Captive Insurance Alert | New Governance Standards for Risk Retention Groups
After much delay and discussion, Vermont has formally adopted governance standards for risk retention groups. While the RRG governance standards do not become effective until May of 2016, RRG’s should begin the process of reviewing their governance practices in order to determine whether modifications will be necessary in order to comply with the new law. If you have further questions or would like to develop strategies to manage these developments, please contact a member of Downs Rachlin’s Captive Insurance Group.
A brief summary of some of the significant aspects of the new RRG governance standards is below:
Each RRG must have a majority of independent directors. Directors are considered independent if they do not have a material relationship with the RRG. As a general rule, a person that is a direct or indirect owner of or subscriber in the RRG – or is an officer, director, or employee of such owner and insured – is deemed to be independent. However, if in addition to his or her role with such direct or indirect owner of or subscriber in the RRG, such officer, director or employee has some other position that constitutes a material relationship, then such officer, director or employee will not qualify as independent.
A director has a material relationship with an RRG if he or she or a member of his or her family:
- In any 12-month period, receives from the RRG, or from a consultant or service provider to the RRG, compensation in an amount equal to or greater than 5% of the RRG’s gross written premium or 2% of the RRG’s surplus;
- Is affiliated with or employed by a current or former auditor of the RRG; or
- Is employed as an executive officer of another company whose board includes executive officers of the RRG, unless a majority of the membership of such other company’s board is the same as the board of the RRG.
Material Services Provide Contracts
Material service provider contracts are limited to a term of 5 years and the RRG’s board must have the right to terminate for cause at any time. Additionally, all material service provider contracts must be approved by a majority of the RRG’s independent directors and the Department of Financial Regulation.
“Material service providers” include captive managers, auditors, accountants, actuaries, investment advisors, attorneys, underwriters, or similar service providers whose aggregate annual contract fees are equal to or greater than 5% of the RRG’s annual gross written premium or 2% of its surplus.
Plan of Operations
Each RRG’s plan of operation must include written policies approved by its board requiring the board to:
- Provide evidence of ownership to each member;
- Develop governance standards;
- Oversee the evaluation of management;
- Review and approve the amount to be paid under material service provider contracts; and
- At least annually, review and approve:
- the RRG’s goals and objectives relevant to the compensation of officers and service providers;
- the performance of officers and service providers as measured against the RRG’s goals and objectives; and
- the continued engagement of officers and material service providers.
Each RRG must have an audit committee composed of at least three independent directors. The audit committee must have a written charter defining its responsibilities, which must include:
- Assisting board oversight of the integrity of financial statements; compliance with legal and regulatory requirements; and the qualifications, independence, and performance of the independent auditor or actuary;
- Reviewing audited financial statements with management;
- Reviewing audited financial statements with the independent auditor;
- Reviewing risk assessment and risk management policies;
- Meeting with management;
- Meeting with independent auditors;
- Reviewing with the independent auditor any audit problems and management’s response;
- Establishing hiring policies applicable to employees or former employees of the independent auditor;
- Requiring the external auditor to rotate the lead audit partner; and
- Reporting regularly to the board.
Each RRG’s board must adopt governance standards that include:
- A process by which the members elect directors;
- Director qualifications, responsibilities, and compensation;
- Director orientation and continuing education requirements;
- A process allowing the board access to management and, as necessary and appropriate, independent advisors;
- Policies and procedures for management succession; and
- Policies and procedures providing for an annual performance evaluation of the board.
These governance standards must be available to the members through electronic or other means and provided to the members upon request.
Code of Business Conduct and Ethics
The board of each RRG must adopt a code of business conduct and ethics applicable to the RRG’s directors, officers, and employees. This code of conduct must address:
- Conflicts of interest;
- Matters covered under the Vermont corporate opportunities doctrine;
- Fair dealing;
- Protection and proper use of RRG assets;
- Standards for complying with applicable laws, rules, and regulations; and
- Mandatory reporting of illegal or unethical behavior affecting the operation of the group.
The business code of conduct and ethics must be available to the members through electronic or other means and provided to the members upon request.