It’s a little unfortunate that months and years of good work to close the gap at the NAIC, and with others, on the misconceptions of the regulation of Risk Retention Groups can be set back in what amounts to an instant.

As many of you know, with the hard work and leadership of Sandy Bigglestone and Christine Brown of Vermont’s Department of Financial Regulation, and Sean O’Donnell of the DC Department of Insurance, Securities and Banking, there was much progress on creating a common regulatory approach to RRGs and educating non-domiciliary states to that end under the auspices of the NAIC’s RRG Task Force.

Over the past year, the Task Force has been working diligently to provide additional guidance to both state insurance regulators and industry regarding the registration process for RRGs in non-domestic states. The process started last year with a letter from the National Risk Retention Association (NRRA) citing concerns regarding fees and delays in the review of registration forms, supported by a letter from the VCIA. The discussion that followed also raised concerns from non-domiciliary states, such as incomplete registration forms or potentially non-compliant RRGs. As a result, a drafting group was formed to develop frequently asked questions (FAQ) and best practices documents, and updates to the NAIC Uniform Risk Retention Group Registration Form, which made great progress toward the goal.

Unfortunately, in response to a bill that would expand the Liability Risk Retention Act to allow certain, narrowly defined, RRGs to provide property, zombie tropes about how well RRGs are regulated rose again from the grave. The NAIC sent a letter opposing H.R. 4523, the Nonprofit Property Protection Act, and stated in the letter “RRGs have historically had a higher insolvency rate when compared to admitted insurers.”  The letter was signed by the current NAIC president-elect, Ray Farmer, Director of South Carolina Department of Insurance, among others.

As a joint response from VCIA, CICA and NRRA pointed out, this is simply untrue.  According to a study conducted by the Risk Retention Reporter, which uses data from A.M. Best for the period 1987 to 2017, RRGs had a yearly insolvency rate of 1.2% as opposed to 1.5% for the entire property-casualty and life and health marketplace.  In brief, RRGs during this 30-year period were less likely to become insolvent that traditional carriers.

It is noteworthy that the NAIC did not cite any authority for its conclusion.  And at the actual hearing for the bill this week Chlora Lindley-Myers, Director of the Missouri Department of Commerce & Insurance, repeated the claim – again with no backup data!  RRGs are subject to a different regulatory regime than traditional insurers, but that does not mean that the standard is “lower”. RRG regulation by the domiciliary state is subject to the accreditation process by the NAIC itself.

I hope this does not mean a complete move backward at the NAIC regarding RRGs. I have immense faith in Vermont’s regulators, and other allies in the industry, to keep pushing forward – and finally burying these long-discredited zombies.

To view a copy of the joint letter click here.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President

That’s NOT the Spirit

regulationThe big news at the CICA conference in Tucson (other than my travails in getting home) was the placement of Nevada-based Spirit Commercial Auto Risk Retention Group (RRG) into permanent receivership and how it might impact the alternative risk transfer market. A story broken by Christopher Diemel of the Risk Retention Reporter examined the problems of Spirit dating back to 2013, where there were clear warning signs that the company was not living up to its obligations. On February 27, 2019, the Eighth Judicial District Court of Nevada entered its permanent injunction and order appointing the Nevada commissioner of insurance as permanent receiver of Spirit Commercial Auto Risk Retention Group, Inc.

Chris’s report outlined developments at Spirit in 2018 including an auditor’s letter alleging material misstatements, the restatement of the company’s 2017 annual statement, and a loss portfolio transfer deal in excess of $100 million.  However, it was the response (or lack thereof) by Nevada regulators that is most troubling to me – and a warning to the industry as a whole.

The concern that the NAIC might again put RRGs under the microscope is real, however, the industry overall is solid. By all measures, captive insurance companies, including RRGs, have far better metrics than traditional insurance companies.  A 2018 report by rating agency Demotech revealed that RRGs remained financially stable, as cash, assets, and liabilities all increased since 2017 Q2. According to Demotech, the results suggest RRGs are adequately capitalized and are able to remain solvent if faced with adverse economic conditions or increased losses.

The Spirit case is a prime example of the differing levels of regulation by states. Chris’s report provided examples of RRGs that ran into trouble but were quickly and efficiently handled by state regulators in other domiciles. I don’t know what exactly happened in Nevada, but to me the issue isn’t rogue captives or RRGs, or less than scrupulous service providers. It is state regulators failing to do the right thing – and that’s not good for any of us.

Thank you all very much, and I look forward to hearing from you!

Happy St. Patty’s Day!

Rich-LeprechaunSt. Patrick’s Day is one of our first harbingers of spring here in Vermont, although with the snowstorm that passed through a few days ago, one would hardly notice! That being said, having the sun shine early and stay out later makes it all worthwhile.

I just returned from the annual CICA conference in San Diego this week. It’s a great opportunity for me to meet and check in with many leaders in the captive world outside of our own annual conference in August. One highlight was a meeting of the Captive Association Leadership Coalition, or CALC, which (as the name sounds) is a gathering of captive association leaders to explore issues facing the captive industry as a whole.

There are a number of issues facing the captive industry at present. Perhaps the one that has all most concerned is a border adjustment tax proposed by Speaker Ryan. Taxes would apply based on the destination of where goods and services are consumed, rather than where they are produced or where the business has its headquarters.   It is still uncertain whether financial services transactions will be taxable if this proceeds (and it seems likely based on the reports I have heard), with the impact to reinsurance costs estimated to be in the billions. In most other jurisdictions that utilize a similar value added tax (VAT), financial services are exempt due to the unique nature of these transactions. VCIA is working with the same coalition that opposes the Neal Bill on this issue, seeking to insure this exemption applies. We’ll keep you posted!

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President

Congrats, Dan!


Most of you have heard that Dan Towle has been named to succeed Dennis Harwick as President of the Captive Insurance Companies Association (CICA). Dan has been Vermont’s Director of Financial Services and a fixture in the state’s captive insurance industry since 1999.   Most of you know him as the person promoting Vermont as the premier captive domicile by successfully touting the State’s reputation as the Gold Standard. He has witnessed and been an integral part of the licensing of over 600 captives, more than half of all the captives licensed in Vermont’s history.

VCIA has been partners with CICA over many years teaming up together on issues critical to the captive industry and I wish Dennis the best of luck in whatever he looks to for the next phase! Dan has been a true partner and friend of VCIA during his tenure in Vermont and I am heartened to know that CICA will continue to be under the leadership of someone who knows (and gets) the captive insurance industry, and someone who has been a friend and colleague for many years.

Although his tenure doesn’t start until April, I am heading out to the CICA conference this weekend and look forward to seeing both Dennis and Dan as they begin to transition into their new roles. Good luck, Dan, and bon voyage, Dennis!

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President