RRGs governance standards good for industry but may challenge smaller groups

In the last three years, various domiciles have enforced new corporate governance standards that are specific to risk retention groups (RRGs), and it is important for businesses to educate themselves on what changes and potentially challenges this brings to their operations.

This is the view of a panel, ‘Governance Standards for RRGs’, speaking at the VCIA annual conference in Burlington, Vermont. Speakers include Christina Kindstedt, senior vice president at Advantage Insurance Management (USA); Heidi Dupont Rabtoy, assistant chief examiner of the Vermont Department of Financial Regulation - Captive Division; Michael Hakimian, senior vice president and chief financial officer of MCIC; and Joseph Holahan, attorney at Morris, Manning & Martin.

“One size doesn’t fit all,” said Hakimian. “Your compliance and regulatory obligations will really depend on the circumstances of your business.”

Holahan suggested that many RRGs were already well governed before the governance standards started being adopted.

“The thing about the governance standards; they’re not anything new,” said Holahan. “RRGs have been doing this all along, now there’s more formality, and there are some aspects that require a bit of planning.”

The National Association of Insurance Commissioners (NAIC) put into effect a series of corporate governance standards in place specific to RRGs through the Model Risk Retention Act, which became effective for accreditation January 1, 2017.

These governance standards have a number of requirement and obligations, for example the owners of the RRG have to elect directors to sit on its board who have particular qualifications and responsibilities, as well as to put policies and procedures in place for management succession. There are also a number business conduct and ethics guidelines for directors, officer, and employees, including matters covered under the corporate opportunity doctrine in the RRG state of domicile.

Rabtoy noted that the independence of board members can be an issue on smaller boards, where they rely on third party service providers on oversight. Governance standards dictate that the majority of an RRGs board has to be independent.

There are currently 229 RRGs in the US, although this number fluctuates. Together they write $3.2 billion in gross written premiums. 181 of these RRGs write between $10-15 million dollars gross written premiums.

MCIC is the second largest RRG in the US, and is approaching $400 million in gross written premiums. It provides medical professional and general liability insurance coverage and risk management services to its academic medical centre subscribers and their various affiliated entities, employees and physicians.

“We’ve developed a pretty robust governance structure to manage that relationship [with RRG members], to ensure you have fairness built into the system, appropriate transparency with members, and that you have some clear lines around management decisions relative to board decisions,” said Hakimian.

Kindstedt added that a consistent theme across many examinations of RRGs to ensure they are complying with the governance standards, is that many already are, but now the processes are now more formalised. RRGs are now taking a look at the formality of how they report their financial results, and making sure roles and responsibilities are assigned appropriately.