In late 2018 the National Risk Retention Association, frustrated by difficulties its members experienced when registering to do business in several non-domiciliary states, petitioned the National Association of Insurance Commissioners for assistance. Jon Harkavy of Risk Services examines the current state of play.
The Federal Liability Risk Retention Act (LRRA) requires risk retention groups (RRGs) to register in states outside their licensing domicile before soliciting, or doing business, outside their domicile.
Under the leadership and guidance of the Vermont and DC insurance departments, the National Association of Insurance Commissioners (NAIC) Risk Retention Group Task Force has investigated the problems posed by a number of non-domiciliary states in rejecting, delaying, or imposing conditions or restrictions on foreign RRG registrations.
“The task force notes that the LRRA was silent on the issuing of fees, but then ignores the consequence of this statement.”
While the NAIC does not have enforcement authority per se over regulators, it can persuade and educate its member insurance departments, through its accreditation programme and resources as to rights, responsibilities and resources that are available in non-domiciliary states.
The task force has adopted two documents: Best Practices–RRGs; and Frequently Asked Questions (FAQs)–RRGS. These documents clearly place the NAIC imprimatur behind the LRRA’s lead state statutory framework, making clear that the LRRA’s registration provisions do not grant non-domiciliary states any regulatory authority not explicitly delineated in the federal law.
The FAQs published by the task force make it clear that unless there is an incomplete registration, where the documentation required by the LRRA is absent, registration should be acknowledged by the non-domiciliary state within 30 days after filing. Should there be solvency or capitalisation concerns regarding the RRG seeking to register, the non-domiciliary state regulator should address its concerns directly with the domiciliary regulator, rather than making demands upon the RRG seeking to register.
A number of non-domiciliary states have declined to convey their concerns directly to the domiciliary regulator. Instead, in direct violation of the LRRA, they have unilaterally rejected, or placed demands on, the RRG seeking to register.
Under the LRRA, should the domiciliary state fail to address the non-domiciliary state’s concerns adequately, the RRG must still be registered by the non-domiciliary state. However, the FAQs set forth the actions preserved for regulators in non-domiciliary states under the LRRA, including the right to demand that the domiciliary state perform a financial examination of the RRG. If the domiciliary state refuses to conduct such an examination, the non-domiciliary state may do so.
If the RRG is found to be in a financially hazardous condition, the non-domiciliary state can seek a judicial injunction to prevent the RRG from operating in the state. If brought in federal court, the RRG could be enjoined from operating nationally.
In practice, these extraordinary remedies are rarely, if ever, sought by non-domiciliary states. An RRG’s domicile is invariably responsive to the concerns of non-domiciliary group regulators having questions as to RRGs seeking to register in their state.
The Best Practices paper published by the task force largely reiterates the importance of direct communication between the non-domiciliary state where the RRG registers and its domiciliary regulator. It also strongly emphasises the significant responsibility of the RRG’s domiciliary regulator in licensing an RRG which could potentially do business throughout the US.
That is fair enough. But this author sees a distinct lack of balance in the NAIC’s treatment of domiciliary and non-domiciliary regulators under the NAIC accreditation programme, which places significant sanctions on states losing NAIC accreditation. This includes, but is not limited to, the refusal of accredited states to accept the financial examinations performed by non-accredited states.
Conversely, an accredited state which improperly rejects, delays, or places conditions on a non-domiciliary RRG faces no consequences or sanction from the NAIC. While a domiciliary state can lose its accreditation based on improperly licensing an RRG, a non-domiciliary state abusing the registration provisions of the LRRA faces no such consequence.
Another area of disappointment was the task force’s discussion of fees charged by non-domiciliary states to non-domiciliary RRGs for various activities. These include initial and annual registration fees and other functions, estimated to be some $770,000 yearly. The task force notes that the LRRA was silent on the issuing of fees, but then ignores the consequence of this statement. Under the LRRA, if authority is not specifically delineated as possessed by the non-domiciliary regulator, it does not exist.
As of the time of writing, the task force appears to be poised to address another area which has previously been a controversy: an RRG’s ability to serve as a reinsurer. RRGs sometimes operate in a reinsurance capacity for rating, financial responsibility requirements or other reasons. Previously, California and New York have raised challenges questioning whether an RRG can serve in a reinsurance capacity.
The NAIC task force looks set to acknowledge an RRG’s ability, with the permission of its domiciliary regulator, to serve in a reinsurance capacity. But it mandates that if an RRG seeks to reinsure another RRG or its members, the ceding insurer or its members must be eligible for membership in the RRG serving as a reinsurer.
A perhaps cynical view may be that the NAIC task force is only acknowledging the limited non-domiciliary state authority delineated in the LRRA, without providing an enforcement mechanism against non-domiciliary states violating the LRRA through its accreditation protocol.
However, for those RRGs seeking initial registration or expansion into other states, the RRG community hopes that non-domiciliary states will abide by the guidelines provided by the task force.
Jon Harkavy is of counsel at Risk Services. He can be contacted at: email@example.com
Jon Harkavy, National Risk Retention Association, National Association of Insurance Commissioners, NAIC, Liability Risk Retention Act