A National Association of Insurance Commissioners task force–formed to address issues brought up in a federal government report on risk retention groups–drew accolades from the RRG sector for expressing willingness to accept GAAP as well as statutory accounting methods for the alternative market facilities, as long as there is a summery of the differences for reviewers.
The Government Accountability Office had asked the NAIC to set standards for RRGs, saying the rules should include a uniform accounting method.
Robert H. Myers Jr., National Risk Retention Association general counsel, told National Underwriter that the group's success at the meeting was largely due to the inclusion of more domiciles on the task force, as previously requested by NRRA, the Captive Insurance Companies Association and several state domiciles. This allowed for better communication and understanding with state regulators, he said.
Mr. Myers–a partner with the law firm of Morris, Manning & Martin LLP in Washington, D.C., a growing captive domicile–was part of a panel here discussing the recent NAIC committee meeting at CICA's annual conference.
"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 [Generally Accepted Accounting Principles] accounting serves a useful purpose, and that the states can live with [both] GAAP and [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., and a columnist for NU, also was a panel member. She answered an audience question about the type of regulation most effective for RRGs. Captive regulation for RRGs, she noted, has been shown to have better results than traditional insurer regulation.
Ms. Cutts explained that since the beginning of the federal Liability Risk Retention Act [in the mid-1980s] until 2005, 308 RRGs have been formed. Of those, 270 were regulated as captives under state captive laws and 38 were regulated as traditional insurers. "Of the 270 regulated as captives, 3.6 percent failed," she noted, while "of those regulated as traditional companies, about 31 percent failed."
Ms. Cutts added that captive domicile regulators are now "much more sophisticated" in leading their domiciles. "They have a commitment to the RRGs in their domicile. They watch them very carefully, and they share information so that RRGs may not be allowed to form when regulators acknowledge something isn't right," she said.
Thomas Hampton, acting insurance commissioner for the District of Columbia, who attended both the NAIC meeting and the CICA conference, said the District, which is participating on the task force, wants to see a regulatory scheme different from that used for traditional insurers. "We believe we can get the best practices from Vermont, Washington, D.C., South Carolina and some of the major captive jurisdictions to develop a scheme that can be beneficial to everyone," he told NU.
NRRA issued a statement last week that backed the task force's actions, saying it surveyed several RRGs regarding initial results of the GAO Report. The survey, NRRA said, found an overwhelming number of respondents "think that there are inconsistencies among states of domicile." NRRA added it believes traditional insurer regulation is not uniform, and RRG oversight should allow for reasonable flexibility in each state's discretion.
The statement commented on the GAO report's recommendation for consistent accounting methods. "Some survey respondents believe a change in accounting from GAAP to SAP would be problematic for many RRGs," the group said.
Other respondents believe a change in accounting methods "would particularly hinder the formation of RRGs, because it would create additional problems for the use of letters of credit," NRRA added.
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