The NAIC and multi-state abuse of risk retention groups

One of the recurring issues faced by risk retention groups (RRGs) forming and operating under the federal Liability Risk Retention Act (LRRA) has been the roadblocks that some non-domiciliary state regulators have imposed on non-domiciliary RRGs seeking to register in their states.

It shouldn’t be that way: the LRRA’s statutory language, and a number of federal court cases, make it clear that the registration mechanism created under the LRRA is not a means for non-domiciliary states to regulate an RRG beyond the limited authority granted them under the LRRA.

Section 3902 of the LRRA permits a non-domiciliary RRG to do business in any state, without condition, upon the provision of the documents delineated by the LRRA to the non-domiciliary state. The seminal federal case of NRRA v Brown, decided in 1997 without any challenge or conflicting opinion, explicitly sets forth the limitation of non-domiciliary authority in the registration of foreign RRGs.

One such area of non-domiciliary state abuse is the levying of registration fees by roughly half of the states. RRGs are now paying in the range of $1 million per year on such registration fees, many of them annually. A number of states, such as South Carolina, California and North Carolina, extend fees and registration requirements each year beyond an RRG’s initial registration. These self-described registration fees cannot be lawfully charged under the LRRA.

By far the most problematic practice imposed by a number of states is illegally to refuse, or to condition acceptance of, a RRG’s registration on a RRG’s willingness to accept a non-domiciliary state’s regulatory demands pre-empted by the LRRA and not required by the RRG’s domiciliary regulator.

Compounding this problem, some states are implementing a “review” process, not unlike that imposed on traditional insurers, on foreign RRGs seeking to register in their states. They often attempt to apply traditional insurer standards on RRGs, or make additional demands as a condition of registering the RRG.

Non-domiciliary states cannot impose such requirements under the LRRA. It can take between nine months and a year to secure confirmation of a RRG registration in these states.

All these hurdles and restrictions on RRG registrations fall well outside the scope of non-domiciliary authority under the LRRA. Yet a number of these states are using registration either to second-guess the domiciliary regulator, or to impose conditions on registration not permitted of the non-domiciliary regulator under the LRRA.

NAIC investigates
To address these issues, the National Risk Retention Association (NRRA) has petitioned the National Association of Insurance Commissioners (NAIC) Risk Retention Working Group for assistance.

The working group has been holding hearings and receiving testimony from regulators and members of the captive insurance community, including the NRRA and the Vermont Captive Insurance Association (VCIA).

While no conclusions have yet been reached, and no report issued, preliminary drafts that have been circulated among some trade associations suggest the NAIC Risk Retention Working Group recognises there is a problem for RRGs. It also seems to agree that the questions, concerns, or issues which a non-domiciliary RRG may have regarding a registrant RRG should be taken up directly with the respective RRG’s domiciliary regulator.

A number of foreign non-domiciliary states, rather than communicating directly with the domiciliary regulator as to their concerns, attempt to coerce the non-domiciliary RRG by imposing pre-empted demands or requirements unilaterally on the foreign RRG before agreeing to confirm the RRG’s registration.

Other non-domiciliary states refuse to accept the domiciliary state’s determination as to the RRG qualifying as such under the LRRA, unlawfully utilising the registration mechanism to second-guess the lead regulator’s determination and denying the RRG’s registration.

As the NAIC has seen fit to incorporate within its accreditation standards the protocol on how domiciliary states should license and regulate their RRGs, by extension the same accreditation process should incorporate the standards and protocols which non-domiciliary states follow in registering non-domiciliary RRGs.

This would enable registration to become a cooperative process between domiciliary and non-domiciliary regulators consistent with the LRRA’s lead state regulatory framework, rather than a multi-state gauntlet some defiant states have established and currently impose.

Jon Harkavy is executive vice president and general counsel at Risk Services. He can be contacted at:  jharkavy@riskservcos.com