA DOI issued a Cease & Desist Order against
  AD-RRG. AD-RRG obtained a temporary
  restraining order and then a preliminary
  injunction against CA DOI from the U.S.
  District Court in Sacramento, CA.
 Auto Dealers RRG v. California
 The chartering (domicile) state has exclusive
  regulatory authority over the “formation and
  operation” of the RRG.
 Who regulates the state of domicile?
   • Its insurance commissioner?
   • Federal courts?
   • NAIC?
 Auto Dealers RRG v. California
• What can a non-domiciliary state do, if it
  objects to the registration of an out of state
  RRG?
• Ask the RRG for more information?
• Ask the domicile regulator for more
  information?
• Deny the registration?
• Issue a Cease & Desist Order?
• Obtain an injunction from a court of
  competent jurisdiction?