Orlando, Fla.–Captive domicile officials appear to be reaching a meeting of the minds with state regulators over what sort of accounting format risk retention groups should use to report their financial condition.

An attorney for the RRGs gave a positive assessment after the latest meeting of the National Association of Insurance Commissioners task force that is studying regulation of the groups in the wake of a federal government report on RRGs.

Robert H. Myers Jr., National Risk Retention Association general counsel, said the task force had shown a willingness to let RRGs continue expressing their data using Generally Accepted Accounting Procedures as long as regulators are provided a summary translating the report from GAAP to statutory accounting.

The task force's next step will be to draw up a method for this conversion.

Statutory accounting, which is a more conservative method of assessing finances, is the format which the NAIC requires insurers to use in making their quarterly and annual reports to the regulators' association.

The Government Accountability Office in a report last year asked the NAIC to set standards for RRGs, saying that the rules should include a uniform accounting method.

Mr. Myers told National Underwriter the meeting's success with the NAIC group was facilitated by the fact that the NAIC had agreed to a request from the Vermont Captive Insurance Association (VCIA), the Captive Insurance Companies Assiciation (CICA) and his association, to put more persons with knowledge of RRG operations on the task force.

These included representatives for regulators from states that domicile captives. This allowed for better communication and understanding with state regulators, he said.

Mr. Myers, with Morris, Manning & Martin LLP, located in the growing captive domicile of Washington, D.C., was part of a panel that met during the Captive Insurance Companies Association's annual conference in Orlando to discuss the recent NAIC task force meeting.

“This is a huge part, and it's really facilitated the education process,” Mr. Myers said. “A large part of getting a reasonable result is having all the regulators participate at the same level of knowledge, and we're getting there.”

The accepted accounting method was one of the biggest issues for the NAIC accreditation committee, he said. The committee is now working out an accurate reconciliation statement between the two accounting methods.

He explained that “last year there was a basic assumption that statutory accounting was the accounting form that should be adopted” by RRGs. Now, however, “I believe the committees have come to the conclusion that [GAAP] accounting serves a useful purpose, and that the states can live with [both] GAAP and SAP [Statutory Accounting Principles].”

SAP, required of insurers, was thought to be a better method for RRGs by the NAIC because of its use by insurers. But many captives use GAAP because their corporate owners use this accounting method. To add to the complexity, many states require GAAP for captives, Mr. Myers noted.

Derick White, director of captive insurance for the domicile of Vermont, and a member of the CICA panel, said that GAAP accounting for RRGs “is doable and it's on the way.”

What won't work for RRGs, however, and is still being discussed, he told NU, is “the 10 percent rule, which means an RRG's largest risk can't be more than 10 percent of its capital and surplus.”

The rule makes sense for “a huge company with tens of thousands of policyholders, but for a small hospital system with five members it won't work,” he added, suggesting the rule “ought to be pushed aside. We shouldn't have to adopt it to be accredited.”

Karen Cutts, editor and publisher of the Risk Retention Reporter in Pasadena, Calif., noted statistics that 3.6 percent of RRGs regulated as captives have failed, compared with a 31 percent failure rate for RRGs regulated as traditional companies.

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Talks Progress On Risk Retention Group Accounting

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