"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?